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A Game of Confidence

by TwoCentsEditor

Published on: 02/27/2009

Categories: Current Events, Economics, My Two Cents

Comments: 4 Comments

A scan of the financial and economic landscape of any society during solid, genuinely prosperous times will always reveal a populace brimming with confidence. Confidence in their ability to make a living, confidence in the ability of their leaders, confidence in the workings of their financial markets to whatever extent they exist, and ultimately confidence in the strength of their money. These factors are all interlocking directorates; take any one of them away and you’ll witness an economy that is no longer efficient and begins to stumble. Take them all away and you’ll witness unbridled economic chaos.

It is the latter statement that causes me to reflect this week on the prospects for our return to prosperity. We have had the opportunity over the past year to listen to many speeches from Presidents to heads of Treasury and the Federal Reserve. Many men and women – bright men and women, have weighed in and opined on our current situation. They’ve spoken of stimulus, of consumer spending, government spending, bridges, roads, healthcare, energy, banks, and many other topics too numerous to count in this short space. However, what I haven’t heard nearly enough mention of is confidence even though the stated purpose and intent of these speeches has been to inspire the same.

The confidence of consumers

One report in particular has made some inroads in terms of getting coverage of the precipitous drop in overall consumer confidence. And in fact, the most recent release of the Conference Board’s measurement of consumer confidence was the worst in history since measurements began more than 40 years ago. Perhaps the worst part of this report was the expectations component, which absolutely fell off a cliff, plunging from a level of 42.5 to a 27.5 level. The jobs component of the report was no better. 47.3% of those surveyed expect there to be fewer jobs in the future with a mere 7.1% expecting more jobs. 4.4% thought jobs are easy get with nearly half (47.8%) opining that jobs are very hard to get. The chart below tells the awful story.

Consumer Confidence Chart

It is fairly easy to see how the lack of confidence has translated into overall drops in retail sales. Sure people are spending less for gasoline (a major component of retail sales) than they were a year ago, but they certainly aren’t buying anything else in its place either.

This situation, however, goes way beyond some numbers reported every month. It goes to the very heart of the opening paragraph. Confidence is the key to a successful economy, particularly ours, which is so heavily dependent on the consumer taking on debt and spending money. In order to perpetuate this dynamic, the consumer needs to have utmost confidence. As last 2008’s failed stimulus package demonstrates, simply handing money to consumers who are not confident will result in the money being saved or used to pay off existing bills. No confidence, no spending. It’s as simple as that.

Collapse of retirement contributions a referendum on confidence in the financial system

Whether it is along with, beside, or because of consumer’s confidence, equity markets on a global scale have crashed in grand form over the past year. Sure, not all of that was caused by the little guy selling his 401(k)/IRA and going to cash. It is our opinion that the little guy actually represents a relatively small component of the overall money invested in the markets when leverage is factored in. However, the little guy’s actions have still had major ramifications. Consider the following:

• 529 plan contributions are down an average of 60% from 2007 according to a 529 plan representative who materialized at my office door a few weeks ago

• According to TD Ameritrade, 63% of people with retirement plans stopped contributing to them in 2008

• Only 21% of individuals surveyed in the above study had more than $50,000 in investable savings

• Unemployment (32%) and increases in health care premiums (25) were the leading reasons why people stopped contributing to retirement plans in 2008

• Nearly 25% of survey respondents in the 35-44 age group said they’d completely stopped contributing to retirement accounts in 2008. This more than any other group

While complete data for 2008 contributions is incomplete due to the fact that 4/15/09 is the deadline for 2008 IRA contributions, it is relatively clear that 2008 contributions will be down significantly. This problem is two-fold. The first is many people don’t have the funds to invest. The second is that they have lost confidence in the markets and their ability to protect (let alone grow) capital. This reality is unfolding at an unprecedented time in history – a time when people can least afford to be caught without savings.

Job loss – the ultimate confidence-killer

As now more than 600,000 Americans each week are realizing, the loss of a job is one of the most stressful events one can endure. There is an old adage that it is a recession when your neighbor loses his job, but it is a depression when you lose yours. This is not meant to trivialize the matter of unemployment in the least, but rather to underscore the effect that the loss of one’s livelihood has on confidence. As can be expected, consumer confidence has plunged as job losses continue to increase.

