If you have been keeping up with our posts on the website, we have laid out a compelling argument for why we are cautious on the market and the economy for the second half of the year. On the website, I have also provided several links that back up our opinion.
Our job is to sift through the plethora of economic information, make sense of it, and look for any discrepancies if we can. We have found several.
1) The Employment Data: The government does not keep records of the U.S. jobs lost to offshore outsourcing and to work visas for foreigners. Since the government does not keep a record of American jobs shipped to foreign counties, the jobs lost do not show up in the employment numbers. Over the past 5 years, 2,000 manufacturing plants have been closed in the U.S., and around 2 million jobs have been eliminated. I think this little tidbit would be useful to the public. Many of the new jobs created were service oriented jobs, and these include positions for waiters, waitresses, and bartenders.
In February, the payroll jobs report listed 205,000 new private sector jobs. As has been the case for a number of years, the new jobs are in domestic non-tradable services. The sources of February's new jobs are: construction (primarily specially trade contractors), 41,000 jobs; wholesale and retail trade, transportation and warehousing, 15,000 jobs; financial activities such as insurance and real estate, 22,000 jobs; professional and business services, 39,000 jobs, half of which are in administrative and waste services jobs; education and health services, 47,000 jobs; and waitresses and bartenders, 21,000 jobs. Paul Craig Roberts
In the past year, the economy has lost 60,000 private supervisory jobs, 48,000 manufacturing jobs, 65,000 jobs in nondurable goods such as textiles, apparel, paper, paper products, and 25,000 jobs in air transportation. Over the last year, the economy has gained 203,000 jobs for waitresses and bartenders. Paul Craig Roberts
2) Consumer Debt & Lower Household Income: The replacement of higher-paid jobs with lower-paid jobs is one reason for the decline in median household income over the past five years. How can the economy continue growing when median household income is not growing?- Paul Craig Roberts
Its simple, just add more debt. And where are consumers getting the cash to keep up their torrid pace of spending? You guessed it, from the appreciated values of their homes, and from credit cards.
3) The Real Estate Bubble: I am not of the opinion that a real estate bubble exists nationwide, but I do believe that certain parts of the country are in more danger of a serious correction than others. For example, I do not think a bubble exists in Oklahoma and Kansas, but Florida, Arizona, Las Vegas, and a few other areas of the nation have attracted the most speculation, and these areas have the potential to see some serious setbacks.
Many parts of the nation will most likely experience a price correction of 10-15% on real estate values, the more speculative areas may see 25% or more. This is not good news for consumers who have borrowed cash from the appreciated values of their real estate.
Experts continue to argue that interest rates are still low, but they did not take into account that much of the money borrowed by consumers on the appreciated values of their homes came from lines of credit. The interest rates on credit lines are charged at the prime rate which currently stands at 7.50%. 7.50% is not exactly a bargain interest rate.
Morgan Stanley chief economist Stephen Roach said in January 2005, that US consumers' debts are an "accident waiting to happen".
Earlier today, CNBC had a report that suggested that real estate may be entering a buyers market. All I have to say about that is, no way. The correction in real estate is just beginning. It took 10 years to create the current situation; it is not going to correct itself in a month or two.
4) U.S. Trade Deficit & National Debt: Between 1997 and 2004, the U.S. trade deficit increased six-fold.- Paul Craig Roberts
The imports of these cheaper goods have been the main ingredient used telling the American public that inflation is under control. Since the government does not include the price of food and energy in the inflation numbers, the reports are very misleading.
Our national debt and the government's budget deficit, is causing a decline in the U.S. dollar. As the dollar declines, foreign nations that have been funding our debt are going to look for alternatives to dollar denominated assets. These foreign investments have been keeping our longer term interest rates low. If these foreign countries begin losing money on dollar denominated assets, they will begin to sell their holdings in U.S. Treasuries, which will cause our longer term interest rates to spike.
To keep the U.S. from defaulting on its debt obligations, on March 16th, the Senate voted to raise the federal debt limit to almost $9 trillion. This is the fourth time the cap has been raised since 2002.
5) Inflation: Energy prices are high and are not factored into the inflation rate, raw materials and commodities have skyrocketed, housing prices have jumped, and in reality the argument over inflation can be spun in five different ways. Why is this? Because there are actually 5 different types of inflation: commodity inflation, wage inflation, monetary inflation, fiscal inflation, and foreign exchange inflation.
Dont you find it disturbing that there are no hurricanes in the Gulf of Mexico, and gasoline prices are just a stones throw away from the highs we experienced last summer after Katrina and Rita?
All we care about as consumers is what affects us. So, when we hear there is no, or low inflation, is it any wonder that the inflation numbers being reported to us doesn't correspond with what we are experiencing in our daily lives?
Higher energy prices have caused an increase in the price of services that we receive. Plumbers, electricians, and contractors are passing along the increases in energy in their labor costs.
So, to say the least, I remain cautious.
