“That's another fine mess you've gotten me into.”

Early cinema comedian Oliver Hardy, of Laurel and Hardy fame

 

U.S. Economy — The Big Picture

 

A mess by all accounts—and seemingly getting messier.

 

As we have been saying for some time, U.S. economic growth is stuck in the slow lane.  Very slow lane.  There are few signs of any significant lane changing ahead.

 

We have seen a serious slide in the American standard of living over the past three years, since the beginning of the recession.  The slide can be measured in many ways.  Food stamps recipients have increased by 48 percent and the cost of the program ballooned by 80 percent.  Medicaid recipients are up 17 percent and program  costs are up 36 percent.  Welfare recipients are up 18 percent, and program costs up 24 percent.  That isn’t the kind of growth that’s good for any economy!

 

Looking ahead, we expect the standard of living decline to continue for up to another seventeen years.  Our economy and society are substantially changed, but the change to date is moderate compared to the magnitude of change ahead.  In 2018, the U.S. will be a much poorer country than it was in 2008. 

 

We envision the average family spending a higher percentage of income on food and shelter.  People will retire at 75 years of age...not 65.  Many may not be able to retire.  Many retirees will have to re-enter the work force as their savings and pensions are diminished in buying power.  The streets will be filled with more poor and homeless.  The dollar will continue its decline. Gold and other commodities will continue to rise in price.  All of these are symptoms of a decline in the public’s standard of living.  Unfortunately, we expect it to last for quite a while.

 

If it is any solace, the U.S. does not stand alone in the economic muck.  Japan has been going through the doldrums for almost twenty years now and that sorry state of affairs will likely continue for another decade.  Europe’s standard of living is moving in lockstep with the U.S.  We give the Europeans, like the U.S., a poor seventeen year prognosis.  To us, it looks like the developed world is ‘un-developing.”  By 2020, expect to see a more humble developed world, viewing itself differently, playing a lesser leadership role, and having a vastly different view of the use of debt to create prosperity in society.

 

 

Labor in the Big Picture

 

The U.S. has big problems on this front.  The country needs to employ more than 2 million new workforce entrants every year.  Plus, there are millions who lost jobs in the last three years who still need to be rehired.  How does the U.S. deal with challenges like this in a situation of slowing economic growth?  The reality is a very difficult employment outlook for current and future U.S.-born workers, especially those with minimal education and skills, and for immigrants with inadequate English fluency.

 

Conversely, the jobscape looks brighter for the educated and skilled, especially individuals in the fields of computer science, electronic engineering, mathematics, geology, energy science, and oil field engineering.  The job market also appears better for individuals in some low-paying retail jobs and other service industries who demonstrate good attitudes and a willingness to work.

 

The U.S. employment picture is changing and it has become necessary for the labor force to have higher skill and education levels in order to compete.  The U.S. still has a comparative advantage over other countries in areas involving technology and skilled labor.  The construction jobs that kept so many laborers working for the past two decades are gone.  We don’t see them returning for many years.  Moreover, there is little unfilled demand for factory workers at high salaries and government employees who receive secure pay and rising benefits.

 

What can our erstwhile politicians do for us?  Other than utter the usual platitudes, don’t expect much.  For them, the big picture isn’t rosey at all.  If employment growth is a key to getting re-elected, the boys and girls in Congress are in difficult straits.  When the job situation does not improve, expect them to hit the panic button in late 2011.  Their anxiety will generate interest in extending unemployment benefits along with food supplement and other social programs.  All intended, of course, to encourage voters to view them more favorably.  But, in the process, will run up more debt.

 

 

The Big Picture — The Risk of Big Government Statism

 

History has shown that it takes at least a decade for a country to get back on its feet again after defaulting on its debts or losing its reserve currency status.  Washington appears oblivious to this huge and looming risk.  We suggest policymakers consider what happened to Argentina as an example of how to destroy a country’s standard of living.  The Peronists in Argentina took a once-proud country and have driven it to its knees.  When they could find no buyers for their government debt their crowning stupidity was forcing pension funds to buy government bonds.  They have stooped to highly destructive measures that will be felt for a long time in order to delay a day of reckoning by a short time .  This is what irresponsible politicians do.