Unemployment Graph

Next Friday’s unemployment report is likely to feature an unemployment rate well north of 8% not counting the thousands of workers who lost their jobs in late 2007 and early 2008 that have now fallen off the unemployment rolls and as such are no longer counted. By our count, there have been nearly 2.4 million first time claims for unemployment in the past 4 weeks alone and the trend shows no signs of slowing, at least not in the short term. While unemployment insurance lasts up to a year (depending on the state), it only covers a portion of lost earnings. A good average is probably around 60%. I don’t know about you, but I don’t know too many people who can maintain their current standard of living on 60% of their income – or are even willing to try.

Money – A True Crisis of Confidence

Confidence in the monetary system of the United States has been a true lagging indicator. Inflation at a rate of 5% or so per year has been institutionalized in the system for as long as anyone can remember. Keynesian economics teaches us that this inflation is a normal by-product of growth and should be accepted with glee, which is absolute nonsense. This is akin to welcoming a burglar into your home and offering him 5% of your belongings then chalking it up as a cost of living.

However, even the most regular of folks are starting to wonder where the trillions of dollars for their retirements, healthcare, financial system bailouts, various industry bailouts, state bailouts, government spending, and other pet political projects are going to come from. The fact is we’ve crossed the Rubicon in this regard. The world no longer creates enough savings to cover our massive balance of payments and fiscal deficits. And remember, one in three Americans have less than $50,000 in savings to deal with this. Everyday Americans are starting to wake up to the reality that this money doesn’t exist and must be created from nothing. That certainly doesn’t bode well for their confidence in the value of the currency they carry in their pockets. It can no longer be called money, because to call it money is to imply that it is a store of wealth and acts as a standard unit of exchange.

A real store of wealth holds its value and maintains purchasing power. The US dollar has lost around 96% of its purchasing power since the Fed was created in 1913. Other paper currencies are not far behind. This reality has driven record demand for gold and silver coins as the public awakens and attempts to diversify out of paper. This overall loss in confidence in paper assets is what drives mainstream columnists to attack gold as a ‘useless rock’ and float the false notion that people who bought stock after the 1929 crash got their money back in a few years when in fact it took a few decades. Remember, it is all about confidence.

In the end, the financial crisis of 2007-? will be summed up as a fairly simple process:

1) Confidence shaken

2) More debt accumulated to maintain confidence

3) Confidence further shaken

3) Even more debt accumulated

4) Confidence lost because of all the debt accumulated

For in fact during the early stages of the crisis, policymakers and pundits alike were busy talking about strong economic fundamentals and failing to address the root causes of the problem when it might have mattered. For nearly 9 months the current depression brewed before Fed head Bernanke and Treasury Secy. Paulson were even willing to admit that a problem existed outside the banking system. The entire sum total of their efforts was to maintain confidence. It was a dangerous gamble that has proven disastrous and they’re about to learn the hard way that while you might be able to create a bailout for big banks and big government, there is no bailout for confidence.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.suttonfinance.net and clicking the free report banner.

Disclosures: Long GDX

The Turning of the Tide?

by TwoCentsEditor

Published on: 02/20/2009

Categories: Current Events, Economics, Financial Markets, My Two Cents

Comments: 3 Comments

For the better part of the second half of 2008, the decision was an easy one. For the first 30 or so days of 2009, the decision remained easy. Then something changed. Something subtle, but at the same time worthy of our utmost attention. Producer and consumer prices began to climb off the mat and beginning in January 2009, there has been a rather remarkable turnaround. Granted, one month does not a trend make, but in this environment, big moves, which have become commonplace bear even more study when they reverse themselves on a dime.

Ironically, this is the second such major trend shift that we have witnessed in the past 75 days. On 12/5/08, a two-year relationship between WTIC and the Euro ended abruptly. From 12/1/2006 through 12/5/2008, WTIC and the Euro had walked in lock step to a level of statistical significance rarely witnessed. What we had in effect was a pegging of the Euro and Crude oil. A peg that ended on 12/5/2008.

