The consumer continues to be under duress. Job losses continue to mount; while weekly readings are down from their highs, initial unemployment claims are still running above expectations. For those already out of work, they face only a finite amount of unemployment benefits. Housing prices continue to fall, again, at a slower pace, but the effect is still the same as Americans can no longer draw on their home values for spending or count on the ever-rising house price for future wealth increases. Credit lines are being drawn in by card issuers and consumers face high fees for their outstanding debt balances. Without question, these factors have had their effect on consumer spending (and saving). Retail sales continue to contract more than economists have expected. The savings rate, at 4.6 percent, remains close to the 13-year high it reached in May.
The tough consumer environment clearly is having an effect on retailers, who have largely struggled through this deep recession. At the expense of profits, most have cut prices to keep up sales volumes; job cuts and inventory reductions have helped support profit margins, but there is no getting around the dismal environment. On the other hand, some retailers have held their own. One in particular has been Wal-Mart (WMT). The world’s largest retailer reported second-quarter earnings last week that not only beat analysts’ expectations, but also showed growth versus the year earlier period.
For the first time in five weeks, the market posted a weekly decline last week, changing the underlying mood from overwhelmingly bullish to more cautious. Market participants concentrated on retail sales numbers and on the decline in consumer confidence as measured by Reuters and the University of Michigan index of consumer sentiment.
While the auto sector has received a boost from cash-for-clunkers-related sales, the overall picture continues to reflect a consumer who’s stretched beyond his means. Foreclosure filings rose to a record, and retail sales declined the most since March. Americans are increasingly seeking bankruptcy protection: 35 percent more individuals or households file for bankruptcy today than a year ago, and the numbers are moving higher. The trend is also very disturbing for businesses, with a 64 percent increase in filings over a six-month period versus a year ago.
These are just some of the reasons why I am concerned that the market’s advance is overdone. The government spending, which has been replacing both consumer and business demand, has been helping the economy, but this just cannot replace all the demand that’s been lost – and cannot go on forever.
The other day, Warren Buffett reiterated his views on the government spending by writing an op-ed piece for The New York Times. Buffett called it a “butterfly effect” as the consequences of the government spending could exceed the size of it. With the U.S. economy “out of the emergency room,” now could be the time to address the size of that spending. “With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.”
Buffett finished his op-ed article with the following: “Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.” I cannot agree more. This is why I like the markets of those countries that are commodities-rich, expecting commodities to benefit from the weaker dollar. And, of course, I like gold – the ultimate dollar hedge.
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Wednesday, August 19, 2009
Wednesday, August 12, 2009
The U.S. is No Longer an Economic Superpower
In last week's update, I outlined the no-win situation the U.S. economy finds itself in today. I was pleased that so many people sent me comments and questions. Considering how much work I put into these missives, it's great to know people are reading them. And while I can't reply to every message individually, I can attempt to address the most common issues and questions people had.
My basic argument is that the U.S. is becoming a smaller part of the global economy, while the combined emerging markets and resource-rich markets are starting to matter more.
This shift in power and influence carries some dire implications for Americans. For, if the world's economy continues growing, commodity prices will rise to ever higher levels. For obvious reasons, the resource-rich nations will benefit from this trend. Brazil, Canada, Australia (and to some extend Russia and China) will grow rich by supplying commodities to everyone else. Emerging nations too will prosper. Their strong growth will be the driving force behind commodity prices. At the same time, that growth will outpace inflation, enabling them to comfortably pay more for commodities.
Unfortunately, the U.S. is neither emerging nor possesses excess resources. Moreover, the U.S. consumer has been dealt a serious blow in this recession. In the past decade, consumers spent more money than they earned, creating more GDP growth than their GDP contribution. But those days are over, forcing the U.S. to experience much slower growth. Consequently, for Americans, rising commodity prices will not be a sign of expansion but rather a tax that inhibits spending.
Some experts suggest that commodity prices and the growth of the U.S. have a direct correlation. But there are two problems with the idea that one automatically means the other. Over short-term periods commodity prices correlate strongly with world growth, including U.S. growth. Higher production usually raises demand for raw materials. Thus I see that this year stock prices have risen along with commodities. Similarly, brief downturns in commodity prices can occur alongside brief downturns in stocks.
However, over longer periods, the correlation reverses. In fact, looking at data as far back as the 1970s, I can see a negative relationship between commodities and growth. Sharply higher commodity prices can limit growth and rapid growth can bring commodity prices down. I won't go into the math here, but the statistics clearly support this view. (If you want the figures, let me know.)
