In my daily writings, my goal is not to continuously be the bearer of bad news. When it comes to the economy, my goal is to educate my readers as to the severe structural economic problems the U.S. faces in the hope that more awareness of the issues will help my readers prepare their portfolios for the inevitable hardships that lie ahead.
Most Americans go along their merry way, oblivious to the mounting economic challenges facing America. I assume that, since you and hundreds of thousands of others read this column daily, you do not want to be in the “merry oblivious group.” You want to know what’s really going on with different aspects of the economy and how they will ultimately play out for or against you.
The following are seven major problems facing the U.S.:
1. Foreign Ownership of America
Ten years ago, foreigners owned 20% of U.S. Treasuries. Today, they own between 40% and 50%. If we go back through history, when we see past countries exposed to such dependence on foreign investment, the debtor nation (in this case the U.S.) has eventually faced sovereign debt problems and high inflation.
2. Price Action of Gold
The price of gold has risen 413% in less than 10 years and, during that 10-year period, it has failed to face a major correction in its price advance. The spectacular but steady rise in the price of gold bullion is a leading indicator of either a collapse in the value of the U.S. dollar or rapid inflation or both.
3. The Fed
As blunt as I can be, and in a nutshell, here’s my opinion: The Federal Reserve’s printing press has been supporting the economy since March of 2009. At the end of this month, the Fed says it will stop its QE2 program—basically a fancy name for printing money, taking that money and buying U.S. Treasuries. I have read various reports issued by analysts and economists. Depending on which report I choose to believe, the Fed has been buying about 50% of the Treasuries issued by the government under QE2. Who will buy these Treasuries if the Fed stops buying them? Scary thought.
The U.S.’s budget deficit this year will be in the $1.5-trillion to $1.6-trillion range. Our debt ceiling (the amount the U.S. can legally borrow) is here and it’s $14.3 trillion. Only nine years ago, the national debt was $6.0 trillion. In less than a decade, our national debt has gone up 140%. But the official national debt numbers we hear do not include entitlements to U.S. citizens and unfunded liabilities. Include these and our total debt is in the $70.0-trillion to $100-trillion range, again depending on which analyst report you believe. The official national debt is expected to increase another $6.0 trillion by the end of this decade.
5. Government Gone Too Big
Under the Obama Administration, the government has only gotten bigger. Between 40% and 45% of households in the U.S. receive some form of government support. Over 30 million Americans use food stamps. And, of course, the government is the biggest employer in the country. Social Security and Medicare—those expenses are huge for the government. But conveniently, they are not included in the government’s total debt, as they are both unfunded expenses. The government took over Freddie Mac and Fannie Mae during the credit crisis. Since these two entities owned or guaranteed half the residential mortgages in the U.S., does this mean the U.S. government now owns or guarantees half of all residential mortgages in the U.S.?
6. U.S. Dollar
Since June of 2010, less than 12 months ago, the U.S. dollar has declined 16% against a basket of six major world currencies. The devaluation has been steady and slow. Frankly, considering all the debt the U.S. has piled on, I’m surprised that the U.S. dollar hasn’t simply collapsed. Maybe it’s being supported. I don’t know; I’m just a writer. But I have studied history. And I can tell you that no superpower has thrived as its currency has devalued. In the case of the U.S., the situation is dire—the U.S. dollar is the reserve currency for 70% of world central banks. If they all dump the dollar, the repercussions to the U.S. economy will be insurmountable.
7. House Prices
The average price of a home in the U.S. has declined 33% in 20 major cities from their 2006 price peak, according to the S&P/Case-Shiller Index. It will be years before the housing market recovers…a major impediment to the U.S. economic recovery.
Yesterday, at a conference in New York hosted by Standard & Poor’s, Robert Shiller, co-founder of the S&P/Case-Shiller House Price Index, was quoted as saying that he would not be surprised to see U.S. house prices decline another 10% to 25% over the next five years. Shiller noted that, in Japan, housing prices fell for 15 years after Japan’s property bubble burst in 1990.
For eight consecutive weeks now, the bellwether U.S. 30-year fixed mortgage has dropped, and consumers are still not interested in buying houses.
A 30-year fixed U.S. mortgage today costs 4.49%. Last year at this time, it was 4.72%. The record low was 4.17% in November of 2010 (Source: Freddie Mac).
If the 30-year mortgage rate in the U.S. fell to three percent, would buyers surface? I doubt it. Consumers have no faith in the housing market and the inventory overhang is unprecedented. Just when you think the housing market can’t get any worse, it will get worse.
Based on the above, I’m sure you can see why I’m so concerned about America’s future and my kids’ future. American is no longer the industrialized leader it was following World War II. We face severe economic problems in the years ahead; hence you see why I’m long-term bearish on the stock market.
Next week, I’ll tighten the time frame and give you my more immediate reasons as to why I believe the U.S. economy will soon fall back into recession. Today’s U.S. economy…it’s looking very similar to me to the Japan economy of the 1990s.
Where the Market Stands; Where it’s Headed:
Stocks broke through their longest losing streak since 2009 yesterday. Although I was disappointed the market didn’t end on its high for the day, the market is putting in a base here.
I’d be worried if the Dow Jones Industrial Average fell decisively below the 12,000 level (12,124 was the opening this morning), but until then, the “tired” and “long-in-the-tooth” bear market rally presides.
What He Said:
“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe that only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.