This morning the CPI for January 2009 was released and showed a marked and striking divergence from the trend of the past 6 months. The headline and core numbers both reverted from their ‘deflation-mode’ back to their ‘inflation-mode’ of late 2007 and early 2008. We have spoken about such a possible inflection point for quite a long time, making the following observation on 11/21/2008:

“However it must be noted that perhaps the biggest ‘fundamental’ arguing for increases in equity markets is the trillions of Dollars in new money and credit that has been pumped into financial institutions over the past few months. For whatever reason, that money has largely stayed on the sidelines for the meantime. It is our firm belief, however, that this will change, and when it does we’ll have ourselves another epic paradigm shift, and cash will once again become trash. Identifying the inflection point will be the key. Stay tuned.”

We spoke of this situation again on 12/12/2008:

“Now, consider the monetary environment within which we are operating at the present time. Much like the yields on short-term Treasury bills there is zero discipline. None. Money is being created on a massive and unprecedented scale. This is precisely why the banks are sitting on it. If this money were released en masse into the real economy, we would have hyperinflation at the precise time when economic activity is grinding to a halt.”

Unfortunately, as the December disconnect between oil and the Euro and the concomitant reversal in consumer price trends (yes, we believe there is linkage there) indicates, we may have in fact witnessed the inflection point when we see the value of cash again come under attack. If in fact this is the case, Gold will have once again been something of a front-runner despite what have been extraordinary efforts to quench gold’s march upward over the years.

And speaking of gold, this writer took a lot of flak back at the end of August 2008 for calling Gold the ‘Opportunity of a Lifetime’. Especially when the price dipped under $700/oz for a brief time in November. Gold bears of every stripe took their shots. Granted, the game is far from over, but let’s just take a look at Gold versus the DJIA for a minute. Gold is up over 16% since that article was written, the paper DJIA down nearly 36%. If this doesn’t outline the reasons for holding at least a portion of one’s assets in real money, then nothing will.

Clearly these are dangerous times for investment portfolios and the underlying wealth they represent. During a massive liquidation phase, it was an easy call to sit on the sidelines, collecting nominal interest from bonds, CD’s, and money market funds because we were secure in the knowledge that the money was becoming worth more. Come again? Think in terms of a gallon of gas for example. A good price for a gallon of regular was around $4 last summer. A good average price now is around $2/gallon. So if you had a $20 bill in your pocket last summer, it would have purchased 5 gallons of gas. Now that same $20 bill buys 10 gallons. Obviously the same situation has occurred in terms of stocks and real estate. The money is worth more now than it was last summer. The value of the money wasn’t under attack.

Since the creation of the Federal Reserve System in 1913, this phenomenon has been the rare exception rather than the rule, and as such, consumers are less able to quickly recognize and understand the implications.

However, at the same time, in other areas, this has not been the case. Food prices have continued to be persistently high although their rate of increase has slowed somewhat. We have been writing and talking for over two years now about sector-based inflation and how consumers are going to really have to keep their eye on the ball in terms of what is going up and what is going down. The current consumer price environment is indicative of this situation. Ideally, money allocated for food, medical needs, education, and lately, gasoline should be spent today because it will be worth less tomorrow. In the opposite, money allocated for investment in stocks and real estate should be saved because it will be worth more tomorrow. What a world we live in.

If we have indeed witnessed the inflection point where the trillions of dollars parked in investment and commercial banks are finally being let out to play, then our wealth and purchasing power are about to come under serious attack. Obviously the risk in putting such an assertion to paper is that if we return to the previous trend of falling prices even for a brief time, the entire construct will be discredited rather than the possibility that the timing was a bit off being acknowledged.

There are some factors that would help us to confirm or deny that such an inflection point has taken place.

Gold – Gold is in confirmation mode at the present time. It has roared back from the high 600’s in November to the precipice of $1000 – a whopping 43% increase, much of it in the time since the Euro-WTIC peg ended on 12/5/2008. We have discussed in our Centsible Investor newsletter for some months now the triumvirate of gold, oil, and the Euro and been following the developing relationships closely. This has enabled us to make the call on inflation quickly as opposed to being 3 or 6 months in arrears. The obvious risk is that we could be early in making this call.

