American Missive

BECKLEY— Today the economic news was good.  The Gross Domestic Product surged to 3.5%. Of course the stock market rallied back up over 10,000…again.    This is no surprise with government spending (yes, GDP is composed of government spending) in all their various forms this was bound to happen.  Add to this that consumers are starting to spend more as they buy into the call for consumerism.  The GDP is really of no surprise nor is the correlated stock market rally.  Perhaps now the stock market is overvalued.  However, the current value of the stock market is of no concern.   What is of concern should be the future? As today will pass and become history and as of yet their are no time traveling devices, the real question is what does the future hold?  First, let us look at some data. 

First money supply, as I said the rise of GDP is of no surprise.  Money supply is going through the roof.  With so much money out their their should be spending.  Particularly as M3 drops from the depletion and spending of larger accounts. 

Of course these are inflation indicators as well.  The stock market should rise with inflation; however, it doesn’t mean that the value of the stock market rises in terms of American’s purchasing power.  The lies the government tells us include the CPI rate which is their measure of inflation.  It is very misleading and in this way the government can attempt to have their cake (growth) and eat it to (no/low inflation).   The stock market may continue to grow (very slowely), it may move side ways for quite some time, or it may decline again to try to get to a reasonable value. 

Historical data shows cyclical cycles in the history of capitalist economies.  The longest of these is known as the Kondratiev Wave which explains the rise of economic expansion from the Industrial Revolution, the Age of the Steam & Railways, the Age of Steel & Electricity, the Oil and Auto Age, the Information and Telecommunications Age.   Not without debate one can place the beginning of the age of information and telecommunications in the early to late 1970s as computers came to enough maturity and usability as the mouse was invented in the previous decade, and Pong hit the markets making the way for mass marketing of Windows in the 1980s.  Given the 40 to 60 year cycle economic times are now in a declining period until the next revolution.  Of course the Kondratiev Wave isn’t intended to predict stock market movements but more the real underlying economy not the false representation given in the stock market at any given time, which can go a long way to explain the extreme disconnect between the market and the future.

As the U.S. prints money, sells debt, starts to spend more, things will only get worse.  Currently, the U.S. debt and spending stimulating the economy is thanks to the American people who will take it on the chin with inflation and thanks to China for purchasing our debt.  However, China is getting wiser.  Why they import our inflation while exporting their goods is a long-term historical trend that is only due to the various lies of the past that (thanks to our previously strong economy) have afforded us such a strong reputation.    However, interest rates will have to increase at some time.  The Chineses have purchased a lot of debt that is going to get slaughtered when interest rates rise.  The long-term difficulty though is that the U.S. will not be able to raise rates fast enough to keep up with inflation particularly with such a week economy that as Mr. Van Nuys has pointed out  is going to take a LONG time to recover.   This means that not only will the dollars be devaluing what the Chinese are receiving but these dollars will be fewer due to a lower interest rate then what China could get else where.  But the Chinese are getting wise as earlier this month a Chinese central banker again pointed out that the Chinese are working on a solution to these issues.   The solution is really quite simple.  Begin dumping U.S. dollars for various other assets and at the same time let the RMB float free to the U.S. dollar.  Of course this would be a nightmare for the U.S. as our dollars would be worthless when buying Chinese goods and the Chinese who have been saving RMB for decades (the Chinese have some of the best savings rates of any culture) are suddenly much richer and able to buy their own goods from their own manufacturing firms not to mention oil and goods from other countries as the Yuan would suddenly become a valuable currency.  Of course the U.S. with our exported manufacturing base is way behind the 8-Ball.  Since services can’t be exported and the U.S. is a service economy now we will have extreme challenges fixing our economy.   The question to the Chinese government is can the Chinese people remain a conservative financial culture while also taking on a broadened roll of the consumer.  Personally, I think this is a very LONG range question.  China still has a lot of poor who even if they become wealthier will still be poor and have the mentality of savings that a life of hard work creates.  I think it will take generations before China would become corrupted by the consumer mentality probably longer then it to the U.S. to become corrupted by this sick mentality of the “consumer” being the life blood of a society.  Whoever started placing such importance on the consumer was truly an idiot.  Consumer spending is the opposite of economic health it’s economic destruction pure and simple but that is going off on a tangent. 

The coming economic difficulties in the U.S. are something that can’t be avoid as a whole economy.  I’m afraid the U.S. will only make it worse by continued spending or even with more big spending like health care reform or a second economic stimulus plan.   While they allow the current programs that are in place will continue to expand.   With Social Security and Medicare already heading down the hole the government will not make the tough decisions to cut these programs and revolutionize the tax code.  The simple solution will continue to be print more money and hide the inflation numbers behind phony CPI numbers.   Given the reality that inflation will come and that inflation not deflation are the real threats to economic stability the stock market is largely irrelevant unless it is able to dramatically outperform inflation and depending on how high inflation is then that is how high the stock maret would have to perform plus.  This is highly unlikely.  Say we head back to the true inflation we saw in ea5ly 2008 of 8% the stock market would have to return 16% or more to even be valid.  With a long term average of 6.5% I think this is unlikely.    How will it outperform other markets that are able to benefit from strong currencies and healthy economic activities that benefit from our inflation as their currencies strengthen on the global market place?  It won’t I do not think in the next decade Wall Street will be the financial capital of the world.   The solution I think is international stocks such as companies like Phillip Morris International that are diversified out of the dollar and will perform well and even better with inflation are some solutions.   Additionally, I believe that various Chinese stocks purchased directly (if possible although I’m looking at a couple ADRs) on the their exchanges represent great opportunity if they meet my various investment criteria.  Also, as part of a balanced portofolio I can’t help but keep some of my money in at least a few U.S. Companies particularly companies that deal with exportable goods such as oil and materials.  While on the opposite hand I think technology companies will have a hard time exporting American made software and importanting outsourced IT materials.  One of my past favorite investments was NetGear and while it treated me well these manufactured goods will be hard to get solid returns on when importing from China once China ceases to import our inflation for the export of their goods.   Also, to avoid the devaluing of the dollar through inflation I believe foreign currency and commodities represent promising opportunities perhaps even ETF or Mutual Funds may be quality solutions as predicting where and what economy or commodities out perform each other is difficult to say the least especially when their are only limited hours in a day.  Finally, due to the extreme instability that I think is still coming gold and silver represent for me some of the best options.  I think the risk of these commodities is low and they are my personal answers for the high interest rate risks of  Treasuries and TIPS.   I believe the value of gold and silver is stronger then the value of the U.S. Governments honesty with interest rates and CPI. 

Even with the challenges in our economic condition their are still great economic opportunities for individuals willing to put in the work and do the research.   If the worse of the worse happens and their is true financial chaos in the U.S. then these financial ideas might turn-out even better due to their posistion once the dust settles.  If the economy limps into the sunset then that is fine to and at the worst their would be times to take advantage of even better prices to dollar cost average into even stronger posistions.   However, it is personally frightening to look at the grandiose attitude that the government and Wall Street take as they head into this future.  Arroganance I think is something that will bite some of those that think they can control people and wills the best we can hope for is to control ourselves.  As for every person that is well prepared for the economic challenges of the future there has to be substantially more that are not prepared.