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Let’s Hope So…

Kevin Raymond August 2, 2010 Uncategorized No Comments on Let’s Hope So…

Slow Growth Ahead…Let’s Hope So!

GDP numbers came in last week. Growth was slower than expected at 2.4%. Nothing to write home about but not surprising if you have been reading this column of late. In fact, I don’t even pay attention to the number because it’s just not a true reflection of what is going on in the real world. The last GDP number that came out showed growth as a result of government subsidies and inventory rebuilding, not consumer spending. The current number is much lower than the first quarter GDP, a disturbing trend if it does indeed develop.

Here’s the paragraph that stood out the most:

The deceleration in real GDP in the second quarter primarily reflected an acceleration in imports and a deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

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Here we show a deceleration in investment by companies meaning that the inventory rebuilding of the first quarter is beginning to slow down – demand is still not there. Worse, the upturn in residential fixed investment was mainly the result of the government incentive to buy homes – more government subsidization, and real buying from individuals taking advantage of the collapse in home prices…something that is continuing. Foreclosure rates are moving higher as the crisis has shifted from sub-prime to prime.

Prime borrowers are those borrowers who could afford their mortgages, but thanks to unemployment they are now out of a job and can’t afford to pay the mortgage that they were qualified to have. Finally, you see an up tick in state and local government spending and acceleration in Federal government spending. The two entities that can least afford to spend are going in debt faster than ever. I guess if you throw enough borrowed money at something it is bound to work sooner or later. It’s just not working yet.

The only hope is that the growth no matter how slow will continue. It’s going to be a tough slog as this is the slowest recovery from a recession we have seen. Worse, the growth is slowing meaning that the post recession recovery is already heading the wrong way. Can you say “son of stimulus”?

Will the Markets React

So far the US stock market has proved to be resilient in the face of slowing growth numbers. It’s perplexing to be sure. The markets look forward, not backward. At current levels the markets are signaling better times ahead. It maybe better for companies in the short term since they are driving employees to produce more under threat of job loss. Materials prices are stable, but not low. Demand is barely existent. The only ones who can spend are the ones who have good jobs. One out of every five working adults doesn’t fit into that category. Taxes are about to rise. Healthcare costs are rising. Home prices are still falling. In Florida they are expected to fall a further 13% this year after falling almost 50% from peak values in many large cities.

The outlook is grim my friends. But, one look at the S&P and you would not know that. Is it time then to invest in this market or are you better off staying on the sidelines? Well, sometimes if you want to make money in the future, you have to make sure you have money to invest to make that money. Once you lose capital it’s hard to do that. But, don’t lose faith; there are always places to make money if you’re willing to look outside your comfort zone.

Meanwhile…

The emerging markets of the world are not facing our problems. China is still growing, India is still growing and Brazil is experiencing spectacular growth. Now, to be fair, these economies are starting at a smaller base. It’s much harder for a $14 trillion dollar economy to grow at 8% than one that is a trillion, give or take. But, let’s look a little deeper and the trend is clear to see. First, these emerging economies are not debt laden. As everyone knows China has over $2 trillion in foreign reserves and continues to pile on the cash. China is also the world’s largest consumer of oil now, surpassing the United States. The US is the world’s largest consumer of oil per capita though by far. The growth of Asia means good things for you if you own oil.

India is growing at a fast clip as well. One of the beauties of the Indian market, which make it more appealing than China is that it is not one that is reliant on exports to drive growth. Rather internal spending and consumption drive its economy. But, it has no oil and consumption there is rising as well.

Brazil, once the dark horse of the world is doing quite nicely. A strong currency, strong economic growth and energy self sufficiency makes this country, about the size of the US in area and population the one to watch going forward.

The trend here is that if you want growth you will need to look off our shores for it. Sure the US is still the largest economy, but it is moving in the wrong direction. It may surprise you to know that Singapore is the richest country when measured by per capita income. If you have no exposure to emerging markets, look for corrections as opportunities to invest in companies or ETFs for the countries I mentioned above.

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Best Regards,

Kevin Raymond


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