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Economics: What is Going On?
New York: March 01, 2004
By John R. Stephenson
Things couldn't be more confusing. A whole host of indicators
seems to be pointing to better days (ISM numbers, productivity
etc.) and yet others seem to be pointing to worse days. The
economy appears to be heading back up after three years of
tepid performance and yet there aren't all that many jobs
being created, certainly not enough to close the gap from
the start of the recession. Both white collar and blue-collar
jobs (11,000 manufacturing jobs lost in January alone) are
being sent overseas to low wage countries. What jobs are being
created are in residential construction and in retail sales.
Today's non-farm payroll number was further confirmation of
the weakness out in job land. But what should investors focus
on?
The US dollar is under attack and continues its slide, even
with considerable intervention in the currency markets by
the Japanese. In the first 28 days of January, the Japanese
spent a record $67.7 billion ($813 billion annually) to keep
the Yen from rising against the dollar (buying Dollars/selling
Yen). This current pace of intervention cannot possibly be
sustained leading to one conclusion ? a weaker dollar in the
future.
Bank Credit Analyst, a respected economic newsletter,
is calling for US economic growth to slow considerably over
the next twenty-five years from an average growth rate of
over 3% to 2% by 2025. The outlook for Europe? Even worse.
They are calling for growth rates in the 1.4% range over the
next twenty-five years and Japan should see its economy slow
to almost nothing in the next twenty-five years as 23% of
their working age population retires. The problem at home
and in Europe and Japan? Far too many old people demanding
products and services and not enough young workers to provide
them. Why is this a problem that will shape our economic prospects
for decades to come? It takes three times as many resources
to support a retiree as it does to support a child. The potential
tax burden on the young workers is quite possibly, immense.
The solution: cut services or raise taxes. Either solution
will chock -off economic growth.
Rising corporate profitability has led stock markets higher,
but jobs and a strong dollar are nowhere to be found. So what
should you do? First and foremost, don't believe all the rosy
commentary out of Wall Street. The structural changes (aging
demographic, outsourcing of jobs) are unstoppable and cannot
be reversed. The aging population and huge government indebtedness
in the US cannot be sustained and short-term optimism will
yield to long-term realism. The stock markets and the housing
market may well head higher for the next six months or so,
but eventually they will correct as these macro trends continue
to wind their way through the economy. So what's your action
plan?
Get yourself to higher ground by cutting debt now. No point
playing Russian roulette with your finances by betting on
a rising economy. Where possible, try and get a little diversity
in your investments and income. Consider a part-time job or
some dividend paying stocks as possible ways to be less dependent
on a rising stock and real estate market. Look for gold to
strengthen and the dollar to weaken. By all means, spread
your bets around, now is not the time to concentrate your
bets.
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