THE NEW NORMAL - WHY ANY RECOVERY WILL BE PAINFULLY SLOW

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

Comments

[Tim Clark]

Dear Kip,

Another great information update. Kip, I am always a little confused after reading what you write because you never give us any hints what we should be doing. I understand you can not give us advise but you could tell us what the smarter people are doing. I want to hear you tell me what you are doing to grow wealth and where could be the best place for us to keep our money through this down time?

I have been thinking that Tech stocks are a good place to be now because of the growth in Chindia in wanting hand held computers. ie: (palm, aapl, rimm) but am afraid after hearing you talk that the Stock market will not hold up. I pulled out our money in march and watched as the stocks I had rose 200% in 3 months.

Do not get me wrong, I respect your advise and I pay attention to it. You know much more about this than I do. I am just confused and need some solid growth options in regrowing my retirement. Currently at 52 I need both growth and safety.

TC