RIP The Private Sector Economy
Graham Summers
November 5, 2009
One of our central themes at Gains, Pains, & Capital is the REAL issues plaguing the US economy and how the powers that be have completely failed to do anything to remedy them.
For starters, we've pointed out that REAL US incomes have declined roughly 40% since their peak in the early '70s (which is why it now takes two working parents to make ends meet).
We've also detailed how the Federal Reserve used loose money and easy access to credit to "paper over" the massive decline in living standards in the US in the last 20 years: a process which resulted in consumers increasingly resorting to financial speculation first with stocks, then more sophisticated financial instruments (options, futures), and finally houses (the largest asset a consumer ever buys) in their efforts to generate wealth.
The end result of this is that by 2007, the US was literally saturated with debt on its consumer, state, and federal government levels. This Credit Bubble burst forcing systemic deleveraging, a portion of which involved the Financial Crisis of 2008 to the present (it's nowhere near over).
One of the worst consequences of these trends (lower incomes, lower living standards, increased indebtedness) has been the slow, painful death of the private sector in the US economy. Regardless of whether you're an individual or a corporation, excessive debt is like an anchor hanging around your neck, forcing you to work harder and harder simply to stay afloat.
The end result is that today, we are literally witnessing the death of the private sector in the US economy. I realize that statement may appear too bold or outlandish, but let us consider the facts:
- There has been NO private sector growth in the US for 10 years
- The US Government currently accounts for 18% of US incomes
- We've seen roughly 500,000 folks lose their jobs every week of this year, putting total firings for 2009 around 20 million
These data points lay out in uncertain terms that the US economy is rapidly becoming a public sector economy. However, what I'm about to reveal is the RAEL zinger.
According to research published in the November issue of Archives of Pediatrics and Adolescent Medicine, 50% of US children will be on food stamps at some point in their lives. Put another way, virtually everyone will know a family that has used food stamps at some point in their lives.
This is BEYOND staggering. The US, once thought the capital of capitalism, is now in a such a state that half of is children will require government aid to get a decent meal.
Nationwide, 36 million Americans are on food stamps. That's 11% of the population. And it represents an 8 million (28%) increase from last year's levels.
Hard to see how this translates into an economic recovery, isn't it?
The reality is that neither the Stimulus nor the bailouts nor any of the Government's moves have fixed the issues plaguing the US economy. Already in debt to our eyeballs, the powers that be figured issuing more debt was the solution. It's total madness. And it's going to end very, VERY badly.
Welcome to the New Normal in the US. An economy in which Uncle Sam is the higher, lender, buyer, and feeder of last resort.
Stocks have completely disconnected from this reality and are pricing GDP growth of 4-5% next year. Put another way, stocks are AT LEAST 20% overvalued and due for a major correction and/ or Crash.
Long-time readers know that I've begun to develop a love/hate relationship with the US Dollar. On one hand I believe the US currency is horribly flawed given our unserviceable debt load and the Fed's profligate spending.
However, on the other hand, to make money investing you have to be willing to go against the crowd. And with less than 3% of investors currently bullish on the US Dollar, the contrarian in me can't help but wonder if we have the makings of a serious Dollar rally similar to the one that kicked off the 2008 Crash in stocks.
Thanks to Ben Bernanke and pals, the US Dollar has essentially become THE carry trade for the entire world. If you're unfamiliar with "carry trades" these are investment strategies in which you borrow in one currency (usually one with very low interest rates like the Dollar today) and invest in another currency or investment class of higher returns. Provided the second investment returns substantially more than interest rate on the currency you're borrowing in, this can be a highly profitable strategy.
With interest rates at 0.25% or so today, the US Dollar has become the carry trade of choice, with investors all over the world borrowing in Dollars and investing in stocks, gold, oil, virtually any investment class you can name. The end result is that the Dollar has begun to trade at a near perfect inverse relationship to pretty much everything out there:
Carry trades work fine until the currency you borrow in rallies (or suddenly interest rates go up). When this happens the profit margin disappears the trade often reverses as investors sell the second investment in order to pay back the money they borrowed.
Which may be happening for the US Dollar right now. Last week, the Dollar rallied strongly as stocks, commodities (everything but gold), collapsed. The question now is whether this was the start of a genuine Dollar rally or simply a brief head-fake before the US currency rolls over to test 72: its 30-year low.
From a technical standpoint, the Dollar failed to break its 50-ema. Until this happens, the US currency remains in a downtrend.
However, it's worth noting that the Dollar held its ground at 76 and change. Previously, 76 was a point of downward resistance. The fact that the Dollar rallied ABOVE this level and held it IS a sign of increased strength. If the US Dollar HOLDS here we may in fact be seeing the first signs of a rally in the US Dollar. If this happens, expect to see stocks and commodities (with perhaps the exception of Gold) completely collapse in a repeat of the second half of 2008.
Long-term I believe the US Dollar is a horribly flawed currency. The US has absolutely no way of paying back the debts it owes. And we've now spent more money battling the Financial Crisis than we did in WWI, WWII, and the New Deal combined.
However, with so much of the investor world betting on a Dollar collapse, the stage is set for a MAJOR surprise here. Even a brief bounce in the Dollar could become a full-fledged rally as shorts and other investors who are borrowing in Dollars rush to cover their shorts (buy Dollars).
Keep your eyes on the most-hated currency in the world. It could be flashing a signal that stocks are due to collapse. I'm already preparing investors for what's to come with a FREE Special Report detailing THREE investments that will explode when stocks start finally collapse. While most investors are complacently drifting towards the next Crisis lke lambs to the slaughter, my readers are already getting ready with my Financial Crisis "Round Two" Survival Kit.
The investments detailed within this report will not only protect your portfolio from the coming carnage, they'll also show you enormous profits: they returned 12%, 42%, and 153% last time stocks collapsed.
Swing by www.gainspainscapital.com/roundtwo.html to pick up a FREE copy today!
Graham Summers
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