A Tale of Two Economies

As America struggles with crises after crises, she looks to her people for her future

By Joshua E. Stone


As the S&P closes in and surpasses the 1220 target mapped out in Jan by me, and even earlier by others; the questions are becoming more and more glaring. Where is the volume in this rally? Where are the average investors? Does the rally mean the recovery will be strong? If so, then why is new employment still below 300k a month?
I have come to the conclusion there is a tale of two economies: one in which the traditional job market is gone forever, another where the job market is wide open and not enough talent to fill the demand.
I think the biggest challenge facing America going forward is its people. They are used to getting jobs the old fashioned way, where you go to the paper and find something you can live with, or you get a job at the local mill or car company because that’s all the town has ever known.
While there may not actually be a job posted at the local mill, there is a job there no doubt….its just the management and the seekers don’t see it. At a local mill there is one job I can think of right away that is most likely not being filled: social networking marketer. Another example of a job at a hospital or any big firm that is not being filled: waste reduction engineer. Radio and TV stations are already using social networking or WEB2.0 with great success. The forex industry is a near grandparent in this field already, with social forums and whole websites devoted to experts and consumers alike where you can chat and exchange ideas with like minded individuals.
Between social networking and reducing waste in this economy, we could see vast improvements’ in our productivity and profit thereby increasing the GDP. Things like this are already underway in the form of the Green Economy. These are just two examples I have thought of for the purposes of writing this article, but there are more. For example, it is well known that the high tech industry in the USA is flourishing, but is plagued by a lack of talent in the employment pool and flying vultures in the form of new taxes.
The result is jobs are outsourced, the employment is floundering, industry growth is stagnant and the long term outlook for the economy gets more uncertain to many. Since it appears the people of the USA have been collecting unemployment for the longest time in history, one can’t blame them for feeling like there is no hope for improving their situation.


In theory and in history, the spendicide the US government is committing on behalf of its people will work to get us out of recession in the short term. The problem is that the principles of good economics demand that we don’t run large deficits during the good times. This is something we have failed to do since the late nineties; this has put us in a very bad condition to deal with these tribulations. Aside from the fact the spending policy in Washington has to change dramatically, the private sector has to put the other foot forward and create sustainable jobs for the future, thereby increasing the size of the economy and the revenue base the government has. All that said, history seems to suggest government surpluses as well as taxes that are too low lead to recession.
If this does not happen the next financial tsunami known as the bond market collapse will surely be impossible to navigate and survive in a meaningful way. A strong US economy will help us weather the collapse of the bond market much better, I would think. It also needs to be said that the USA is not Greece or like any country anywhere else, and our bond market crises will not be like the ones we are seeing now in Europe. Will this be good or worse as a result, only time will tell. All that said, history seems to suggest government surpluses as well as taxes that are too low lead to recession. I also do know we can print our own money, so that certainly changes the traditional dynamics of any bond market crises we will have here in the USA.

It is also easy to blame the government for this jobs crisis, the current administration fails to get serious about a jobs creating energy policy. This will ultimately be all of our undoing as the prices for everything continues to soar for the average person. The average person is not going to make it through the transition to more energy efficient models as even the most optimistic plans don’t have everyone driving hybrids in the next few years. I know that high energy prices are deflationary, but cheap energy is a prerequisite for a strong economy. An idea that seems to be lost on everyone these days but the poor folks and business owners who are seeing 60% increases in the COD and fuel expenditures year over year as we transition into the new decade. A VAT tax will put many of the small businesses left in this country right out of business. The recent disaster in the Gulf of Mexico proves the argument and concern beyond a shadow of a doubt: industry and the US administrations have proven there incompetence regarding energy production and policy. Just the consequences of this most recent catastrophe alone may have wiped out nearly an entire gulf and may devastated many industries in one of the world’s formerly most prosperous and beautiful regions for decades to come. In my opinion the Gulf of Mexico has pretty much been quite devastated up to this point by dereliction in policy and industry, and this flow of oil into the sea will certainly not help at all…no matter how lucky we get with the exact details of the cleanup.

My take on the market and the economy at this point are not very optimistic, I do have some optimism. But it is fading as I see the real issues and problems in this country either not being fixed, or even being completely ignored or exacerbated by a seemingly inadvertently genocidal political and corporate establishment.
I do think the current bull market is still in place, as mentioned before on this blog, most bull markets have two year cycles, that puts the current cycle at the age of a toddler by next March and set to end its buoyant ways in the next several months. I don’t see the FED raising rates before then, so that leaves the markets with room to move up baring some development that changes the current trend: like the FED adjusting their language to allow for an increase in rates.


