US Economy in Serious Trouble Whilst Asia Booms - What it Means For Your Portfolio
Stock-Markets / Global Stock Markets Nov 29, 2007 - 09:03 AM GMT
The U.S. is not only sneezing, it's struggling to breathe with a bad lung infection. Failing real estate and mortgage markets might just cause the worst recession this country has ever seen.
Meanwhile, to the south in Latin America and to the east in Asia, the world is witnessing huge economic revolutions and spectacular growth.
This has never happened before. In the past, sickness in the U.S. economy spread around the globe.
So what gives? How bad will it get in the U.S.? More importantly, are emerging economies really able to stand on their own two feet now?
First, the Scoop on the U.S. Economy: It's in HORRIBLE Shape
Look, I'm a U.S. citizen and will always be one. I was born here ... my family resides here ... and I will always be a country-loving American. But I am worried sick about the future of the U.S. economy.
Here's why:
The cornerstone of the U.S. economy — the dollar — has never been weaker.
The buck has lost nearly 37% of its purchasing power in just five years, and the dollar's bear market could go on for a lot longer.
This means, on an international level, that the value of U.S. gross domestic product has been cut in value by more than a third!
Plus, it means that the Dow Jones Industrial Average — even at its recent high of 14,000 — buys you 21% less than it did when it hit 11,722 in January 2000!
And when measured against tangible assets like gold and oil, the Dow purchases even less — almost 70% less than it did seven years ago.
Remember, just because you don't see these losses on your brokerage statements, or in your IRA or 401(k) — it doesn't mean they aren't there. They are! Your money has lost massive amounts of purchasing power.
Meanwhile, the U.S. is facing its worst real estate market since the Great Depression.
Housing starts are down 47% from their peak. Residential construction now accounts for 4.4% of total GDP, down from 6.3% at its peak in 2005. And for the first time ever, the national median home price has declined.
These figures don't even begin to cast light on the debt problems behind the property markets, either. The subprime mortgage crisis is far and away the worst credit crisis this country has ever seen.
As much as $500 billion in mortgages may go up in smoke, in direct losses to the aggressive financial institutions that pushed these loans on the public.
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| Citigroup's CEO, Charles Prince, stepped down earlier this month, after the bank warned of billions in writedowns ... |
Citigroup could lose $18 billion, putting its Tier 1 capital — the company's core cash, including equity capital and disclosed reserves — in jeopardy. It's already looking for handouts, with the Abu Dhabi Investment Authority giving it a $7.5 billion cash infusion.
More than 130 mortgage lenders have already shut down. Thousands of other banks, mortgage companies and S&Ls are or will soon be facing trouble.
In short, the heart of the U.S. economy — the financial industry — is having a massive attack that will require emergency efforts to shock it back to life. And even then, it will probably need a pacemaker to keep it ticking.
This is no pretty picture. It's intensive care in the emergency ward. And it's only made worse by the fact that the average U.S. citizen is in hock up to their eyeballs.
Relative to their incomes, household debt as a percent of disposable income in the U.S. is now 130%. That means the typical American household has $1.30 in debt for every one dollar of income. In the early 1990s they had 80 cents of debt for every dollar of income.
There is NO way ... simply NO WAY ... that the average American household can survive that financial strain, especially with property values falling and the national savings rate still at record lows of just 0.9%.
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| Sky-high fuel prices are hurting already-strapped consumers! |
Of course, all of this is being aggravated by soaring energy prices, which act as a tax on the consumer, making it much more difficult for them to pay their bills.
Bottom line: I say the U.S. is already in a recession. And it's going to get worse before it gets any better.
Washington is dead set on letting the value of the dollar fall even more. As painful as it is, a (much) lower dollar is the only potential cure for the economic problems the U.S. faces.
The thinking goes like this: A sharply lower dollar boosts inflation ... that raises asset prices ... and thereby reduces the size of debts relative to assets.
Whether or not it will work remains to be seen. If it doesn't, the result would be even worse than what we have today. The U.S. economy would sink into a hyperinflationary stagnation, or even more dire, a hyperinflationary depression.
I don't like this any more than you do. But everything I just told you is fact. The U.S. is probably in its worst economic condition since the Great Depression.
Conversely ...
Emerging Economies Are Booming, And Breaking Free of the U.S.
Let me be clear: Emerging economies have not completely broken away from the U.S. And I doubt they ever will. But there is absolutely no question in my mind that they are now more independent of the U.S. than they have ever been before.
Some facts supporting that belief:
First, emerging economies are no longer financially dependent on developed nations. Instead of running current account deficits as they did in the late 1990s, nearly all emerging countries now have current account SURPLUSES.
Second, with the exception of China's yuan, currencies of most emerging economies now freely float against the dollar, giving them much more flexibility to develop policies to overcome any speed bumps that come along. This in itself gives them an independence they did not have just a decade ago.
Third, the new consumer class in emerging economies is developing very rapidly, and in many countries, way ahead of even the most optimistic forecasts.
In China, for instance, consumer purchases now account for 37% of China's GDP and have plenty of room to grow. It's the same thing in India (67% of GDP) ... Brazil (64%) ... and Russia (55%).
This new class of consumers, amounting to three billion people in Asia and another 381 million in the emerging economies of Latin America, represent more than half of the world's population.
As they consume more and their incomes rise, it's not hard to see that they will no longer be dependent upon the U.S. for economic growth. They have plenty of fuel to build their economies from within.
To be sure, there are still plenty of problems in these countries, and plenty of hurdles for them to overcome. But in general, they will continue to outgrow the U.S. (and other developed economies) by a factor of four or five to one.
And despite occasional pullbacks, even violent, deep declines like we've seen lately in China, the upside is very much intact and has a very long way to go.
So ...
Stay on Track with the Themes I've Been Telling You About
1. Continue to stay out of the U.S. stock markets, except for select natural resource stocks. The U.S. markets are the most vulnerable to the downside. I see the Dow falling to at least 11,800, and possibly much lower.
2. Stay out of Treasury and corporate bonds. Bond markets remain vulnerable, and the declining dollar compounds the problem.
3. Hang on to your gold! On August 2, and again on September 6, I suggested DOUBLING your gold holdings. That would have been a smart move, as gold is now almost 30% higher.
4. Consider buying key natural resource stocks! Tangible assets thrive when more than half the world's population has suddenly become a new emerging consumer class — and thrive yet again when the U.S. dollar is being devalued.
Best wishes,
Larry
P.S. Want my latest picks in natural resources and international markets? Then subscribe to Real Wealth Report ! You'll get 12 monthly issues plus all of my flash alerts and 24/7 access to my website — for just $99 a year. Join now!
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