This employment analysis by the economists at Northern Trust does not support a vibrant recovery in the US. The persistent and drastic declines since 1945 in factory employment, now only 9% of total employment, will continue. Although service industry employment is showing some potential signs of slowing employment decline rates, most of the new service jobs are with government. This sector is not known for its productive output, but government employees' record high wages compared to the non-government sector may provide some support for normal family spending.
Many of the government programs for giving cash to people and asking them to spend it are running down, but they are so popular with the public and with Congressional "economists" who have elections coming up next year that the give-aways will doubtless be extended to buy votes. Some people taking advantage of Cash for Clunkers or new mortgages to qualify for the $8000 Federal new owner tax credit are already apparently wondering if they will be able to make payments on their new debt, according to a report by CNW Marketing Research several weeks ago. Also new waves of residential mortgage rate upward re-sets are coming this fall, and banks will also be getting hit by a massive wave of commercial mortgage defaults. The recent increase in numbers of small community banks being taken over by FDIC is probably an early warning sign of coming disasters in commercial real estate.
It would be too easy to go on and on about the future in this train of thought, about which each of us individuals can do very little. But we can do something about investing our own funds. Despite this potentially horrendous future, like last year at this time, the investment markets by and large are doing very well. Given the hoards of cash at the banks and in money market funds paying effectively 0%, people and banks are being forced into the markets to get any returns at all. This is how bubbles and parabolic hyper-inflationary runs are born.
James Stack has done a study of September and October stock market performance since 1928. September has had the worst record of any month of the year with only 43% of Septembers rising. But for September and October returns, those two months' totals were up 55% of the time. And for Septembers and Octobers of the years when a bear market move bottoms, 80% in such years were up. So this may not be as serious a period as many fear for an immediate decline. Given the massive FED and Treasury and Congressional pump priming and zero percent interest rates, we could see a giant parabolic rise in stocks and gold up to January, as happened ten years ago in 1999.
Then too, we don't really know at what point the realization hits home that the FED won't be able to tighten back toward normal interest rates or when the bubble becomes imbedded and when persistent hyperinflation develops with a huge decline in the US dollar. The deflationary possibility has become the consensus view in recent months, judging by what I read everywhere. But with the dollar breaking new lows and gold threatening to break out permanently above $1000, I'm becoming more dubious about the consensus view. Many commentators are convinced that the US reflation program won't work. But if people and banks are fleeing the dollar where there is no interest rate to earn, perhaps the massive reflation is beginning to work "too well" and will lead shortly to hyper-inflation.
We don't have to decide on intellectual grounds or by economic analysis. We can simply watch where the markets go in the next few months and go with them. The three easiest to watch are the US stock markets, the 30 year US Treasury bond market, and gold. If stocks continue to do well, gold stays above $1000 and the 30 year Treasury bond stays under 123 (futures) or the yield on the 30 year stays above 4% and starts rising, hyper-inflation will be the outcome. The opposite or inverse market outcomes for stocks, bonds, and gold will lead to deflation.
I'm keeping a foot in both camps right now. In the tax-deferred accounts, which will probably be closed out this year, especially if hyperinflation looks probable, I have mainly high yield vehicles, but most of them have an inflationary tilt. Obvious examples are the oil and gas trusts, GGN (gold option writer), IRR (energy stock option writer), LSBDX (higher yield corporate and foreign bonds), and GIM (foreign bonds). In the taxable accounts it's primarily short to intermediate term munis and gold and a slew of hedge-fund like and nimble funds (see recent list). Changes can and will be made quickly if events make the outcome clear.
If the economy doesn't make it well out out of its recession low, that's when a "second dip" into recession will cause social dislocations. With the President mocking and threatening his health bill opponents in Congress during his speech there last week and a congressman calling him a liar on funding health care for illegal resident aliens, we got a vivid glimpse of the frustration on both sides even in that august national building. It won't be pretty if reflation fails, whereas hyperinflation will mask the problems perhaps for several years or longer. Stay tuned to the markets for clues.
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