You’re reading this and I’m writing it. That’s conclusive evidence that the “Rapture” that was scheduled for May 21, 2011 failed to occur. No worry; the next one is scheduled for October 21st, 2011. Mark your calendar now.
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A rapture of different sorts is occurring however, in Europe. Last week it was Spain and Italy’s turn to get debt downgrades. The Euro panicked and sold off, but it has a long way to go yet. The market’s, it would appear, are ignoring the plight of the Euro zone currency as the Euro is still trading much closer to its all-time highs versus the US Dollar than its lows. Yet the problems in Europe are as big if not bigger than those faced by the US. Economic growth is stagnant, unemployment in places like Spain is close to 20% and governments across the continent are liquidating assets and facing strong recessionary headwinds. Greece announced that it was putting assets on the block including its ports. Yet, the Euro continues to hold steady. My take on this is that it is NOT so much that the Euro is strong, but that the US Dollar is even weaker than most imagined. What the Euro has going for it, is something we don’t, and that is a hawkish Central Bank that is more concerned with inflation than depression.
The dollar on the other hand seems to care less about inflation and more about growth. An argument can be made for each position. The US believes that growth in money supply equals growth in the economy and that equals growth in tax revenue, which mitigates deficit spending. The Europeans believe that a strong fiscal system and currency are keys to preventing inflation and a way to increase economic stability over the longer term. That is the difference. The US thinks short term and the Europeans think long term.
The markets like the US way of thinking more as the stock market has more than doubled in value since the beginning of the Great Reflation. The only problem here is that the wealth being created is not seeing its way into the general economy in the form of jobs and industrial growth. The latest numbers from various indices that measure manufacturing and growth are heading the wrong way. Unemployment is still high and the linchpin, housing, is still in a spiral, albeit a slower spiral.
Over the past two decades it was widely thought that the US housing market could support annual homebuilding increases of between 750,000 and 1 million units for supply and demand to be in balance. Unfortunately, somewhere along the line homes were being built at a clip of over 1.5 million units per year. That was great as long as investors and speculators were picking up the slack (see 2002-2007). That ended and inventory levels shot up and now are at levels, which are causing homebuilders to build less than 500 thousand units annually. In about three to five years, we’ll see equilibrium return. Until then, housing and the jobs related to construction will be in a funk.
Unemployment is a major concern, not only for the obvious reasons, but also for the not so obvious reason. The not so obvious reason is tax revenue. Unemployment has a devastating effect on the government’s income statement. Not only do unemployed people not pay much in taxes, they also receive benefits. It’s somewhat akin to a failed fast break in basketball followed up by the opposition scoring a three. Not only did you give up not getting two easy points, you end up being down five after the sequence. The unemployment problem is not going away, it will likely stay where it is or get worse as the workforce is ill-prepared to compete in a job market that is searching for highly skilled workers – something the US does not produce these days.
In Europe the situation is not much better. Archaic work rules, strong unions, anemic economic growth and increasing unemployment are dragging most of the Euro economies down as well. This is one race we don’t want to win.
So, who are the winners? Who will avoid the coming rapture? Well, you need to look no further than Asia and even North America – not the US, but even further north, Canada. Strange but true, the North American continent does have an economic success story – a country that was once a basket case – a country that was where we are today just a decade ago – weak currency, high unemployment, a massive deficit. Canada took steps to suck it up and balance its books – it was painful for a few years, but today that pain has transformed the country into the envy of the Western World. The US does not have to look very far to see a model that is working – the question is whether the US has the fortitude to do the right thing and emerge from this death spiral. I have confidence that it will, but it won’t happen quickly or painlessly – some may wish that we did indeed have that “Rapture” instead – it could have been less painful than the times we are going to encounter.
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