Two different parts of the world, two very different ways countries are dealing with their economic contractions…
In the U.S. yesterday, Eric Rosengren, President of the Federal Reserve Bank of Boston, said that the Fed should do more to bring down the unemployment rate. Rosengren suggests that the Fed buy mortgage-backed securities while the government does more to help halt economic contraction.
In France on Monday, the government announced plans to increase taxes and cut government spending for a total benefit of $26.0 billion in 2012 in the face of economic contraction. The plan is to raise taxes on large companies, raise some value-added taxes, and make some welfare spending cuts. This is France’s second austerity measure of the year. France acknowledges its economic contraction. The country now expects GDP of one percent in 2012, down from a previously forecast 1.75%.
When I listen to someone like Rosengren say that the Fed should buy mortgage-backed securities and the government should do more, I think three things: more money printing; more debt; more of the same for America. It’s been three years since the credit crisis hit. I have yet to see the U.S. government announce any major austerity measures, such as a significant cut in government spending, all in spite of the evidence of new economic contraction in the U.S.
What I have seen in America is ballooning government debt, a Federal Reserve that has increased its balance sheet by over $2.0 trillion, a government that indirectly owns or guarantees half the residential mortgages in the country, a government that has increased the country’s national debt by 50% in less than four years, and very little progress on reversing the economic contraction.
It’s ironic that France, which is a major socialist country, is not taking the route of Keynesian governments and increasing spending to spur its economy in times of economic contraction. The worst-kept secret is that, because of the spreading debt crisis in Europe, France has no choice but to put its fiscal house in order before interest rates on its bonds start to rise.
France national debt to GDP will be about 88% in 2011. The U.S.’s national debt to GDP will be about 100% this year.
I thought I’d never see the day that a country like France would be on a better path than we here in America are on when it came to dealing with a national economic contraction.
Michael’s Personal Notes:
Does he know something we don’t?
Berkshire Hathaway, Inc. (NYSE/BRK-A), the investment vehicle of arguably one of the most successful investors on earth, Warren Buffett, invested $24.0 billion in the third quarter of 2011. The actions of Buffett are often looked at as a key indicator of the stock market’s direction.
Buffett put $7.0 billion in common stocks, $7.0 billion in preferred shares and warrants of Bank of America Corporation (NYSE/BAC), and about $9.0 billion in direct company purchases…moves seen as key indicators that Buffett sees equities as undervalued.
While Europe’s debt crisis was moving from Greece to Italy, and while U.S. stocks had their worst quarterly performance since 2008, Buffett made the most investments in the three months ended September 30, 2011, than in any other quarter in Berkshire Hathaway’s past 15 years…this is a key indicator from Buffett (see Why Stocks Will Rise as the Economy Deteriorates Further).
So what is Buffett buying?
Berkshire Hathaway disclosed that it made investments in MasterCard Incorporated (NYSE/MA) and Dollar General Corporation (NYSE/DG) for the first time this year, a key indicator of expected increases in consumer spending. Buffett must think his company’s stock is a good deal, too. It’s been well-published that Berkshire Hathaway started buying back its own stock in September 2011…a key indicator that the general economy will improve.
Buffett’s investment spree bodes well for my personal opinion and is a key indicator that the bear market rally will move stock prices higher, that the stock market will continue to climb a “wall of worry” higher against a backdrop of stronger-than-expected corporate earnings and prevailing investor pessimism. (See Why the Pathetic New Consumer Confidence Reading Is Good News)
As I have written many times this year, there are few alternatives to stocks. “Real” and “estate” are still two dirty words. 10-year U.S. Treasuries pay a paltry two percent. Few investors have gotten in on the bull market in gold bullion. In the immediate term, there are simply few good investment alternatives to stocks and investors are starting to see this picture. A Buffett action in the third quarter is a key indicator that he sees it this way.
Where the Market Stands; Where it’s Headed:
We continue to be in a bear market rally that will move stocks higher before Phase III of the bear market sets in—that’s the phase when the stocks move back down to test the low at which the bear market rally began. In this case, that number is 6,440 on the Dow Jones Industrial Average, reached on March 9, 2009. Typical Phase II bear market rallies like we are presently experiencing can last three to four years. The current rally has lasted 35 months so far.
What He Said:
“The U.S. lowered interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of bringing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005. Long before anyone was thinking of a credit crisis, Michael was warning that the coming real estate market bust would create havoc with the banking system.