Thursday, June 20, 2013

Realistic Expectations for the Economy

The term "the new normal" has not been used much as of late, but going forward it may be about to return. Many investors and the public at large may be about to realize that central banks can only do so much through printing money and lowering interest rates. Both these actions carry with them some very strong and nasty side effects. Markets have become very distorted as money has flowed into risky assets in search of higher yields. It could be we are about to see the markets morph into a "realizing market", one that grinds slowly downward. Another possibility is that at some point the wisdom of buying every pullback changes and the market simply drops like a stone.

So what has brought us to this place? We have seen many companies cut their work forces, replaced workers with lower paid employees, and outsourced to offshore factories to increase profits. For many companies profits have grown but sales have remained relatively flat, in some cases margins have been squeezed and only cost cutting has moved them forward. Sales have been propelled forward by cheap money and often not because of real or pent up demand. Speculation based on mere hope is not a solution to our complex problems, long term planning is in short supply. How will America react to the stress that comes from slow economic growth, how will it effect our budget and culture as the long term cost burden of carrying the unemployed builds.

Huge government deficit spending of nearly $4,500 each year per man woman and child has propped up America's GDP during the last several years. This money, much of it borrowed will become a long term drag on the economy going forward. Sadly much of this money has been poorly spent, it was to be used to buy us time in which to address many of the structural problems that plague our economic future. Unfortunately this has not been done, instead government has fiddled away the time in deadlock. Even the tailwind of lower energy cost through the massive expansion of the natural gas supplies has not been enough to move the economy forward. Much of what has occurred should be considered a one off that is behind us. The deflationary effects of the crisis may be behind us, prices only go so low before beginning to rise.

The reality is our future cannot be sustained on just the exports of Boeing aircraft, the manufacture of some kind of computer tablet, or internet usage. We need to look at more substantial and broader based benchmarks. Silly talk about the fact that the deficit is beginning to shrink is like saying it is now safe to jump into the water because in is no longer as deep as it was ignores reality, the depth has dropped to ten feet after being at twelve. Bottom-line all this trickles down to job growth, and it is nothing to brag about, more troubling is that the quality of these jobs is distressful and pathetic.

What we should expect going forward is very slow growth. As QE comes to an end and the government tries to deal with runaway spending, whether through sequester or more targeted cutbacks, the headwinds to the economy will be felt. Expect the burden of past debts and future promises made to those retiring and unable to find good jobs to weigh heavily upon society. Recent protest and outburst in countries like Brazil, Turkey, and throughout Europe may get worse. Tensions are elevated in many parts of the world and we cannot rule out the possibility of a major war. The world is rapidly changing and nobody has a crystal ball that will predict how this will all play out, but one thing is certain, and that is storm clouds are on the horizon.

Footnote; Two other post strongly tie into this message, they are listed below. Other related articles may be found in my blog archive, thanks for reading, comments are encouraged,



  1. Private ownership of stocks are trending below generational levels and companies have been aggressively buying Back shares to boaster earnings! The American treasury market happens to offer good value trading at discount to other sovereigns and with QE coming off should provide a good source for euro and yen-dollars seeking a safe home? Everything took a big reset already and many are SITTING ON BOND GOLD MINES? Sorry about not giving out teeshirts but been busy making direction trades off the Fed! You should try it even if you hate everything else making money is a GOOD thing!

  2. If the fed stops buying assets than the money supply tanks! That is all.

  3. I would think two things should happen in succession. First the tensions and sanctions will force e Russia to sell gold which wont be restricted in order to continue the gold slaughter and the dollar catching a stronger growth bid seeing that Russia is selling gold? A stronger dollar is my take which will wreck earnings and force the Fed to start a new QE? Our economy is wrecked but our shirts will stay cleaner than the rest of the world because of our position in the universe as sole super money power! Change the name and still the Fed cant stop buying and NOT SELLING ASSETS?