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Vol. 249 - What Will Save The US Economy?
What's in Store This Election Year?
The Obama machine knows it has more than tried the patience of the American public and will have to pull off an amazing comeback to be re-elected in 2012. As we stated last year, it will take an unemployment rate of below 8% to give Obama the victory. The Obama Administration has a plan for growth that is shaping the way our team at Pinnacle is investing; it is not just the loose monetary policy and the endless money printing that has us loaded up in commodity-based assets. As investors, it is invaluable for us not only to understand the Fed's motives but also political agendas in Washington, as they typically work hand-in-hand.
The administration's push to devalue the dollar in an effort to drive net exports and lift America out of the worst recession since the Great Depression is gaining momentum.
In the first quarter of 2011, US GDP was running at roughly $14.9 trillion. Consumption was 71%, investment was 12%, government spending accounted for 20% and net exports were -3%. Although investment has picked up slightly in recent quarters, what's wrong with this picture?
Manufacturing is dead, but with a weak US dollar, it can rise from the ashes.
In recent history, 71% consumption is bang on average for the US, but in years past, the US consumer wasn't in financial hardship like they are today. The US consumer now lives in the real world where the artificial value in their home is gone, the age of retirement is fast approaching and the unemployment rate continues to hover around 9% (while underemployment has stalled between 15% and 16%). The government can no longer rely on its faithful consumer to spend itself into bankruptcy. So what does this mean? An increased level of manufacturing and net exports is desperately needed.
In past recessions, the Federal Reserve, at the control of Greenspan and now Bernanke, would lower interest rates and consumers would start tapping credit lines. In so doing, the US would spend its way out of a recession: that's the consumption strategy. Those days are far behind us. The consumers can't save us. What about investment? We've talked for months about companies sitting on record cash positions. Why aren't they spending/investing to stimulate the economy? If the consumer isn't buying, who are the companies selling to? It is a vicious cycle.
So with the consumer down and little likelihood of large private investment, government spending had to step up - and it did. We saw, and continue to see, unprecedented intervention by the Federal Reserve and the ECB in attempts to stabilize our economies and promote growth. Though we did float through glorious periods of false hope and manipulated markets, government spending is not fixing the problem of unemployment. Furthermore, especially in Europe, government spending is not creating real growth or real lasting GDP. This REAL GROWTH (increased GDP) is paramount if the US or any of these western countries ever hope to dig themselves out of debt before interest rates rise and the candles are blown out. Increased exports and manufacturing is the way out.
Let's turn back to the pieces of the GDP pie. The consumer, both public and private investment and government stimulus have all failed. They make up 103% of our fledgling economy. There is only one aspect left. Our -3% of net exports.
The Obama Administration believes the only way out of this economic trough is through increased exports. They are right as it's the only sustainable strategy left. The only way to achieve greater exports is to create products the world needs, and more importantly, create products the world can afford. The US exports a substantial amount; but not nearly enough. It has lost millions of jobs and GDP dollars to wholesalers from China or other regions of the world that have significantly lower costs of production.
How can the US start increasing its exports and making them more affordable to countries and trading partners around the world? One thing in the short-term makes it all better - a cheaper US dollar. It just so happens that this plan coincides with the US' ultimate plan to inflate away its debt.
In the State of the Union Address, on January 27th 2010, President Obama announced the National Export Initiative. This initiative is intended to double US exports in 5 years. This has been long forgotten by the press, but our team has been watching the numbers closely.
We are of the mind that this initiative is unlike many of Obama's committees which ultimately do nothing but waste an inordinate amount of tax payers' dollars. This is a real plan that could save America.
How has the plan worked thus far?
As you can see, in the 2nd and 3rd quarters of 2011, net exports have been on the rise.
Real exports of goods and services increased 4.7 percent in the third quarter, compared with an increase of 3.6 percent in the second. Real imports of goods and services increased 1.2 percent, compared with an increase of 1.4 percent. The US actually produced and exported more than it consumed through imports in the third quarter of 2011.
The US is still not even close to where it needs to be, but if this trend continues, and Obama is successful at doubling US exports within 5 years (or whichever administration is at the helm), it could add more than 1% to the GDP. That would take America's very low GDP of 1.8% (third quarter 2011) to over 3%, safely out of the recession threat zone.
This is an interesting tactic which is being discussed by very few economists. The way in which this tactic is implemented is what you need to be concerned with. It is also the foundation of our investing principles as we move further into 2012.
The traditional and quickest way to increase exports has always been to lower the value of the currency.
The dollar has strengthened in recent months (deflationary trend) - a trend which cannot continue if the US hopes to pull itself out of this recession. Its exports depend on a cheaper US dollar. At the end of 2010, and the beginning of 2011, the dollar was weak and exports were on the rise. The Fed and the Obama Administration are working to get back on that track.
What this means is that the US has to devalue its dollar if it wants to rebound out of the great recession. It will attempt to devalue its dollar by 15 to 20% against its competing peers within 3 years. We are buying gold (equities included), buying commodities (equities) and sticking to our guns. The US dollar will not continue to be a safe haven investment - the US government simply cannot allow it to.
All the best with your investments,