Gold Chart

CRB Commodities Index – Unlike Gold, the CRB (of which Gold is a component) has not confirmed that such a trend change has taken place. However, as is clearly demonstrated in the chart below, the CRB Index is searching for a bottom and in fact several of the long term indicators we compile internally are close to giving longer term ‘buy’ signals.

CRB Chart

Crude Oil – WTIC, which is also a component of the CRB Index, has languished below $40 for most of the new year. Given the precarious nature of global supplies (yes we still have a production deficit globally), oil is one area where banks might choose to deploy their newly found bailout wealth. The fact that the Euro/WTIC ‘peg’ recently ended elevates the probability of this eventuality an order of magnitude of at least several times what it was while the ‘peg’ was still in place.

WTIC Chart

While it is my opinion that we have seen the inflection point, it is still an unconfirmed opinion at this point. The three factors pointed out above along with many other metrics we monitor on a daily basis will aid in either confirming or denying that such an inflection has in fact occurred, and more importantly what to do about it from a capital management perspective.

Clearly it was easy to sit on the sidelines of the equity markets for the second half of last year with little worry of wealth coming under attack by inflation. If in fact we have seen this paradigm shift, however, then it is going to be a very dangerous time ahead. Returns in excess of taxes and inflation will again come to the forefront and the obvious question is where to go? Equity markets are at the very least unstable and that is being rather kind. The good news in this regard is that we have been able to find and report many solutions to our clients and subscribers. Solutions that have passed the tests of 2008 with flying colors while also providing for the inflationary times that I feel lie directly ahead of us. Clearly this is not a time to throw in the towel, but to dig in our heels and prepare to fight another battle for our purchasing power.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.suttonfinance.net.

Disclosures: Long GDX

Another Hit and Run

by TwoCentsEditor

Published on: 02/13/2009

Categories: Current Events

Comments: 12 Comments

In eerily similar fashion to last fall’s financial system bailout, the American people are once again having another piece of legislation jammed down their throats without their elected representatives even having a chance to review it. This by a new administration; one that promised that such things were of the past. However, when it comes to pork, all politicians are the same and this new stimulus bill has now grown to well over 1000 pages in the hours before the final vote.

The bigger question is how could an elected representative in good conscience vote for something they haven’t even had a chance to look at? At the very least, this is despicable behavior. This bill of goods has been sold under the premise that if something isn’t done within days that the economy will collapse. This is utter nonsense and fear-mongering – nothing more. An economy doesn’t collapse over a period of days. It has taken us well over 2 years from the beginning of the blowup just to get to where we are now. Certainly a few weeks could be taken here to at least give due diligence before committing the equivalent of fiscal suicide.

Unfortunately, by the time we actually learn about the content of this ever-changing bill, and its ultimate impact on us as citizens, the time for action will be long gone.

A response to Senator Arlen Specter

by TwoCentsEditor

Published on: 02/10/2009

Categories: Current Events, Economics

Comments: 1 Comment

Like many Pennsylvanians, I have been less than thrilled by the representation of Senator Arlen Specter. This dissatisfaction reached a Zenith today as Sen. Specter was one of the 61 Senators that voted for the pork-filled economic ‘stimulus’ package. I’d like to take Senator Specter’s op-ed piece from the Washington Post and provide some in-line reactions (bolded)

“I am supporting the economic stimulus package for one simple reason: The country cannot afford not to take action.

Agreed 100%, Senator. Unfortunately, taking an opportunity to create lasting, sensible solutions is much different than going in with a half-baked, half-compromised plan and hoping it will keep things glued together a few months. I might remind you of the $168 Billion cure-all stimulus from early 2008. At the time the Congress was convinced that action would fix everything. Now the same Congress is convinced that nearly a trillion will be enough. Not to mention nearly another $10 Trillion in pledges, guarantees, and bailouts that have been thrown at this collapse between Stimulus I and Stimulus II. At the very least, the Congress should be willing to admit that it has no idea of the ultimate final cost of this problem. I will guarantee you this much though – it is a lot more than $10 Trillion.