The events in Europe recently have also demonstrated the contagion effect is quite real and could very well if not already have capped the markets in this bull cycle. Some analyst say the market will begin to fall this summer and there is somewhat scary evidence to support that now with the way the markets fell and gold surged on the heels of the Greek crisis in recent days. On the other side the recent uptick in volume could be a sign the average investor is putting their toes back in the water, perhaps as a result of the regulatory bills being passed increasing confidence in the market. I see this market as quite strong still, and the trend we have seen since March of last year though threatened at this point has not quite been broken. The rally and fundamentals are still intact; bolstered by improving economic data and a burgeoning consumer wallet fattened from ripping up credit cards, selling jewelry and walking away from mortgages. I think some sideways action will be in store for summer, then fall will arrive and the market will have done the classic sneak range up by that time.


This leads me to think the most likely scenario for the recovery will be something like what one analyst I saw describe as square root shape. We are seeing a bounce, but I think we will have another recession soon if the taxes go up as many are saying they will next year, and of course as the “business as usual” policy continues.
On the foolishly optimistic side, we could see a history defying economic boom from here on out. I believe in the USA, so I am certain we will do well at the very least. As Americans we can all look forward to the next great road bump, they are hard to deal with and painful, but we need them to wake us up and keep making this world a freer and better place for us all on Gods Green Earth.

Economic Outlook for 2010 and Commentary

By Joshua E. Stone

Monetary Policy:
Expect the Fed to keep the Federal Funds Rate at current levels near 0-.25% for the remainder of this year at least. I know this might come as shock to many, and it repeats last year’s forecast verbatim. The fed has new tools at its disposal beyond the scope of this article, but suffice it say the current language “extended period of time” means “we are not changing this language for at least 3-6 months”; when the Fed changes the language that will mean only that the door is open to the language getting more hawkish. That means another 3-6 months of jawboning before we actually get to any language that will allow the Fed to raise rates, and then it could be another 3-6 months or longer before they actually do raise them. Fed action in the week of the posting of this blog supports this outlook.
So being conservative that puts any significant change in Fed language at least 9 months out before the Fed even has the language in place to allow a rate hike. I have heard some analyst say that September might be the earliest we will see a hike. The language in the Fed statements would have had to change already in my opinion for that to happen. There is much mystique around the Fed and how it operates; in my opinion this might not be a good thing that Bernanke has done: drawing some of the curtains back so we can peer into the Fed’s ivory tower. These maneuvers only result in more questions which is not bad, but it also results in special interest using confusion to promote their agenda.

Housing:
In last year’s forecast I said: “…expect the housing prices to start to bottom in the next year maybe even longer…” and it appears like it will be more on the latter side of that statement. We have got a very bad situation in housing, and it’s perfectly indicative of the overall situation facing the country at large.The Federal Reserve CRE Forecast for 2010 is not at all rosy, and hints at an even bigger problem facing the real estate world: the commercial real estate bust. Like all the forecasts from the Fed and economists, a recovery in real estate all depends on the recovery in the economy.
The recovery from the Great Recession is still ongoing, and will be derailed by the coming sovereign debt default facing the USA in the next 5 years if we don’t get the people off this sinking Titanic of derelict spending fast. With deficits and debt as high as the eye can see, I was among the first to point out that there is over 120 trillion dollars in unfunded liabilities’ on this blog fxretracer; now it is common knowledge a year later. In short, the real estate market is telling us we are heading over the cliff in the next year or so. This could be stopped like all our economic problems with a real energy based economic initiative like I always say. But with the tax rebate for home buyers program ending in April, it is going to take some months before everyone realizes that something is wrong in real estate again. Right now with everyone buying on the lower income of society, it’s hard to hear the higher end earners when they say their houses are not selling. This is going to make things worse obviously. But that said, data recently has been encouraging for the USA.

