THE NEW NORMAL - WHY ANY RECOVERY WILL BE PAINFULLY SLOW

Think for a second about where our economic growth came from over the last 10 years or so. We know that consumers have been the primary drivers for the US economy. Because we now manufacture and export little of anything (and far less going forward with the implosion of the auto industry), the only reason our economy has been able to grow has been tied to consumerism....the things that we buy on a daily basis. In fact, government statistics tell us that over 70% of our gross domestic product (DGP) now comes from our own purchases. You don't have to be an economist to figure out that this is not a sustainable trend. A country that continues to produce smaller and smaller amounts of exportable products is doomed in the long run, and in the short run can only expect sluggish growth at best. On top of this, consumers are now turning into savers, something that is a big positive long term, but also something that the Obama people must hate in the short term. Without consumers driving our economic engine, where will the growth come from? And, we are seeing the same thing play out throughout Europe and other Westernized countries. Increased savings equals slow to no growth.

Now consider this. Over the last decade, approximately 60% of all corporate profits have come from the financial services industry...Wall Street, banks, insurance, servicing of mortgages, auto's, etc. And we all know the shape that this industry is in today.

Hence, all of those jobs, earnings and corporate profits will take a huge hit that we will likely never see a full recovery in, and certainly not for at least a decade to come.

Incredibly, we would have actually had little to NO economic growth had it not been for mortgage equity withdrawals (MEW's) during this decade. Home owners used their equity like a piggy bank, and the record levels of MEW's were THE primary reason for our positive GDP over the last decade. Think about this for a second....without MEW's we would have been in a recession for the entire decade! And of course we know that MEW's are now essentially a thing of the past. Few people have positive equity, and those that do are either leaving it alone or could not get a loan even if they wanted to. Quick question: what percentage of people in the US have a credit score of 750 + ? Answer:less than 5%. Why is 750 significant? Because that is basically what it takes to get a bank loan these days.

The bottom line is that without the consumer driving economic growth, and with our most profitable industry becoming a thing of the past, where will the recovery come from? Where will the millions of jobs promised from Obama miraculously appear from? Green jobs? Give me a break!

This is why I continue to see this 40% stock market rally as nothing more than a bear market rally with very limited upside from here. The S&P 500 is now trading with a forward P/E (price to earnings multiple) of over 18. This kind of P/E is associated with market tops rather than market bottoms! And, lets not forget that the average bear market ends with a P/E of 7, indicating that we have lots more room on the downside before we can even begin thinking about the next bull market.

 Folks, this is why any recovery that we will see going forward is going to be so painfully slow....there are just no real drivers for growth. To compound matters, terrible decisions have been made at the governmental level and the trillions that are being pumped down the drain will simply become an albatross around our kids and their kids necks for a generation to come. We are already seeing higher interest rates and increased inflation, and they will only get worse from here. 

There are lots and lots of ways to become wealthy now, and in the years to come. Betting on a strong recovery in the overall US economy and stock market is just not going to be one of them.

Kip

Wayne Allyn Root, WMI’s Senior Economic Advisor, the 2008 Libertarian Party Vice Presidential nominee, and a regular personality on FOX News and FOX Business, is declaring “W.A.R” on big government beginning June 6, when “W.A.R: The Wayne Allyn Root Show” debuts in the three largest U.S. radio markets.

Root hosts a star-studded lineup on these stations with the biggest names in conservative talk radio- Sean Hannity (KABC), Mark Levin (KABC), Michael Savage (WIND), Bill Bennett (WNYM), Dennis Miller (WNYM), Dennis Prager (WNYM), Michael Medved (WIND), Mike Gallagher (WNYM) and Joe Scarborough (KABC). 

*Our very own CEO and Co-Founder, Kip Herriage, will be appearing as a featured guest on each show, so make sure to block your calendars each week and tune into your local radio station.* 

The weekly, one-hour syndicated talk show will be broadcast on conservative political talk format radio stations on Saturdays. The program airs at noon on AM 970 The Apple WNYM in New Jersey/New York; 8 a.m. on Talk Radio 790 KABC in Los Angeles; and 9 a.m. on News Talk 560 WIND in Chicago. Additional markets are expected to be added in the coming weeks.

Stay tuned to your WMI emails as we will be updating you on Wealth Masters International’s exciting public appearances in the near future!

May 29, 2009

Hello from New York, where I will be joining guest host Wayne Allyn Root on the Jerry Doyle radio show today. The show is nationally syndicated and is one of the highest rated radio talk shows in America with millions of listeners each day. The show runs from 3-6pm est, and I will be on at approximately5 pm est.

Wayne has assembled a powerful lineup today....guests includeRon Paul, Mark Skousen,Rita Cosby...and of course me. I'll have lots to talk about with the big move up in gold and silver this week, along with the huge drop in the dollar and sharp increases in interest rates.

http://www.jerrydoyle.com/

When the FED chose the "nuclear option" otherwise known as quantitative easing, the die was cast with respect to inflation, interest rates, and precious metals. I'll also discuss the "Armageddon Trade" that we have in place in the VRA. I fully expect our profits from this trade to surpass 1000% in the next 5 years.

Kip

April unemployment showed the U.S. losing 539,000 jobs, versus the 600,000 estimate, bringing the unemployment rate to 8.9%. U4, the unemployment rate that includes those that have stopped looking for work and those that are working just part time, now stands at 16%.

8.9% is the worst number in over 25 years, and the only good news is that the rate of decline in unemployment is declining...if only by a very small amount.