The unemployment figures announced Friday, the latest earnings reports and the continuing crisis in banking make it clear that failure to act will leave the United States facing a far deeper crisis in three or six months. By then the cost of action will be much greater — or it may be too late.

This will be the case no matter if this bill becomes law or not. That is because this bill is not addressing the real problem. It doesn’t address the fact that our economy is based on debt, and needs that debt to grow. Without continued debt accumulation, we have no economic growth. Simple as that. That is why it will be necessary for Congress to continue bailing out failed firms and passing stimulus packages. This package will stimulate consumption for a time, but that is it. It will not, nor does it have any prospects for stimulating the economy. If you want this measure to be effective, dedicate 100% of it to rebuilding our lost manufacturing base. Create products here. I know this violates the tenets of globalism and free trade, but it is the only solution. Unless you want to be writing the same arguments for stimulus III in 6 months or so.

Wave after wave of bad economic news has created its own psychology of fear and lowered expectations. As in the old Movietone News, the eyes and ears of the world are upon the United States. Failure to act would be devastating not just for Wall Street and Main Street but for much of the rest of the world, which is looking to our country for leadership in this crisis.

Our country has been the ‘leader’ in the world economy because both our people and our government have expressed a willingness to borrow money to consume. We have done so even to the point of our own detriment, and now decades of borrowing constitute a boat anchor on future growth. Yesterday evening, the President stated that the government was the only institution remaining with the resources to combat this problem. What resources? The government has no resources; other than the ability to borrow (at the expense of the People), create money from nothing (at the expense of the People), and pledge future economic growth to paper over current problems (at the expense of the People). The government doesn’t have $780let alone $780 Billion.

The legislation known as the “moderates” bill, hammered out over two days by Sens. Susan Collins, Ben Nelson, Joe Lieberman and myself, preserves the job-creating and tax relief goals of President Obama’s stimulus plan while cutting less-essential provisions — many of them worthy in themselves — that are better left to the regular appropriations process.

Our $780 billion bill would save or create up to 4 million jobs, helping to offset the loss of 3.6 million jobs since December 2007. The bill cuts some $110 billion from the $890 billion Senate version, which would actually be $940 billion if floor amendments for tax credits on home and car purchases and money for the National Institutes of Health are retained.

Nowhere has anyone actually demonstrated where these 4 million jobs would be created other than the desire to hire nearly 600,000 more government workers. It is very likely that the business community is aware that this will not work and will therefore seek to conduct whatever business the stimulus allows without actually expanding staff to the extent expected. This is not a ‘business as usual’ environment. If the private sector really had faith in this package, it wouldn’t continue to cut jobs as it has been. It would hang on and wait, understanding that retention is far more cost-effective in the short run than going through the hiring cycle. The private sector’s actions alone are a vote of no confidence with regard to government stimulus.

House Speaker Nancy Pelosi says the proposed cuts “do violence to what we are trying to do for the future,” especially on education. Her objections are a warning to conservatives that more cuts would be unlikely to win House approval. They are also an admission of the high price that moderates have been able to extract for their support of stimulus legislation.

If a stimulus bill doesn’t pass, there won’t be any money for Title I education programs. The moderates’ bill provides marginally less money for Title I than the House and Senate bills. But while it’s less than supporters want, this proverbial half a loaf beats no loaf by a mile.

Title I existed long before the stimulus. Education is one of the few areas that have actually seen growth over the past year in terms of employment ex-stimulus! How will Title I spending stimulate the economy?

In health funding, both the House and Senate bills contain billions of dollars for wellness and prevention programs, including for smoking cessation, prenatal screening and counseling, education, and immunization. The moderates’ bill, regrettably but necessarily, cancels this funding on the grounds that such programs are better left to the regular appropriations process.

Same point as above – how is any of this going to stimulate the economy? This is one of the portions of the bill which has been totally dedicated to the political pandering necessary to get the votes needed for passage. While on the surface, all of these initiatives sound warm and fuzzy, they will not stimulate anything other than perhaps the national debt.

