Smart Money with Keith Springer Saturdays at 1PM and Sundays at 6AM on NewsRadio KFBK 93.1 FM and 1530 AM

Critical Economic and Market Commentary 08/17/10

Economic Update — Is the World Waking to Reality?

Good morning world. Welcome to reality. I must say, it’s nice to have company at last. For the longest time I have largely been alone in my expectations for significantly slowing economic growth. Seemingly even more radical (until recently) has been the prognosis for deflation, which I predicted in my landmark Economic Tsunami special report of December 2007 (which is still pertinent today).

However the problem with too much company is that, ironically, consensus never happens… “If it’s obvious, it’s obviously wrong!” There is so much talk about how the market just has to decline, citing a litany of rationales ranging from double dip recession to the Hindenburg Omen, that, at least for the short term, the big drop has been stalled and the market looks to go higher. Once complacency overtakes this market (and it is creeping back) you’ll see investors running for the hills.

The long term outlook continues to look precarious. Although I was correct in my assumption that GDP would come in lower than expected, the reports were taken in stride. The GDP figures are likely to be amended lower when the first revision report is released on August 27th. There simply seems to be no substantial growth in the economy and future numbers will reflect that. Whether that translates into a big decline now or later is unclear, but the market can’t ignore these facts forever. However, it can go on for longer than you think it should.

The combination of an aging population that naturally spends less and the forced massive deleveraging of both individual and corporate balance sheets (people forced to actually pay down their debts) can only create less aggregate demand in our economy (fewer people buying stuff). Less demand in turn leads to less supply of goods and services needed and therefore fewer people to produce these items, so we get sustained high unemployment.

This creates a vicious cycle until aggregate demand increases. That demand can only occur when there is a generation large enough to make a difference—namely, the echo boomers. The good news is they do exist, unlike in Japan or even China due to its one-child policy. The bad news is that we are several years away from them being old enough to make a difference. [This is discussed in depth in my Mid Year Forecast – Economic Tsunami, the 2nd Wave – How to prepare your portfolio!]

Sure, the government can create artificial demand through stimulus, cheap money and low interest rates. They did so in the last two bubbles with the real estate boom in the early 2000s and the stock market rally of 2005-2007. Unfortunately, this time around we simply don’t have the money, and wasting borrowed money to do it is a disaster waiting to happen. Sorry Charlie, but the solution to an over-indebted/over-leveraged nation is NOT more debt and leverage. That said, it can delay things for a while and there is no way of telling when the next crisis of confidence will occur. The best we can hope for is that we are in another bubble, one which allows you to make some money, but which eventually bursts even worse than the last.

Regards-

Financial Advisor – Keith Springer

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