Employment:
Last year I said in this blog to “…expect unemployment to reach double digits before this recession is over. I am guessing it may go as high as 10% this year. I don’t see much of an employment recovery really. This will be a jobless recovery. Unless the new Administration in Washington can get the corrupt politicians to make a new energy policy that creates jobs. Yes We Can!...”
I think we could be surprised to the upside in employment this year, the Adminastration is already predicitng 90k jobs a month being created by spring. I think unemployment will not go much higher from here, but dont expect it get back to the normal 5% for a few years at least. Of course that also depends on whether we deal with the problems still facing us.
During the week of the release of this article, the President has made a step in the right direction by ordering the creation of two new nuclear power plants, however this is measly and is really another tremendously blown opportunity for a President who has had enough support, especially in his first year he could have got anything he wanted done. I think biomass/biofuel or some space age technology for energy would be best to pursue for this country, but I know nuclear power has some very good arguments to support it. I think we could do better than nuclear power. This is just slipping into the same old big interest pattern so familiar from Washington now. That said, the President has done a good thing and this ads steam to an economy that came out of recession in Sept or Oct according to the Conference Board.
What I found most remarkable this year was that unemployment did not rise as fast as many I heard from said it would, it was slow grind up to 10% last year, and then it retreated from the double digits! While many of the critics say that we did not have a recovery this year, in the same breathe they tell us that the stimulus had no effect. How then do they explain the positive GDP in recent quarters? They will contradict themselves by telling you it was all government spending.
What does this mean? We clearly have a lot of doubt around the recovery, that’s not news. What is noteworthy is that it is true that much of the economic recovery is organic at this time, this is why we do have some decent GDP results in recent quarters, and the government spending did not account for all of that growth. What the problem is with this organic job recovery is that it will be drowned next year from what I understand by new taxes that will be coming to everyone, “rich” and “poor”. The reason we have not seen better activity as of yet is because of the uncertainty going forward for small business, not because they can or can’t fund pay roll with debt. That kind of thinking from our leaders is scary.
To find a good example of how the government can help stimulate the economy, one has to look no further than my home sate of New Mexico, where the unemployment is below the national average thanks to a diversified economy and the government created tax rebate for the film industry that has catapulted us into the top five best filming locations nationwide. New Mexico has other good incentives as well and is rising in the ranks for one of the best places to do business in America. We need sales for small business, to get sales we need people to have jobs, to have jobs we need the government to direct incentives on cheap energy and other industrial policies: the lifeblood of strong democratic economies for over a century now. What we don’t need is the spending we have had, and the repeal of finance laws that kept the financial wizards and their political cohorts from weaving the kind of catastrophe we saw in 2008 with the collapse of Lehman.
Take me for example, if fuel costs less, the seeds would cost less, then I could go out and hire someone to promote my product. As it is, I am squeezing by on a thread still thanking the daylights Bush popped the oil bubble and a bit bitter at a media that does not remember that fact. But then, that is no surprise: after all this is the same administration and media that ran and covered a campaign platform based precisely upon opposing the surge and losing a war just to gain power. Now that the surge has succeeded, it has become a strategy that they now take full credit for and the media has let them do so. We all know who they would be blaming it on had it failed. I am also left having somewhat mixed feelings about an economy that was engineered to crash, and as a result has kept prices low on consumer goods. I do know that it is a good thing we have not recovered fast, any recovery that bounced back too fast would have got us right back to a standstill with high oil prices and inflation. Going forward I know that any recovery that does not have the uncertainty for small businesses addressed, have a jobs creating energy policy and has dealt with the debt will not be a recovery, but a blip on the radar before the mightiest and richest nation on God’s green earth fell.