The other problem with this belief is to regard the U.S. as the top player on the world stage. That's because, until quite recently, it was. For decades, the U.S. economy accounted for over 50% of the global economy.
People's understanding of the world changes much slower than the world itself. So it's no wonder most people still believe that if the U.S. sneezes the world catches a cold (and, vice versa, if the U.S. strikes gold the whole world gets rich).
The world has been changing, however, in ways that few Americans comprehend. China and India combined now account for more of the world’s GDP than does the U.S. (in real terms). Moreover, their growth rates are many times ours, which means that by the time you read this, the difference between China/India and us will be even greater. Throw in Brazil, Russia, and the rest of Asia and you'll discover the U.S. is no longer the economic superpower it once was.
Today, growth in the U.S. can falter without derailing commodity prices (at least not for long). What's more, the longer the developing world keeps its growth rate above ours, the bigger its influence on the world economy will become, and the smaller ours will be. Just as no one worries if a recession in Switzerland will cause the price of cocoa beans to plummet, eventually a recession in the U.S. will have much less of an effect on oil prices.
So the question is -- How do we deal with this brave new world?...Give me your thoughts.
________________________________
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My basic argument is that the U.S. is becoming a smaller part of the global economy, while the combined emerging markets and resource-rich markets are starting to matter more.
This shift in power and influence carries some dire implications for Americans. For, if the world's economy continues growing, commodity prices will rise to ever higher levels. For obvious reasons, the resource-rich nations will benefit from this trend. Brazil, Canada, Australia (and to some extend Russia and China) will grow rich by supplying commodities to everyone else. Emerging nations too will prosper. Their strong growth will be the driving force behind commodity prices. At the same time, that growth will outpace inflation, enabling them to comfortably pay more for commodities.
Unfortunately, the U.S. is neither emerging nor possesses excess resources. Moreover, the U.S. consumer has been dealt a serious blow in this recession. In the past decade, consumers spent more money than they earned, creating more GDP growth than their GDP contribution. But those days are over, forcing the U.S. to experience much slower growth. Consequently, for Americans, rising commodity prices will not be a sign of expansion but rather a tax that inhibits spending.
Some experts suggest that commodity prices and the growth of the U.S. have a direct correlation. But there are two problems with the idea that one automatically means the other. Over short-term periods commodity prices correlate strongly with world growth, including U.S. growth. Higher production usually raises demand for raw materials. Thus I see that this year stock prices have risen along with commodities. Similarly, brief downturns in commodity prices can occur alongside brief downturns in stocks.
However, over longer periods, the correlation reverses. In fact, looking at data as far back as the 1970s, I can see a negative relationship between commodities and growth. Sharply higher commodity prices can limit growth and rapid growth can bring commodity prices down. I won't go into the math here, but the statistics clearly support this view. (If you want the figures, let me know.)
The other problem with this belief is to regard the U.S. as the top player on the world stage. That's because, until quite recently, it was. For decades, the U.S. economy accounted for over 50% of the global economy.
People's understanding of the world changes much slower than the world itself. So it's no wonder most people still believe that if the U.S. sneezes the world catches a cold (and, vice versa, if the U.S. strikes gold the whole world gets rich).
The world has been changing, however, in ways that few Americans comprehend. China and India combined now account for more of the world’s GDP than does the U.S. (in real terms). Moreover, their growth rates are many times ours, which means that by the time you read this, the difference between China/India and us will be even greater. Throw in Brazil, Russia, and the rest of Asia and you'll discover the U.S. is no longer the economic superpower it once was.
Today, growth in the U.S. can falter without derailing commodity prices (at least not for long). What's more, the longer the developing world keeps its growth rate above ours, the bigger its influence on the world economy will become, and the smaller ours will be. Just as no one worries if a recession in Switzerland will cause the price of cocoa beans to plummet, eventually a recession in the U.S. will have much less of an effect on oil prices.
So the question is -- How do we deal with this brave new world?...Give me your thoughts.
________________________________
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Saturday, August 8, 2009
Cash for Clunkers - Who's The Winner...
The government’s “cash for clunkers” program, which offers credits between $3,500 and $4,500 to those disposing of gas-guzzling vehicles and buying new, more fuel-efficient cars, is bolstering auto sales – and auto makers.
After the initial $1 billion apportioned to the program was rapidly drained, a proposal to top up the funds with an additional $2 billion passed the Senate Thursday by 60 to 37 votes and was signed by President Obama without delay. So far the program (formally the Car Allowance Rebate System, or “CARS”) has led to about 750,000 cars being sold.
