For months, we have been waiting on Bernanke to make his speech at Jackson Hole. For months, the market has been on tilt with some of the wildest trading days we have ever seen. For months, gold has been making new highs.
For months, it has been the same old story.
There’s no doubt in my mind that everywhere you turned Friday, Bernanke was the focus. So I am not going to bore you. In short, Bernanke said everything we already know in his opening paragraph:
“The financial crisis and the subsequent slow recovery have caused some to question whether the United States, notwithstanding its long-term record of vigorous economic growth, might not now be facing a prolonged period of stagnation, regardless of its public policy choices. Might not the very slow pace of economic expansion of the past few years, not only in the United States but also in a number of other advanced economies, morph into something far more long-lasting? ”
His speech spoke volumes without saying anything: QE3 is needed.
In past letters, I have maintained my stance that QE3 is inevitable (see Time to Feel the Pain). In a note published earlier this week, Goldman Sachs said that $1 trillion in QE3 is an absolute minimum if the Fed wants to get GDP higher by at least 0.5%:
“Taken together, our analysis suggests that QE3 is unlikely to be a panacea for growth. Nonetheless, our estimates suggests that $1trillion of asset purchases-or an equivalent increase in the duration of the Fed’s balance sheet-might increase GDP growth by up to 0.5 percentage point in the first year after any announcement of QE3.”
I know QE3 will do more harm than good in the long term. I know it may not be as effective as QE1 or QE2. I know the effects of QE3 on financial conditions may be at least partially offset by the Treasury’s debt management policies. But for now, both the market and overall consumer confidence, need to be addressed for the short term.
Bernanke knows it. That is why he announced that a second day has been added to the next Federal Open Market Committee meeting in September to “allow a fuller discussion” of the economy and the Fed’s possible response. Something will happen on those days. But again, we just don’t know what.
Over my recent letters, I talked about focusing on what we do know, rather than what we don’t. So I gathered up some facts that’ll give you a broader picture of what’s happening in the U.S. — word of caution, it ain’t pretty:
- Nearly one out of every five American men between the ages of 25 and 54 does not have a job at the moment
- Approximately one million homes were repossessed by financial institutions in 2010 and a similar number of repossessions is expected in 2011.
- The combination of federal government spending, state government spending and local government spending now accounts for a larger share of U.S. GDP than at any other time in our history
- The supply of existing homes for sale continues to go up
- The value of U.S. homes has fallen by a total of approximately 6.6 trillion dollars since the peak of the housing market
The more money you make, the less taxes you pay: General Electric, the nation’s largest corporation, reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion. Meanwhile, citizens are being forced to pay taxes with money they don’t have.
Ten years ago, the United States was ranked number one in average wealth per adult. In 2010, the United States fell to seventh
In 2010, the United States had the worst current account balance in the world. The U.S. had a current account balance of negative 561 billion dollars for 2010 (see The Shocking Truth)
It takes the average unemployed worker about 40 weeks to find a new job.
Today, one out of every four American children is on food stamps: It is being projected that approximately 50 percent of all U.S. children will be on food stamps at some point in their lives before they reach the age of 18
To date, American household wealth has lost $7.7 trillion since the recession: U.S. household wealth fell by about $16.4 trillion of net worth from its peak in spring 2007, about six months before the start of the recession, to when things hit bottom in the first quarter of 2009, according to figures from the Federal Reserve.
While a rebound in the stock market, an improved savings rate and consumer steps to reduce debt resulted in net worth gains since 2009, only a little more than half of that lost wealth – $8.7 trillion — is back on household balance sheets.
That leaves American household wealth $7.7 trillion less than it was before the recession.
Those are just some of the little details that the US is afraid to tell you. But there’s more. There’s always more…
America Up for Sale
Pieces of America are literally being auctioned off just to help state and local governments minimize their debt problems.
Earlier last month, a bill that will allow the state government of Ohio to proceed with plans to lease the Ohio Turnpike to investors was approved.
Highways have also been auctioned off (most of the time to foreign investors): A toll highway in Indiana (sold to a Spanish and Australian joint venture), the Chicago skyway, and stretches of highway in Florida, Virginia and Texas.
In Chicago, it’s the sale of parking meters to the sovereign wealth fund of Abu Dhabi. Parking meters in Nashville, Pittsburgh, Los Angeles, and other cities are also being sold.
In Wisconsin it’s public health and food programs. In California it’s libraries, water treatment plants, schools, toll roads, airports, and power plants. It’s Amtrak.
Oh, and guess what?
It’s the bankers that caused our financial mess in the first place that are selling these pieces of assets from taxpayers, to private investors.
In Goldman Sach’s 2010 SEC filing, Goldman says it will be involved with “ownership and operation of public services, such as airports, toll roads and shipping ports, as well as power generation facilities, physical commodities and other commodities infrastructure components, both within and outside the United States.”
I am not done.
America Selling Out
All this talk about infrastructure and job creation by the government is just that…talk.
Much of U.S’ infrastructure is not even built in the country anymore.
For example, a 2,050ft-long bridge spanning the San Francisco bay is actually being built in China by the China State Construction Engineering Group and is being shipped over to the U.S. piece by piece.
According to an article in the Telegraph:
According to Engineering News Record, five of the world’s top 10 contractors, in terms of revenue, are now Chinese, with likes of China State Construction Engineering Group (CSCEC) overtaking established American giants like Bechtel.
CSCEC has already built seven schools in the US, apartment blocks in Washington DC and New York and is in the middle of building a 4,000-room casino in Atlantic City. In New York, it has won contracts to renovate the subway system, build a new metro platform near Yankee stadium, and refurbish the Alexander Hamilton Bridge over the Harlem river.
Massive corporations that are either fully or partially owned by the Chinese government are deeply integrating themselves into the U.S. economy.
So what happened to infrastructure as part of Obama’s promise of new job creation? I’ll let you figure that one out for yourself.
While the long term outlook for the US doesn’t look pretty, it doesn’t mean everything is going to collapse right now. The fact is, the US is still the world power – even with the economic turmoil brewing. Let’s not forget that all of these negative statements are a reflection of what the US once was.
If you think the US is no longer a player, you’d be nuts. Even without growth, the US is still number one. While this may not last, there is still a window of opportunity for profits in the US markets. So buck up and stop worrying because the time for worry will come later.
Summer is almost over, which means play time is over. The markets will be back in full swing over the next few weeks and I have a strong feeling that we’re going to see a rally soon enough.
Enjoy the last days of sun because its back to work and back to aggressively making money. The time period to do so will be short lived, so be ready to make moves.
Until next week,
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