I guess its possible to spin this report into some kind of good news, but as far as I'm concerned this is just more terrible economic news. Not a day goes by that I don't see at least 5 market gurus come out and say that the recession is over, but what they don't say is exactly what the recovery is going to look like. Folks, this will not be a V shaped recovery, meaning that the economy will snap back just as quickly as it dropped. We've had those kinds of recessions in my lifetime, but this isn't going to be one of them. If we're lucky, this will be an L shaped recovery....meaning that things stop getting worse and simply stay incredibly slow for a long while. Then, after a year or two, the year over year comparisons begin to compare favorably. The alternative is a Depression, so even an L shaped recovery is good news.

I continue to forecast unemployment will break 10% this year.

Obama's multi-trillion dollar taxpayer funded bailout program will begin flooding the economy with money in the second half of the year, with even more in 2010/11, so the danger is that any recovery could be a phony one...and once the government funny money is gone we could begin seeing unemployment rise sharply once more. Then, in 2011 we could see the "real" economic hardships start. Our national debt levels will be so high that interest rates begin to skyrocket, yet the economy will be so slow that little business will be taking place.

Stagflation would lead to a repeat of the 1970's, with interest rates and inflation at 15-20%. Obviously, this means the worst could be in front of us, rather than in our rearview mirror.

MARKET UPDATE

Lots to cover, but I'll do my best to cover the most important facts. Yesterday was a traders delight. The big jump in banks gave us an opportunity to take strong profits. Then, we nailed the move into the short side and within 4 hours had another 20% gain. Folks, it rarely gets better than this. Having said that, the encouraging news from the bank stress tests, along with the positive spin they are putting on the unemployment numbers, have the futures trading higher by 80-100 points on the Dow.

Here's my take: I'm seeing something very interesting starting to happen. We rally (very briefly) on good news and then sell-off almost immediately. We've seen this exact thing happen several times this week with the ADP jobs number, retail sales, and then again after the stress test news yesterday. This is the exact opposite of the "wall of worry" move higher we've seen over the last 8 weeks and may well mean that the bear market rally is over. I will be watching this closely.

Also, beginning today, just about every large bank in the country will be announcing that they will soon issue massive numbers of new shares in order to stay in the governments good graces. This huge increase in supply cannot be good news for bank stocks. Again, I think we are most likely at a significant top, but I learned long ago that the market could care less what I think.

Kip

Before I get to the market forecast for the week, just a quick reminder that this IS a bear market rally, and once it ends:

• "Too-big-to-fail" banks like Bank of America andCitigroup, and corporations like Chrysler and General Motors, WILL ultimately be allowed to fail; their shareholders will be essentially wiped out andtheir creditors will have massive losses.
  
• In the stock market, the bear market rally we've seen will end; the financial stocks will give up all their gains and the broad averages will plunge to new lows.
  
• Credit markets will freeze up again, the government's stimulus package will be overwhelmed, and any pause in the economic decline will be over.

Having said this, I have no clue whether the bear market rally has a week or six months left to go.

As you can see from the charts below the markets have been steadily moving higher. April's close completed the best back to back monthly performance in over six years. And, the streak continued on Friday with both the S&P 500 andNasdaq finishing higher. At this point investors appear to be more scared of missing the rally than of a market reversal.

As I've been writing, markets that climb a wall of worry are typically headed quite a bit higher and this looks to be the case now. Stocks have been able to climb in the face of one bad piece of news after another, and I look for this to be the case again this week with the release of the bank stress tests along with the unemployment numbers for the month.

We started the week with the threat of a Swine Flu pandemic followed on Wednesday with the report of a nasty 6.1 plunge in first quarter GDP....amazingly neither news was able to drive the markets lower. The S&P 500 rallied after the GDP announcement and continued higher after the FOMC statement finding silver linings in both. The Fed is desperatelytrying to keep interest rates as low as possible by buying treasuries (quantitative easing).Low interest rates traditionally boost demand, and until the consumer comes back into the economy we will ONLY have growth as long as the government continues to supply it with larger and larger amounts of fiat currency.

However, interestrates have been climbing higher as investors (China for example) demand a higher rate of return with this ENORMOUS supply of bonds hitting the market. Folks, all of these taxpayer fundedbailout plans have to be financed with government debt.... and interest rates and inflation will be THE next big issue in the coming months.

Back to the market and where we are headed. Earnings reports have been surprising to the upside.Close to 70% of companies reporting have exceeded estimates...and although estimates that have been lowered dramatically, this is still animpressive quarter. Armageddon appears to be off the table for now, and the market is responding.

In spite of continuing economic report gloom investors are grabbing onto a few bright spots--Friday morning the ISM report showed manufacturing ticking higher over last month rising to 40.1 from 36.3 in March. A reading below 50 still indicates contraction but it's heading in the right direction. Consumer confidence also rose to its highest level since last September.

Next week the earnings parade continues with 84 S&P companies reporting and we'll likely see good results relative to expectations--which should lend more support to the current uptrend. ISM services, initial jobless claims and the Unemployment Report will be released. Even with all the hand-wringing, bad employment numbers haven't been able to derail the rally--and they probably won't this time either. Bulls have been shrugging off economic news and focusing on the sectors moving higher.

The market has a great deal of momentum and it has been able to break through major resistance. Every dip in the market has been short-lived and until this changes I will look for every opportunity to go long on pullbacks. I look for oil to trade back to $35 barrel or so before this is all over, but I also expect oil to hit $200 barrel in the next 3-5 years. For those that find this hard to imagine, remember that both oil and gold are priced in US $, and that once the $ begins to crack, these commodities MUST go higher in price...just as interest rates MUST go higher and just as bond prices MUST go lower.

Until some point in the next few days to few weeks, the bear market rally will continue. We now have major support at 8000 on the Dow, and any pullback should be used to buy. At some point the "wall of worry" will be too high to climb and the decline will resume...we're just not there yet.

Make it a great week all.

Kip