As one of the goals of the program was to get more fuel-efficient cars on the road, it should not come as a surprise that some of the best-selling cars are foreign makes. In fact, as of the latest data available, three out of five new cars purchased through the program are manufactured by non-U.S. companies like Toyota and Honda. As the program has won its additional funds, the hard-hit auto industry will likely benefit from incentive-related sales for a little longer, despite some indications of the waning interest. It’s also important to note that in addition to the U.S., other countries such as the United Kingdom, Germany, Japan and China also offer several measures (consumer credits, tax breaks, subsidies) that are boosting the industry. It was reported that Russia is also considering similar measures for domestic cars. It’s very likely that cash-strapped consumers taking advantage of the program, while getting a good deal on a new car, will have less money in their pockets for other discretionary purchases. And if the economy does not improve significantly by the time the additional $2 billion runs out (which is unlikely), “cash for clunkers” will have revved the auto industry’s engine only temporarily. However, this extra boost should prove helpful to the strongest companies in the business who are getting an incremental advantage over competitors.
One such company is Toyota, a leader in fuel-efficient cars. Toyota, which gets more than a fourth of its sales in North America, holds a second place in cars purchased under the program. Recently, it has provided investors with a look into its future as it released operational results for the first quarter of its fiscal 2010. Despite remaining in the red, the company is now more optimistic about the near-future. Toyota now expects higher sales in Japan for the first time in five years as the result of the government-sponsored program for promoting fuel-efficient vehicles. Its earlier forecasts did not include the effects of government incentives at all. Toyota also narrowed its expectations for full-year operating loss to 750 billion yen from 850 billion yen, a significant improvement. Toyota’s balance sheet remains strong and continues to be a significant long-term positive. While purchases prompted by the governments’ incentives do not necessarily reflect sustained demand, the boost they are giving to Toyota is already helping its near-term results. I like the company because of its industry dominance, which is likely to improve as the industry goes through the slowdown. Toyota’s recent guidance may prove conservative as its technological dominance and financial strength will continue helping it to win over competition.
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After the initial $1 billion apportioned to the program was rapidly drained, a proposal to top up the funds with an additional $2 billion passed the Senate Thursday by 60 to 37 votes and was signed by President Obama without delay. So far the program (formally the Car Allowance Rebate System, or “CARS”) has led to about 750,000 cars being sold.
As one of the goals of the program was to get more fuel-efficient cars on the road, it should not come as a surprise that some of the best-selling cars are foreign makes. In fact, as of the latest data available, three out of five new cars purchased through the program are manufactured by non-U.S. companies like Toyota and Honda. As the program has won its additional funds, the hard-hit auto industry will likely benefit from incentive-related sales for a little longer, despite some indications of the waning interest. It’s also important to note that in addition to the U.S., other countries such as the United Kingdom, Germany, Japan and China also offer several measures (consumer credits, tax breaks, subsidies) that are boosting the industry. It was reported that Russia is also considering similar measures for domestic cars. It’s very likely that cash-strapped consumers taking advantage of the program, while getting a good deal on a new car, will have less money in their pockets for other discretionary purchases. And if the economy does not improve significantly by the time the additional $2 billion runs out (which is unlikely), “cash for clunkers” will have revved the auto industry’s engine only temporarily. However, this extra boost should prove helpful to the strongest companies in the business who are getting an incremental advantage over competitors.
One such company is Toyota, a leader in fuel-efficient cars. Toyota, which gets more than a fourth of its sales in North America, holds a second place in cars purchased under the program. Recently, it has provided investors with a look into its future as it released operational results for the first quarter of its fiscal 2010. Despite remaining in the red, the company is now more optimistic about the near-future. Toyota now expects higher sales in Japan for the first time in five years as the result of the government-sponsored program for promoting fuel-efficient vehicles. Its earlier forecasts did not include the effects of government incentives at all. Toyota also narrowed its expectations for full-year operating loss to 750 billion yen from 850 billion yen, a significant improvement. Toyota’s balance sheet remains strong and continues to be a significant long-term positive. While purchases prompted by the governments’ incentives do not necessarily reflect sustained demand, the boost they are giving to Toyota is already helping its near-term results. I like the company because of its industry dominance, which is likely to improve as the industry goes through the slowdown. Toyota’s recent guidance may prove conservative as its technological dominance and financial strength will continue helping it to win over competition.
________________________________
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Thursday, July 23, 2009
Embracing Change Through Healthcare Reform
Last November the majority of American people voted for change by electing president Barrack Obama into the Oval Office sending a message the country needed a change. Six months into his presidency his approval ratings have plummeted. Are we ready for change? Or did we flirt with the concept of change? Change is defined as making different to alter or pass from one state to another.
