Saturday, October 9, 2010

The Rise of the US Economy : Or Is it?

Most people associate the rising of the Dow Jones Index above 11,000 points on Friday, Oct 8 2010 to the so called 'coming back' of the US economy or its growth. However, with trillions of dollars of debt, rising unemployment (with no signs of new job opportunities), growing budget deficits, irrelevant wars in Iraq and Afghanistan, weakening dollar, higher and yet higher rate of foreclosures of homes, banks under pressures both on liquidity front as well as on the stock market front, declining health care system and deprecating infrastructure, it is a slow and gradual slide into a stagnating economy that will become the US economy going forward.

Infrastructure: We all know that US has not built any major bridges, roads, subways, dams, power plants or even car factories et al since the 70's. Since last year there has been focus by President Obama himself, however, no major projects have yet been announced besides projects to reinforce existing structures around the country.

Joblessness: Aside from the financial services industry, which is the largest employer in the USA, tourism, insurance, hotel, real estate, retail sector, home furnishings, building materials, architecture sector, mortgage and real estate brokers and IT industry and various other sectors have been hurt in the past 4 years, ever since the economic decline started in June 2007. This shows no signs of improvement despite all the stimulus, forget jump starting the job market in a big manner.

Ever rising budget deficits: Wars in Iraq and Afghanistan, support for NATO forces, new drone attacks in Pakistan, efforts to break up Al Qaeda have all cost US a lot of money. In actual terms, these are sums in trillions of dollars and considered by the general public as sheer waste and politically motivated, after a point. Security and self defence is one thing and attacking other countries for prolonged periods with no apparent 'win' is completely another thing. Such deficits are not coming in control and seem like extremely wasteful expenditures. It is pertinent to note that US budgets are under such tremendous pressure that NASA and going to the moon and beyond, kind of projects have taken a back seat over the last 5-6 years.

Foreclosures: The bad loans given by banks due to easy laws and weak standards have now actually gone bad. Such has been the force of these 'sub prime loans' that it has led to the demise of long standing investment banks such as Bear Stearns, Merrill Lynch and Lehman Bros, and caused Govt owned mortgage insurance companies like Fannie Mae and Freddie Mac to buckle under and go bankrupt. the force has not only been felt in America but such poorly structured and terribly weak home loans have caused banks as far away as Ireland, Spain, Greece, Italy and Germany (mostly within Europe)to go under.

In order to recover such bad loans, the assets are required to be sold and loans settled. However, most of these assets are either commercial or residential properties situated within US. In order to sell such properties, court orders are required to ensure everything is being done legally. Already the sale of foreclosed homes are at depressed prices due to more sellers and than buyers. This week, it has come out that various large banks are cancelling such foreclosures which I think is due to 2 reasons a) that paperwork was done in a very shoddy manner and many good people were getting thrown out and b) public pressure is growing on these bailed out banks and bankers who simply do not care inspite of being funded by taxpayers who were able to survive the crisis only due to the bail outs by taxpayers. The stalling of the foreclosures by major banks will make the already weak market further weaker so expect a further decline in the real estate values in the coming 6 months.

Regardless, I believe that US stock markets will continue to do well in 2010 since most American companies though registered in US are increasingly doing more and more business abroad and not in USA. US companies such as Apple and Oracle, Microsoft and Coca Cola, Citibank and Goldman Sachs, Pfizer and Merck, Marriott and Hilton, Starbucks and McDonald's are all growing at a very rapid pace outside the US and able to generate growing revenues and profits for their shareholders from Asia, Europe and Latin America and not from within US. Hence, stock markets may deliver consistent and stable returns although the US economy and job markets may not pick up since jobs are being created in other countries and not at home for such US based companies. This reduces tax revenues for the Govt from individual taxpayers while putting greater pressure on sales of consumer goods and financial services and other goods and services that contribute to the growth of such companies across all sectors and have made consumer spending a major force in the past that led to the rise of America and American economy.

The best way to understand the dilemma of the US economy is the most recent TV show by Jon Stewart where it is funnily explained how the US economy - represented by its banks - is now a 'foreclosure based economy' because if the banks execute home foreclosures on customers unable to make their mortgage payments on time, then US economy and its banks will have financial losses and if they do not do foreclosures, then also the banks shall incur financial losses.

One thing someone can take away is that increasingly in the US, their economy and their stock market are decoupling i.e. not working in the same direction, at this time.

A good to watch video and good use of your 7 minutes and I urge you please do so.

Jon Stewart Oct 7 2010

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