A Blessing in Disguise for Astute Investors

A “snowball” problem for America that just won’t go away could be a blessing in disguise for astute investors…

Manufacturing jobs have fallen steadily since the 1950s. Low-wage countries, especially China, have been the center of the movement of factory work and job creation out and away from the United States.

In the 1960s, manufacturer United States Steel Corporation (NYSE/X) employed over 225,000 factory workers, Westinghouse Electric, had 114,000, and General Motors Company (NYSE/GM) employed over 595,000 factory workers. The center of job creation in America was manufacturing.

Today, service companies in the U.S. dominate the economic landscape when it comes to job creation: United Parcel Service, Inc. (NYSE/UPS) employs over 400,000 people; Target Corporation (NYSE/TGT), 355,000; and Wal-Mart Stores, Inc. (NYSE/WMT) has 2,100,000 service employees on its payroll. From what I can see, job creation over the past three years has been in the service sector (with heavy emphasis on retail) and at the government level.


In his State of the Union address last week, the President was adamant about wanting manufacturing jobs to come back to America. It will probably be a major part of his re-election campaign, in a bid to spur job creation, which is sorely needed in this country. But how can it possibly happen? Isn’t it a pipedream that manufacturing jobs will return to America so the job creation engine will start running again?

China’s development and rapid job creation have led to wages rising at least 15% per annum in recent years, which means that, within five years, the cost savings to manufacturers of producing in China as compared to the U.S. will be minimal (source: Boston Consulting Group).

But manufacturers have a choice if labor gets too expense in China. They can simply move their factories to other less-developed economies where wages are rock-bottom and job creation is sorely needed. Why move back to America? The only way to stimulate job creation by creating manufacturing jobs here in the U.S. would be to revamp healthcare costs and our tax structure in order to make the U.S. an attractive place to invest.

The other major factor in determining a plant location for manufacturers is a weak currency. One cannot understate the importance of exchange rate currency costs in setting up a manufacturing plant. The reason China, India and other such developing countries were able to lure manufacturing jobs away in the first place, and so create the foundation for a surge in job creation was a favorable exchange rate to the once mighty U.S. dollar.

Have the tables turned?

Is it just a coincidence that, in the same week as the State of the Union address, the Fed came out with its policy directive of maintaining its almost-zero rate policy until 2014?

If the President is making manufacturing jobs part of his election campaign for job creation and the Fed has sent a clear message to the markets that it wants to stimulate the economy, then, in my opinion both, add up to a weaker U.S. dollar.

When the Fed announced its policy initiative last week, precious metals, commodities and stocks in general rose, while the U.S. dollar fell. Should more money printing be in the cards, you can bet that the U.S. dollar will continue to fall, as it did during QE1 and QE2.

So, dear reader, if the agenda is to lower the value of the U.S. dollar in order to revive job creation, then what will be the benefit in this market for investors to take advantage of?

Precious metals will benefit most, with gold bullion and gold mining stocks leading the way. It is my belief that gold mining stocks are cheap relative to gold bullion; but, at the very least, ensure that you have some of the shiny stuff in your possession. It will protect you from the loss of purchasing power that will come with a declining U.S. dollar. (Also see: Gold Stocks: There’s Value in Them There Hills.)

The following chart explains my words quite well.

(Source: Lombardi Financial)

Michael’s Personal Notes:

U.S. GDP numbers released Friday, a key indicator of economic growth, confirm what I have been saying for weeks…the U.S. economic growth is slowing, not growing.

Here are the full-year GDP numbers for the U.S. over the past three years:

GDP 2009: -2.4%

GDP 2010: 3.0%

GDP 2011: 1.7%

GDP (which stands for gross domestic product: the total market value of all the goods and services produced by a country in a given period) grew at a “lukewarm” 1.7% in 2011 over 2010. When compared to 3.0% growth in GDP in 2010 over 2009, the obvious question is: where is the economic recovery?

The picture becomes even more distressing when we look at fourth-quarter GDP numbers, because they point to a deceleration in growth.

On the surface, the 2.8% rise in fourth-quarter U.S. GDP was weaker than what Wall Street expected. When digging deeper into the numbers, we find that restocking of business inventories accounted for a whopping 1.94 % of GDP in the quarter. This is temporary boost to GDP.

If we remove inventory restocking from the numbers, we find that the U.S. economy grew at just a measly 0.8% in the fourth quarter of 2011, when compared to the third quarter’s 1.8% rise in GDP.

My feeling, looking at my regular economic gauges, is that there is a clear deceleration of growth as we head further into 2012.

Consumer spending, which accounts for 70% of GDP, came in 2.0% higher in the fourth quarter of 2011, missing estimates of 2.4%, but slightly better than the 1.7% pace of the third quarter. Keep in mind, dear reader, as I’ve been saying in PROFIT CONFIDENTIAL, the meager growth the U.S. economy is experiencing is on the back of sharply higher debt spending by consumers (especially over the holidays), which cannot be sustained going forward.

Let’s also keep in mind that gas prices have remained elevated thus far in 2012. With the continued escalation of tensions with Iran and the U.S. dollar falling in value against other major world currencies (except the euro), this will further dampen GDP growth going forward.

Corporate spending on capital goods rose in the fourth quarter of 2011 at the slowest pace since 2009. The corporate sector continues to be timid against the backdrop of slow worldwide economic growth, preferring to stockpile cash instead of inventory.

I’ve been talking about the terrible shape that local and state U.S. governments are in. Their budgets are stretched to the limit, with states like Illinois and California virtually bankrupt. It comes as no surprise that, in the fourth quarter of 2011, the government spending component of GDP shrank for a fifth straight quarter. Many state governments continue to struggle to get their finances under control.

Couple this with the fact that there are no major stimulus programs currently coming out of the White House and we can assume that government spending will continue to remain a drag on GDP growth in 2012.

This latest GDP report merely confirms the weak economic data that have been coming in of late. Not only does this key indicator put downward pressure on the U.S. dollar, but it also makes one wonder how the markets can continue to move higher under these economic circumstances. Eventually, slow or deteriorating economic growth will push down corporate earnings and, when corporate earnings decline, so does the stock market. (Also see: Last Bastion of Higher Stock Prices Turning Negative.)

Where the Market Stands; Where it’s Headed:

The score: What looked like a strong January for the stock market has dissipated. The Dow Jones Industrial Average starts this morning up a diminishing 3.6% for 2012.

Yes, the bear market rally that started in March of 2009 is alive and well. But it is also weak and tired, getting near the end of its cycle.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.