There are seven phases to the process of change, the first being shock and surprise and the second is denial and refusal. The following steps are rational understanding, emotional acceptance, willingness to learn, realization and integration of change into our lives. Currently our country is stuck in the first two steps regarding health care reform. Part of the issue is that the Obama administration hasn’t done its job with informing folks the nuts and bolts of the proposed plan.
It is becoming clear that some people are using this platform to express their discontent that Barack Obama was elected president. This behavior was on display last week during town hall meetings by individuals booing, heckling and interrupting the meetings and turning them hostile. The opponents of the health care plan are no longer engaging in civil debate but appeared to have turned it into their personal vendetta.
Could these folks, mainly conservatives, be spreading untruths regarding the reform and using them to cause discourse in lieu of the upcoming elections this November? In typical fashion, it seems that the conservatives are using ignorance and scare tactics to cloud the issue. I am amazed that the average “Joe” would participate in such games.
On the other hand, some would argue that if President Obama’s European-style health care is implemented into our society, it will distort our current system. We will be subjected to health care rationing courtesy of the taxpayer. Moreover, the Democratic Congress would seek to extend health care coverage to millions of U.S. residents who historically have chosen to live without health insurance. Without a doubt this Obama style health care will include millions of illegal aliens. As a result, the demand for medical services such as hospitals, nursing homes and emergency rooms would rise.
Doctors will be overwhelmed with cost control under the new insurance polices that may bring about increased prices. This will essentially take away the dedicated doctors’ and nurses’ fundamental rights. Others argue that the elderly, who have faithfully paid into Medicare, but under Obama care would need approval of insurance bureaucrat to get a medical procedure
Unfortunately, our health care system needs to change and the 46 million American without health care coverage need to change as well. The American people deserve to be told what the health care reform contains without being subjected to misleading information. Folks also deserve to have a discussion where the atmosphere is educational and informative. Change can be a positive step forward if and when the message of change is sent clearly and factually.
________________________________
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There are seven phases to the process of change, the first being shock and surprise and the second is denial and refusal. The following steps are rational understanding, emotional acceptance, willingness to learn, realization and integration of change into our lives. Currently our country is stuck in the first two steps regarding health care reform. Part of the issue is that the Obama administration hasn’t done its job with informing folks the nuts and bolts of the proposed plan.
It is becoming clear that some people are using this platform to express their discontent that Barack Obama was elected president. This behavior was on display last week during town hall meetings by individuals booing, heckling and interrupting the meetings and turning them hostile. The opponents of the health care plan are no longer engaging in civil debate but appeared to have turned it into their personal vendetta.
Could these folks, mainly conservatives, be spreading untruths regarding the reform and using them to cause discourse in lieu of the upcoming elections this November? In typical fashion, it seems that the conservatives are using ignorance and scare tactics to cloud the issue. I am amazed that the average “Joe” would participate in such games.
On the other hand, some would argue that if President Obama’s European-style health care is implemented into our society, it will distort our current system. We will be subjected to health care rationing courtesy of the taxpayer. Moreover, the Democratic Congress would seek to extend health care coverage to millions of U.S. residents who historically have chosen to live without health insurance. Without a doubt this Obama style health care will include millions of illegal aliens. As a result, the demand for medical services such as hospitals, nursing homes and emergency rooms would rise.
Doctors will be overwhelmed with cost control under the new insurance polices that may bring about increased prices. This will essentially take away the dedicated doctors’ and nurses’ fundamental rights. Others argue that the elderly, who have faithfully paid into Medicare, but under Obama care would need approval of insurance bureaucrat to get a medical procedure
Unfortunately, our health care system needs to change and the 46 million American without health care coverage need to change as well. The American people deserve to be told what the health care reform contains without being subjected to misleading information. Folks also deserve to have a discussion where the atmosphere is educational and informative. Change can be a positive step forward if and when the message of change is sent clearly and factually.
________________________________
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Thursday, July 16, 2009
What About Gold
In a faltering economy such as ours, where many people (including myself) have lost jobs, it is difficult to maintain an optimistic outlook. Hell...it's even tough to be rational sometimes. But to plan for the future, you have to take control of your sensible side to be able to logically assess potential opportunities in front of you. The opportunity I see right now is the ability to buy gold at a relatively inexpensive price. So to plan for my future, I'm taking my money (or what's left of it) to buy gold... Ever since I was a little kid, I've always had either a gold bracelet or necklace around my body. I've always viewed gold as nothing more than just jewelry. But as I get older and little more in-tune with the world, I realize that having more gold as an investment is not such a bad idea...especially when the fed continues to print more funny money and driving the value of the dollar down to the crapper.