“In politics,” John Kennedy used to say, “nobody gets everything, nobody gets nothing and everybody gets something.” My colleagues and I have tried to balance the concerns of both left and right with the need to act quickly for the sake of our country. The moderates’ compromise, which faces a cloture vote today, is the only bill with a reasonable chance of passage in the Senate.”

As Thomas Jefferson so eloquently put it, “A government big enough to give you anything you want is also strong enough to take everything you have”. This bill seems to be little more than a government stimulus package. It will do very little for the economy or the real root causes of the problem: debt and a broken monetary system.

Twelve Zeros Worth of Protectionism

by TwoCentsEditor

Published on: 02/06/2009

Categories: Economics, My Two Cents

Comments: No Comments

Protectionism has clearly become a dirty word. Unfortunately, those in the position of dispensing awareness and perspective obviously have no idea what true protectionism is. If it were explained properly, I would venture to imagine that most here in America would be in favor of it. After all, it applies directly to us and our standard of living.

In the 1990s globalization was presented to the nations of the world. Terms like competitive and comparative advantage became part of business lore. Americans, already punch drunk from a 25-year assault on the purchasing power of their currency, were sold on the promise of inexpensive imported goods. These goods would be made elsewhere and moved on barges powered by oil that would be cheap forever. While the former was certainly true, the costs of such shortsighted thinking were largely ignored by those in Washington. We are now witnessing the effects of those costs firsthand.

“We cannot afford a trade war”

This week, Senator John McCain proposed an amendment to the pork-laden ‘stimulus’ package that would have effectively wiped out the ‘Buy American’ clause in the package. Essentially this clause stated that any government or public building projects had to use steel that was produced in the United States. Having already lived through the obliteration of this iconic industry once, the ‘Buy American’ clause was very encouraging. However, it appears that in this regard, it will be business as usual, maybe not because we want to, but now because we have to.

To put it simply, America can no longer live on its own production. This is no surprise and has been the case for quite some time. However, we are in a position now where a little leverage might come in handy. Our economy is bleeding jobs and we need to be able to maintain and promote American manufacturing. And contrary to the tenets of globalization, there is absolutely nothing wrong with producing our own goods and services and we should be doing exactly that.

While the argument will be made that our trade partners cannot afford not to trade with us, it is much more likely that they can remain solvent far in excess of our ability to sustain ourselves. This is particularly true in the case of energy, the ultimate staple good. Despite the claims of many that we have enough oil right here in the US to last us umpteen years, even if that were true, you don’t just flip a switch and have oil flowing. History should have taught us that much. It takes years in many cases to raise these products, build a transport and distribution network and get them into the economy. Again, we have no leverage.

And in reality, why do these countries need to trade with us anyway? Much of what they get in return is nothing more than IOU’s on fancy paper.

The chart below illustrates our trade gap in terms of actual goods – goods we either aren’t able to or currently do not produce ourselves.

US Trade Statistics (Goods only – in Billions of Dollars)

Year*	Exports	Imports	Balance
2007	1,148,481	1,967,853	(819,373)
2006	1,023,109	1,861,380	(838,270)
2005	894,631	1,681,780	(787,149)
2004	807,516	1,477,094	(669,578)

*2008 Final Data Available on 2/11/2009

In typical lukewarm fashion, the US Senate shot down McCain’s amendment in it’s version of what is likely to become a $3 trillion pork-barrel spending package in the coming weeks. For those who are counting, that is $3,000,000,000,000. However, what was most telling is that the balance of the Senate has no respect for American jobs or industry either. This was evidenced by the addition of a proviso that no existing trade agreements be violated by the bill.

This is what happens when you’re behind the eight ball. You have no leverage and little flexibility. In the case of trade, it is doubtful that we can even talk tough let alone back it up with substantial action.

‘Free Trade’ agreements and the Lowest Common Denominator

Another spin off of free trade agreements such as NAFTA is that in addition to driving our jobs overseas, they created a lowest common denominator situation where wages in developed nations came under downward pressure. The causal relationship is simple to illustrate. If a company can make something in Taiwan for example where GDP per capita is about 1/3 that of the US (Economist World in Figures 2007), then import the goods back into the US, the consumer will benefit from the cheaper good. Unfortunately, for every benefit, there is an equal and opposite detriment, and in this case, the jobs in the US which used to produce that good no longer exist. This is what has happened over the past 25 years or so. We chose instead to focus on a service economy where we basically shuffled papers and intangible goods amongst ourselves and called it an economy. All the while, we racked up massive external debts to buy the real goods we needed to survive.