The Dollar:
Last year I said in this blog: “the S&P 500 has a 50% downside risk from these levels and is the key to the recovery, besides a good energy policy.” The first half of this turned out to be spot on (the stocks recovered 50% from that time and the recovery is on track for the most part); the second half is still true. If we don’t get a good energy policy soon we can expect the death of the dollar, not that it’s not already pretty dead; having lost a full third of its value in the last ten years alone, and some 98% of its value since the 1800`s.
Again we can look to stocks as an early warning signal for the recovery, if the equities close lower this year I would take that as a sign that the recovery is all but derailed. If they close higher, about 2-3% as I expect, it will mean that there is increased optimism surrounding the economy, and that more importantly, the Washington gridlock will have manifested something productive. My feeling is that there will be a shift of power in the House and Senate and this alone will create enough optimism for 2011 to keep the markets up for the year. It is even likely in my humble opinion, we could see good gains again this year…not 50% again, but 20% does not seem unrealistic.
As for the GDP I expect it to grow at about the same rate as stocks this year, 2-3%. But there are some much smarter people than me out there saying we could see a much higher growth rate this year. Even if that ends up being the case, it would not really be a good thing as it would only trigger massive inflation later, due to the unfettered debt Washington is pouring on. Even worse it won’t matter or help at all, as it will just be a spike on the chart before the Mother of Depressions is here to stay. Don’t get me wrong, it would be great to have an outstanding recovery this year, but it would be equally disappointing and tragic only to see it derailed by large deficits and a neglected energy policy whose fixes were delayed by the euphoria of the recovery. Sadly we need pain to get change and the more the recovery happens in fits and starts, the longer it takes to recover, the better chance we have of really getting things back on track. I think there will either be a recovery (which we are already in) or a depression (which we have not yet slipped into), and there is no “double dip” scenario possible in my opinion. We either get it together fast, or the consequences will be too massive to overcome without a monumental crisis, and it will happen quick, I keep saying 3-5 years; but it will likely be sooner as we have more crises on the horizon not the least of which is the sovereign debt issue and credit ratings for the US.
When it comes to gold, it is a buy in the sub 1070 area, if it goes to $945 an ounce this year, it will be the best buy ever. Why is it going to go that low? We have a long year ahead of us, and the fear is still rampant out there. If you pay attention to the gold bugs, you can see that they are correct about the fundamentals driving gold up, but if you read between the lines you can also see that there is still a risk of deflation due to the doubt surrounding the recovery. What this means is folks buying gold above 1k at this time might have to sit on it for a few years waiting for the politicians to finish flushing this country down the toilet. If Washington does fix the debt problem, then the gold bugs will be sitting on a post Reagan range once again, locked in the 900-2k area in a world where the dollar is in favor bolstered by strong fundamentals. You can also look to silver for sentiment regarding the recovery, as its price is reflective of demand for many products that are used in manufacturing and consumer goods. What I am saying, is I think gold will go up this year to 1500 or maybe even 2k. I think gold could easily close above 1200 this year if everything stays on track. It will only pop out the roof in coming years with continued dereliction of duty in Washington, highly probable that’s for sure. Don’t misunderstand stories of gold losing its safe haven status; the reason gold has fallen against the dollar with the recent sovereign debt crisis in Europe is because this whole juggernaut of debt unwinding is just beginning. Once the debt crisis hits the US, there is nothing left; the buck stops here (pun intended). We have hit the iceberg folks; this is not a joke or a movie.
As for oil, I don’t expect it to go up much this year, due to doubt about the recovery, but closing above $90 a barrel seems very realistic to me. I expect petro prices to stay stable this year; we will get close to, if not over $3 a gallon at some point this year of that I am fairly certain, but I don’t expect it to stay there either. It is a bit harder to tell about gasoline this early in the year for me, as spring is not here yet, and that’s usually the peak in gasoline use for the year. But the recovery is on track and there should be good demand for fuel this spring as consumers hit the road putting pressure on prices at the pump.
Of course you can’t forget the possibility of events affecting the market. Any number of things could change the outlook for the dollar/stocks and energy/commodities in a hurry not the least of which is terror; but China is also a big problem. We can’t depend on them to keep fueling the bulk of this recovery as market action in recent weeks is telling us.

The following credit goes to these sources that I have used in this article, there are also some other sources added not used in this article:


Hot Air » Blog Archive » More “unexpected” economic news
http://bit.ly/9fevni


Hot Air » Blog Archive » Bye-bye Fed funds rate http://bit.ly/9XeSFZ

2010 GDP: Look For A Strong Recovery | FX Instructor Blog - For
Traders, By Traders http://bit.ly/5d0xrz

The Conference Board - Trusted Insights for Business Worldwide http://bit.ly/c4HxfP

Philip Blumberg Blog: Federal Reserve CRE Forecast for 2010 http://bit.ly/cuoewP

Gold Price to 2000 as U.S. Dollar-Gold Correl...bit.ly/83BvHU

Safe Haven | "Commodity Super Cycle"...bit.ly/8KUx2R

Is It Time to Buy Gold? | Uncommon Wisdom http://bit.ly/bhdPOj


FreshPips Stimulus funds nearly 600,000 jobs last quarter
http://bit.ly/91NcMC

cristo1 Rosenberg: Housing Is In A Depression, And It's Already
Double-Dipping: The latest NAHB numbers from yesterday are...
http://bit.ly/4VZZuA

InEgoVeritas Fullcarry: Stock market to decline only after the
FED hikes rates: http://is.gd/52Y8Y Steve Saville.

politiconomic $$ Philip Blumberg Blog: Federal Reserve CRE
Forecast for 2010 http://bit.ly/4VdKcp

FreshPips Gold Loses Safe-Haven Status For First Time in History
http://bit.ly/bhBreB

KevinMHughes upsidetrader $$ 824,000 jobs will disappear
on Friday http://bit.ly/aECvHg

KevinMHughes alaidi and the EUR MONTHLY CHART (Blue
graph) speaks volumes http://bit.ly/88mm6K