It's a tale of two assets caught in a web of unassailable statistics. And, in my humble opinion, it all adds up to the biggest wealth-building opportunity of our lifetime. Let's take the first of these assets - the one that's headed for a severe correction. This asset is the U.S. dollar.
ne of the most basic rules in economics is that of supply and demand. Greater supply and lower demand leads to falling prices, while lower supply and higher demand leads to rising prices. In the past year, demand for dollars has risen as investors sold their stocks and other assets for the supposed security of cash. However, over the past year, the Federal Reserve has worked hard on our behalf to prevent the dollar's rise. The monetary base, one of the basic measures of the supply of dollars, has gone from $832 billion a year ago to over $1.6 trillion today. What's more, the Fed is committed to increasing the money supply in order to get banks to resume lending and bring our economy out of recession.So what happens as the economy recovers? Demand for dollars will fall, as people start buying other assets again. The supply of dollars, however, will remain high, so the dollar's value will correct sharply. You won't want to be left holding too many dollars when that happens. Now let's consider gold. Worldwide gold production peaked in 2001. Older mines are becoming exhausted, while few new mines of any size are opening. Consequently, supplies have been increasing at a slower rate. Meanwhile, demand for gold has been rising by about 7% a year – driven especially by investors who want a safer place to keep their savings than dollars (or euros or any one of a number of other currencies, for that matter). It’s no wonder that over the past decade gold prices have climbed 325% while the S&P has fallen 37%! In fact, it's not just private investors who are buying more gold. Nations such as China have started turning to gold as a safer reserve asset than U.S. dollars. Over the next few years, I expect the demand for gold will continue rising simply because the world has lost some faith in other types of assets such as real estate, stocks, and cash. And that means gold prices are almost guaranteed to accelerate. All this adds up to a fantastic opportunity for us to grow wealthier by applying this one simple idea: trade dollars for gold.
Of course, if you really want to make a fortune, you'll buy not just physical gold (which can be a pain in the butt to store and trade anyway) but also shares in gold mining companies that are increasing their reserves and producing gold for a low cost. Every increase in the price of gold will add considerably to the intrinsic value of these companies. Wait for the pull-back this summer before buying.
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What about the dollar
It's a tale of two assets caught in a web of unassailable statistics. And it all adds up to the biggest wealth-building opportunity of our lifetime. Let's take the first of these assets - the one that's headed for a severe correction. This asset is the U.S. dollar. One of the most basic rules in economics is that of supply and demand. Greater supply and lower demand leads to falling prices, while lower supply and higher demand leads to rising prices. In the past year, demand for dollars has risen as investors sold their stocks and other assets for the supposed security of cash. However, over the past year, the Federal Reserve has worked hard on our behalf to prevent the dollar's rise. The monetary base, one of the basic measures of the supply of dollars, has gone from $832 billion a year ago to over $1.6 trillion today. What's more, the Fed is committed to increasing the money supply in order to get banks to resume lending and bring our economy out of recession. So what happens as the economy recovers? Demand for dollars will fall, as people start buying other assets again. The supply of dollars, however, will remain high, so the dollar's value will correct sharply. You won't want to be left holding too many dollars when that happens. Now let's consider gold. Worldwide gold production peaked in 2001. Older mines are becoming exhausted, while few new mines of any size are opening. Consequently, supplies have been increasing at a slower rate. Meanwhile, demand for gold has been rising by about 7% a year – driven especially by investors who want a safer place to keep their savings than dollars (or euros or any one of a number of other currencies, for that matter). It’s no wonder that over the past decade gold prices have climbed 325% while the S&P has fallen 37%!
In fact, it's not just private investors who are buying more gold. Nations such as China have started turning to gold as a safer reserve asset than U.S. dollars. Over the next few years, I expect the demand for gold will continue rising simply because the world has lost some faith in other types of assets such as real estate, stocks, and cash. And that means gold prices are almost guaranteed to accelerate.
All this adds up to a fantastic opportunity for usto grow wealthier by applying this one simple idea: trade dollars for gold. Of course, if you really want to make a fortune, you'll buy not just physical gold (which can be a pain in the ass to store and trade anyway) but also shares in gold mining companies that are increasing their reserves and producing gold for a low cost. Every increase in the price of gold will add considerably to the intrinsic value of these companies. Wait for the pull-back this summer before buying.
________________________________
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