I will allow that obviously this transformation has not been total. There are still some thriving industries in the US, but rather, I am referring to the net effect of the past 2 and one half decades. Much of the wage gap has been filled with various types of consumer credit whether it is credit cards or, more recently mortgage equity withdrawals. Obviously, as we have seen in dramatic fashion, these levels of debt accumulation proved to be as unsustainable as the dynamics that necessitated the accumulation in the first place.

The Solution?

While we have been showered with announcements that our trade deficit is improving, it must be noted that this is almost entirely due to the liquidation of 2008 (which crashed commodity prices) and the US-led global recession. Were growth to return to normal levels, we would immediately observe the trade deficit returning to its prior trajectory. By way of extension, the same situation exists in the case of the US Dollar. Fundamentally, nothing has changed. Media outlets and pundits alike are reading false signals created by the distortions of a debt-laden, fiat monetary system. It is something along the lines of going to an 80s movie where 3D glasses were necessary to make sense of anything. Only the guy at the door forgot to give them a pair.

For quite some time now this commentary has been a soapbox for the idea that we need to rekindle our productive economy. Never has that been truer than right now. We tried the globalization experiment, and in my opinion, it has been a dismal failure. Sure we got some cheap goods, but as a country, we’ve become dependent on others for our very sustenance. This is not an enviable position for anyone to be in, especially not for a country that wants to call itself an economic superpower.

That said the upcoming stimulus package could be used help return America to her pre-1980s position of industrial superiority. During the late 1800s and early 1900s, we ran large trade deficits and put them to work building an industrial base that was second to none. We have a chance to use the debt that will be incurred regardless for something productive. Simply handing people checks so they can go buy television sets (thereby sending the money to Asia) is not going to help anything. Rewarding zombie banks for past financial transgressions will not help anything. Taking the ‘stimulus’ and building industrial capacity, creating real jobs, and producing high quality products, however, would be a nice start.

Get a copy of Sutton & Associates’ free report – “The 7 Mistakes Investors Make…and how to avoid them” by clicking here

Disclosures: None

Old School Rules for a new era

by TwoCentsEditor

Published on: 01/20/2009

Categories: Current Events, Economics

Tags: beat the street, business, commodities, democrat, Economics, economy, finance, money, obama, politics, president, republican, stocks, the centsible investor

Comments: 2 Comments

I genuinely feel sorry for Barack Obama. As a political independent, it really didn’t matter to me who won back in November. I tend to view things from a more pragmatic stance, particularly when it comes to the immutable laws of economics. When observed in the context of history, political affiliations don’t seem to matter too much. Since we totally abandoned our monetary discipline in 1971, deficit spending, debt accumulation, and devaluation of the currency have transcended everything – political affiliations included. So as we begin a new era, I want to remind everyone of some old axioms – which still rule the day:

1) You don’t clean up spilled milk by spilling even more.

2) Actions have reactions and sometimes the reactions are not what you thought they’d be.

3) A nation cannot borrow and spend its way to prosperity.

4) Neither can a nation print its way to prosperity.

5) Government is the least efficient vehicle for implementing anything, but is unrivaled when it comes to destroying it.

Perhaps most importantly, 37 years of monetary imprudence is not undone in a month, six months, a year, or even a Presidential term. It doesn’t matter who you are, how good you are, or what party you belong to. Even if the mistakes stopped today, it would probably take the better part of a generation to recover from the debt and lack of productive output which currently encumbers us.

I will say that President Obama could have done both his credibility and the American taxpayer a huge favor by taking a pass on the lavish inauguration festivities. There is work to be done; the time for partying was in November. Now is the time to lead, roll up our sleeves and get to work. I will say that I am quite sure I’d be making the same comments had John McCain been sworn in today. Whether or not stocks are in a bear market is open for debate. However, the bear market in leadership in America shows no signs of ending.

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