Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

S&P Credit Ratings Agency Upgrades U.S. Economic Outlook - Wrong Again!

Economics / US Economy Jun 13, 2013 - 12:37 PM GMT

By: Money_Morning

Economics

Martin Hutchinson writes: If you're not familiar with the term "putting lipstick on a pig," well I think there is an apt example at play again from the people who seem to be experts at applying the lipstick.

Standard and Poor's this week raised the outlook for the U.S. credit rating from "negative" to "stable," citing reduced fiscal risks and policymakers' willingness to sustain growth.


Oink. Oink.

There's another recession wave coming, and the U.S. economy is ill-prepared to take the hit.

But that doesn't mean you have to take it on the chin. You can prepare yourself by shunning one investment and looking to a surprising sector that at first glance wouldn't seem a great port in this storm.

Just Look at the Business Cycle
I have always been surprised by commentators' failure in their budget predictions to take account of the business cycle.

In 2001, the Bush administration forecast continued budget surpluses, and the major media agreed with it. Yet there was no "there" there. Like everyone else, I could see we had entered a recession, yet nobody was taking account of it.

I stuck my neck out in late spring, and forecast a deficit of $200 billion for the year to September 2002. I was first to forecast a deficit - and way short of the $317 billion deficit that actually occurred.

A Poor Standard
This time around, Standard and Poor's optimism focused on the improvements in the budget picture caused by two factors: the restoration of the payroll tax and modest upper-bracket tax increases of January, and the "sequester" spending cuts in March.

The sequester in particular was a brilliant piece of policy; it appears to have had almost no effect on the operations of government (thus proving there was massive bloat) and has produced the first real cuts in spending since the 1990s.

As a result, according to the Congressional Budget Office, the deficit for the year to September 2013 is a mere $642 billion, or 4.0% of GDP.

That doesn't sound too worrying. Unfortunately, two special factors are holding it down and are likely to reverse. First, Social Security and Medicare payments are likely to increase rapidly as the Baby Boomers retire in greater numbers.

Second, Ben Bernanke is buying $85 billion of government and agency debt monthly - that's over $1 trillion a year. With a deficit of only $642 billion, that's really jamming interest rates to the floor.

Now interest rates are showing signs of increasing, and by late 2014 they are likely to have risen close to their long-term averages of 2-3% above the rate of inflation, or say 5% on the 10-year bond.

That will have two effects. First, it will push the U.S. economy into renewed recession. Second, it will raise the cost of financing the Treasury. Currently, interest outlays are only 1.4% of GDP, based on debt held by the public of 72% of GDP - an interest rate of less than 2%.

If interest rates go to 5%, that cost can be expected to double, to around 3% of GDP. And that's not a good thing at all.

A Realistic Assessment
Let's assume President Barack Obama is moderately successful at holding spending in check, and that the Siren Song of more wasted "stimulus" spending when the recession hits are avoided.

We can then forecast an increase in spending of about 6% of GDP, as in 2000-03, assuming a somewhat deeper recession than that mild one but better spending control than under the spendthrift George W. Bush. Add the 1.5% of GDP from extra interest payments, and you have a total deficit increase of 7.5% of GDP, giving a 2015 or 2016 deficit of 11.5% of GDP, or about $2 trillion.

Given the oncoming train of higher Social Security and Medicare, that's enough to turn us into Greece. Debt would be increasing uncontrollably, while the politicians would be unable to bring the deficit back under control.

Add the damaging effect on the U.S. workforce of another recession that started from an unemployment rate of 14% or more, as measured by the broad U6 measure, and default on U.S. Treasuries appears as likely as not. After all, there's no Germany to bail us out.

For investors, the lesson is clear.

Avoid U.S. Treasuries.
Split a good portion of your investments between precious metals and a range of emerging markets equities.

Theoretically, emerging markets are liable to run into financial difficulties in a global downturn. But in practice, many of them (excluding the fashionable BRICs) have recently run their economies better than the U.S., and have less debt and more growth, and are therefore a better bet.

Source :http://moneymorning.com/2013/06/13/wrong-again-sp-upgrades-u-s-outlook/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules