May 22, 2008 by TMO
By Bob Wood, MMNS
As I was going through my usual morning routine yesterday, reviewing several web sites for useful information while my TV, tuned to CNBC, was barely audible in the background, an interview with Donald Trump caught my attention. When asked if the U.S. was in a recession, he replied in unflattering terms, that anyone now denying that we are in recession, ‘’must be a moron.’’ Today, a short 24 hours later, Federal Reserve Governor Dennis Lockhart announced that ‘’We’re in a pronounced and serious slowdown, but still growing.’’ Paging Mr. Trump!
When a Government official proclaims that our economy is still growing, he is denying that we are in recession. And Lockhart uses all sorts of government data to support his argument. The latest GDP report shows that the economy did, in fact, grow in the last quarter, up .6% annualized. So, despite Trump’s assessment and Warren Buffett’s claim in recent months that ‘’by any reasonable way of looking at it, we’re in a recession,’’ one Government data point made two of our country’s most successful capitalists look out of touch.
What helps the government show positive economic growth for last quarter is its practice of deducting the inflation figure from the gross calculation for economic activity. So inflation registered only a small increase, .2% for the month, attributable to — seasonable adjustments and falling gasoline prices? That’s right, folks, according to the government, oil’s record high price of $126/barrel is a meaningless number. AAA said that gas prices rose by 10% in April, but what do they know, right?
Yes, they government said that gas prices fell in April! And that “fact” assured that inflation would register a small increase for the month, despite a growing list of commodities, such as oil, natural gas, corn, rice and soybeans, which have doubled or tripled in price during the past year.
One bullish promoter appearing on CNBC excitedly reported that the ‘’core rate’’ of inflation rose by a scant .1%, coming in that much lower than expected. “Isn’t that great news, Mark?” he said! Even more stunning was Mark’s follow-up interview with a NYSE veteran floor trader, who admitted that he didn’t really buy into the government’s assertions about economic growth or the rate of inflation. Yet he continues to trade as if the numbers are true!
So this is where we investors are now — with even less reason to be involved in domestic stock markets. If this “gasbag” sort of analysis is what keeps the stock market moving higher, shouldn’t we question the staying power of any rally?
And speaking of gasbags, the analyst community received a warning of sorts recently when Merrill Lynch put out the word that, from now on, its stock analysts would rate the bottom 20% of companies covered with “under-perform” ratings. As noted by that firm, 40% of the 500 stocks in the S&P 500 fell each year during the past 10 years. Yet, only 5% of all stocks covered currently carry sell ratings.
And we all thought that sort of thing ended after the bear market at the start of this decade saw so many shares fall hard, taking trillions in investor money down the drain, and after a famed promoter like 90’s gasbag Henry Blodgett admitted assigning “buy ratings” to stocks he wouldn’t touch with his own money, didn’t we?
This morning, while listening in on a conference call with an institutional fund company, I heard its analyst speak about improving economic fundamentals and his increasing allocations in equities. His presentation revolved around many of the same data points used by bullish promoters in the financial media – inflation is low, rising gas prices will fix themselves since they crimp demand and falling housing prices will spur demand.
Of course, I took all this with a grain of salt, since the analyst’s job is encouraging investors to buy shares of his company’s mutual funds. He never mentioned the obvious fact that the U.S. is in its eighth year of a secular bear market, nor did he point out that valuations remain at levels seen in market tops when bull markets, historically, run out of steam. Neither did he say that inflation is running much hotter than official data reports — and even hotter for middle class workers, who spend more of their incomes than rich people on commodities like food and gas.
Neither he nor any other bullish promoter has mentioned how much money leaves our country, going to other countries in the form of energy expenses for all that high priced oil, or that wages have not grown for the majority of us during this entire decade. Prices are rising, but wages are not. With a negative savings rate, how long can that pattern last?
I heard no mention, either, of some disturbing economic data points that I read about this week in Pat Buchanan’s book, Where the Right Went Wrong. So we can add data to our list of “untold news” almost daily, can’t we?
The disastrous economic policies begun in earnest during the Reagan administration have promoted the transfer of too many manufacturing jobs to low-cost countries like China. As Buchanan points out, a strong manufacturing sector is vital to the long-run good performance of any economy. When jobs leave, economic growth is imperiled.
Foreign manufacturers end up with a lot of U.S. dollars from selling us things we should have been selling to each other. And that money eventually finds its way back to our shores – but in a different way. As of 2002, ‘’foreigners owned U.S. assets equal to 78% of our GDP. They owned 13% of our equity market, 22% of our corporations, 24% of our corporate bonds, 48% of the U.S. Treasury market,’’ Buchanan writes.
And those facts relate to 2002! Trade deficits have grown steadily since then! As foreigners are continuing to use their surplus dollars to buy up our assets, our profit and dividend payments are headed out the door to them, too. Market strategist Doug Noland recently reported on the Prudent Bear web site that international dollar reserves have rocketed higher in the past four and a half years, up 138% to the current level of almost $6.8 trillion.
That is the amount of dollars currently held by foreigners, which will eventually find their way back, no doubt, to buy more of our assets, control those assets, and take the income derived from them back to their foreign owners.
In his book, written in 2004, Buchanan cites our growing dependency on foreign producers for vital goods. He shows that we import 72% of medicines and pharmaceuticals, as well as 67% of communications equipment, 64% of semiconductors and electronics, 70% of computer equipment, 56% of engines and power equipment and 51% of metalworking machinery. And those are old figures!
Shouldn’t today’s “gasbag” analysts and market commentators include some of these data points along with the obviously specious ones used to convince us that we still have the most vibrant economy in the world and that stocks are great buys based on the underlying fundamentals? Sure they should, but do you really expect that they will?
Telling the truth wouldn’t get their job done, would it? So we are inundated with whatever information works to sell their products. For too many investors, the garbage these promoters dish out is all they hear about the state of our economy, so many buy over-priced stocks, paying no attention to the big picture. Far too many stay invested in one of the worst performing stock markets on the planet over the past decade.
We should forget the “gasbags” in the financial media and big brokers who offer nothing but optimism and time worn adages about buying stocks — when true indicators are at their worst. They look bad for the stock market now because –they are bad for the stock market. Check where our money is going every month, and where it’s headed may well give us better investment ideas.
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.