American Economy: Analyzing the Elements
Yesterday we took a broad overview of America's Economic standing amidst the World and broke down some of the elements that have led us to this point.
Today, I want to break out the elements of the Economy itself and take a deeper look at what is working and what is broken.
1.) The US Dollar
Guru has been a Euro Bull since Dubya's election and those positions have paid off handsomely. The European Union enjoys serious structural advantages as an ECONOMIC entity that make its currency a safer harbor than Dollars in the current climate. Among these are;
* EU Countries are under no illusions about sharing a 'common culture' or 'language'. Instead of bending over backwards to pretend that Poland, Holland and Spain are culturally 'united', the structure allows each country to BE who they are and focuses on areas where they CAN find common ground - basic economic reporting, central bank standards, common currency, freedom of movement, labor and capital (with some limitations). In the USA, economic linkage is taken for granted, but Political and Cultural fantasies about our commonality (say between Vermont, Illinois and South Carolina) lead to distortions of purpose and can invite Political manipulation of statistics and tax revenue. Whereas an EU country knows that other countries will pour over its books with a fine tooth comb and that those countries have no more interest in covering up deficiencies than you have in doing so for THEM, the numbers are assured of a strong component of accuracy. In America, a National Politician...lets just use an initial, say....'W', who may have electoral strength in one region but not another, is likely to be tempted to shift goods, services, tax policy etc. in favor of his support and away from an honest economic model. When this happens, the numbers cannot be relied upon to a great degree of accuracy and finding the ACTUAL national position can be a chore. This is the OPPOSITE of what currency traders want to see in a Nation.
* EU countries compete with one another and are somewhat constrained by the rigorous standards of the EU charter, in terms of their debt, their employment, their expenditures...this makes the EU far more conservative than the USA. In some periods of High Growth, the US model can dramatically outperform the EU - in THIS climate, the opposite is true.
* EU countries are, largely, shielded militarily by NATO and have little reason to ramp us Defense spending to the levels of the US. While America funds two Wars at its poorest moment, EU countries can focus those funds and energies upon their economies and their citizens. A HUGE advantage for the currency.
Many of these same arguments augur well for Japan and the Yen as well. Japan has limited Military, post WW II, a conservative approach to budget matters, saving, R&D expense...an educated populace who are, for the most part, socially coherent and savings focused. Additionally, Japan is the most reliable global partner likely to benefit from China's growth and America's weakness. Japan and China are working to smooth over political differences and it makes sense to suspect Japan will eventually grow its portfolio with China at the expense of the US and UK.
Guru owns 80% Cash in Blue Penguin's portfolios, 48% Yen, 32% Euro and 20% Equities.
It is extremely difficult, at the present time, to make a case for a 'Strong Dollar', based upon the level of debt the US holds currently, the policy posture of taking on dramatically MORE debt, the military expenditures and the interest rate scenario (see below). That said, the Obama administration IS actually a 'Strong Dollar economic team...Geithner, Summers and Clinton are all likely to weigh in towards strengthening and Obama is on board, the question is - when will conditions allow such a strategy?
Not in 2009, from Guru's point of view.
2.) Interest Rates
Interest Rates are near zero and there are simply no scenarios that make an increase likely in the near to mid-term. There ARE several GOP Senators and Congressman, who are sounding warnings about interest rate increases - but their Supply-Side ideas have been so roundly and consistently repudiated by actual DATA over the past decades, it is difficult to not lump this too in with 'Voodoo' as Papa Doc Bush (thanks Gil-Scot Heron) called it way back in 1980.
The Credit binge has come crashing down and the Credit ERA appears likely to have gone with it. Less liquidity is likely to be the rule, regardless of the recovery, as banking and lending institutions will be forced to account for their past disregard for risk and regulators are likely to impose stronger oversight and standards. How this will play out for homeowners, small businesses, households is simply unknowable at such an early date in the recovery plan. For now, no upside risk.
3.) Employment
We all read the same numbers....76,000 laid off last Monday, 7,000 Starbucks workers on Friday, 7,000 Macy's workers today...4% at Morgan Stanley today...Chrysler pushing yet ANOTHER buy-out package note to auto workers -TAKE THE PACKAGE and leave with something to show for your time, don't end up like Lehman or Bear, Stearns workers...N-A-D-A!
Again, not much to add here. Times are terrible, massive layoffs are coming and our entire economy is going to endure a wrenching restructuring. It HAS to happen, we can't continue with the policies and businesses of a different epoch and we must allow time for the new economy to develop.
In the meantime? Live below our means, pay rigorous attention to developments (read your BPR!) and keep your risk profile low. If you CAN hold Euros or Yen, do so.
Guru will give you some stocks each Friday that can be relied upon in this climate, but they should hold money you can afford to leave IN the market. Cash is safe and suggested, but the dollar situation will erode some of its value - so not too much. PAY OFF DEBT with excess, do not owe anyone if you can avoid it.
Tomorrow, Steve is here with you, and Weds., Guru will be discussing the Real Estate Market, region by region. Hope to see you here.
