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Where is the Economy Going?   (2010)

Most people instinctively feel the economy is not
doing well. They see the near 10% unemployment
rate, lackluster business results, mixed stock market
returns and other indicators. What do the coming
months hold for the economy?

Let’s take a look at the recent past:

Consumer confidence /demand / Total demand is low.
The average American balance sheet is much worse
now than it was just 3 years ago.  Their investment
portfolio is perhaps 20% lower than it was. Their
home may be worth 20% less on average than it was
4 years ago. They may have a job that is insecure with
uncertain salary growth, or they may be unemployed.  
Their net worth is lower, and their debt is a higher
proportion of their assets, (or they may be a net
debtor). Of course, they are trying to rebuild their
balance sheets, primarily by being very cautious
spenders.

For businesses, since the beginning of the recession
in Q4 of 2008, which began with a huge shock to the
system, business performance has tread water for the
most part.  GDP has barely returned to its’ 2007
level*. Most businesses are performing modestly at
best, with very modest growth levels since 2008 on
average. A recent survey by the NFIB** showed most
of their indicators at neutral or negative readings.
Most other business forecasting indices are not much
better. Most business balance sheets have
deteriorated along with their earnings since 2008.

Credit/Capital markets have not returned to normal.
Some businesses are having trouble raising capital.  
Small businesses and especially new businesses are
reporting a much harder time getting funds. But even
given this, many businesses report they don’t want to
borrow funds, as they do not have adequate
demand/revenue to justify and pay them back.  

Of course the Fed has flooded the banking system
with funds through low/zero interest rate borrowing to
the banks. And the federal government has spent
billions through the stimulus package. Of course,
besides this being good for the banks themselves,
this has really only trickled down to large businesses,
if any. The stimulus funds have been primarily used to
keep state and local governments going, which may
be better than the alternative, but has done close to
nothing to advance investment in business.

Given this, what do the coming months hold?

I predict very low positive growth over the coming
months, with GDP in the 1 or 2% range through the
rest of 2010. This will slowly build to a more robust
recovery in 2011. The stock market will grow by a few
percent the rest of this year.  Unemployment will slowly
edge down, ending the year close to 9.0%, not
returning to more normal levels (6-7%) until the end of
2011 or 2012.  Of course, the federal budget deficit is
increasing at an alarming pace. Given current
deflationary pressures, I don’t believe it’s a huge
problem now, but government inflows/outflows will
need to be brought closer in line as the country comes
out of recession or that will jeopardize any recovery in
the future.  

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* In all of 2009, nominal GDP was essentially zero,
although it rose to 5.7% in Q4. It decelerated in Q1
2010 to 2.7%, and the forecast for the remainder of
2010 is lower.
Nominal US GDP declined 1.9% in 2008, the biggest
decline since 1946. It had previously risen 2.1% in
2007, which was already anemic.

** National Federation of Independent Business  


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Latest Articles:

There’s much speculation about what the political
fallout will be from the recent debt / deficit deal.
Personally, I think Obama has enhanced his chances
for re-election by forging what is perceived as a
relatively conservative debt package. This pulls in
moderates/independents because he has taken what
appears to be a fiscally responsible position. Liberal
backers don’t like the package but they will stay with
him vs. any Republican. This combined with his new
national security credentials generated from Bin
Laden’s killing, and an unlikely charismatic
Republican opponent, and things are looking better
for Obama. Of course, if the economy doesn’t
improve, that may be too much of a handicap to
overcome.

Of course, the reality is that the debt plan barely
scratches the surface of what needs to be done as far
as the deficit. The plan supposedly saves $2.25 trillion
over 10 years. It will probably wind up saving less than
that for various reasons. Even if it did, it averages only
$225 billion a year.  However, it is projected that we
have a structural annual deficit during that period of
anywhere from $700 billion to $1.7 trillion per year. So
even if we save every nickel of the deficit deal we are
still adding greatly to our current $14 trillion dollar
deficit every day/year – at a rate that is unsustainable.

Stock market is down significantly, a slump mirroring
last summers downturn. It is down 11.6% (as of 8/4)
from it’s high this year in April, giving back all it’s
gains this year and more. Why is this happening? Is it
a reflection of the meaningless deficit deal? Perhaps
a reflection of how little the deal solved in the long run.
The more likely cause is the anemic economic
numbers that have come out over the past 2 months.
GDP for Q2 was estimated to be at an annualized
1.3%, while Q1 was revised downward to 0.4%. So
the economy is growing very slowly, and fears of
another recession  (two quarters of negative growth)
are growing.   

National Small Business Association has a new
survey. It shows that only 29% of members intend to
hire over the next year. 88% of its members anticipate
a flat or recessionary economy – it’s highest point
since July 2009.  

Gold is now at $1,630 dollars an ounce, an incredible
38% increase over a year ago. A 400% rise over the
last decade.  What is the meaning of this? Can this
price be supported? Will it continue to rise? Of course
we know the underlying reasons for the strength in
gold: weak currencies around the globe, especially
the weakness in the dollar. The US is running massive
deficits. We are essentially printing money in the US
with quantitative easing (so called Q1 and Q2) where
the government is buying back its own bonds with
money it creates. But can those factors justify this
price level of gold? Some would say yes, and that rise
in gold has foreshadowed the economic woes we are
now confronting. Others would say that as soon as
economic growth picks up, allowing central banks to
raise interest rates, gold will come crashing down. But
when will the economy pick up?

All these bad economic indicators point to more bad
economic times. I’m not sure if I can take more
economic bad news and another recession…..

When you think that you've lost everything
You find out you can always lose a little more
I'm just goin' down the road feeling bad
Tryin' to get to heaven before they close the door.

Tryin' to Get to Heaven by Bob Dylan

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Right Reasons (Aug 11, 2011)

The past few days have been brutal for the stock
market investor. The Dow has lost over 2,000 points
over the past two weeks. Almost 16% loss in that
period. We’ve heard many explanations. Last week it
was the US Congress bickering with the debt limit -
and Spain and Italy being on the brink of financial
collapse. Three days ago it was the US debt rating
being lowered by Standard & Poor’s. Today it was the
fear of France’s debt rating being lowered and
European banks problems spilling over into the US.

All along their has been concern over the slow
economic growth of the US over the past six months
and its continued slowdown in the near future. This is
the important reason in my opinion. GDP for Q2 was
estimated to be only an annualized 1.3%, while Q1
was revised downward to 0.4%. Certainly, if these
growth numbers portend the future, there was not
much reason for the drive of the Dow up to 12,800,
where it had peaked just a few short weeks ago.

But let’s take a step back. First, no one knows where
the market is going tomorrow. As usual, the best
estimate of where the market should be is – wherever
it is now. The current price is always the best estimate
of the future price. Most investors should take a look
at he market from the proper long-term perspective.
Look at historical patterns - is this decline really worse
than we’ve seen in the past?  In the spring/summer of
2010 we saw a decline in the Dow of almost 13%.
Almost as bad as we’ve seen the past few weeks.
Most people have already forgotten about that. The
market went down almost 50% in 2008/09.

long-term investor should think in those terms. They
should make their judgment based on where they
believe the economy will be in that time frame. Don’t
forget today’s market value should be based on
projected earnings way into the future. Of course, if
you really believe in low or no growth scenarios
extended way into the future, than that is a reason to
adjust your holdings. But make your moves based on
that considered judgment based, not on the raw fear
raised by what happened yesterday and today.

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