 

Look for similar events to occur in the U.S. and in Europe.  Specifically, there is a very large risk that the U.S. will engage in programs such as making citizens and pensions buy government bonds, or legally forcing U.S. residents to turn in their gold, as was the case during the Great Depression of the 1930s.  There are other tactics they can employ that will result in bigger government and bureaucrats within government agencies usurping legislative power from the legislative branch.  Such things are already happening.

 

Fortunately, the public is starting to resist such behavior.  We predict an intensifying battle ahead for control of public opinion by big government and small government advocates.  But unfortunately, close to half of the population either pays no federal income tax or gets more assistance from the federal government than they pay in taxes.  That's hardly a formula for survival.  It's more like a forumla for collapse. 

 

The latest U.S. Treasury data (2008) from about 140 million income tax returns exposes the progressive nature of the tax system.  The argument that the rich do not pay their fair share has serious flaws.  In 2008, the top 1 percent earners paid 38 percent of total federal individual income taxes.  The top 5 percent paid over 58 perecent of the total.  About 52 million filers paid no federal income tax and many millions more did not even file a tax return.

 

Summarizing The Big Picture

 

The U.S. and European standard of living will fall in the coming years, and perhaps for two decades.  We are only three years into the decline.  Government officials will try to slow the decline by depreciating their currencies to improve exports.  This is already causing oil, gold, and foreign investments to rise in U.S. dollar terms and these trends will continue.

 

Here and in Europe, government bonds will be harder to sell.  The search for revenues and a desire to shrink deficits will prod governments into cutting defense and social expenditures, as well as raise taxes.  In the U.S., earners in the top 10 percent (those with incomes of about $113,000 and up) will bear the brunt of the increases.  The top 3 percent of U.S. earners currently pays more than half of U.S. individual income taxes.  This situation will eventually cause many high-income earners to leave the U.S. and seek to earn or invest their money abroad, thereby further decreasing the tax base of the country.

 

The wealth of the nation will fall.  Investors should protect themselves.  It is not too late.  Please check our archives and you will see that many current economic and social events seen in the world today were predicted in our pages well in advance, including the banking crisis of 2008, the derivatives crisis in the world banking system, the fall of the U.S. dollar the rise of gold, oil, and many other important events.  If you listened to us before, you have benefitted.  Refer to our archives to see our calls and listen to us now.    

 

 

With So Much Economic “Slack,” Where is Inflation Coming From?

 

It’s a combination of key factors:

● U.S. money supply growth

● Money supply and credit growth in Europe, Japan, Russia, China, India, Brazil, and other countries in the emerging world.

These factors are rapidly adding liquidity to the global financial system.  The liquidity is finding its way into asset and commodity prices.  This has been our long-term view.

 

Credit growth in the emerging world is a big reason why prices are rising, and one that does not get enough press.  Money supply growth alone without the credit growth would not create inflation.  The developed world banking system is weak.  Loan creation isn’t happening.  But credit growth is booming in the developing world, especially Brazil, India, and China.

 

These dynamics explain why inflation is now booming in the developed world.  We have been saying for some time that inflation would first arrive in the emerging markets and then migrate to the developed world.  This has happened.

 

Our next prediction in this string of events is that QE3 will take place in order to combat the slack in the U.S. job market.  Any delay would slow down economic growth and employment.  With an election approaching, you can bet there will be strong pressure from politicians for QE3.

 

While we are in a predictive mood, we’ll add that investors, seeing more QE (and more government), will send the price of U.S government bonds lower, and currency markets will continue to mark down the value of the U.S. dollar.  This will create a downward spiral of declining dollar and bonds as people around the globe reduce their exposure in favor of investments such as those in our recommendations below.  You will witness a continuing vicious cycle until Washington decides to tighten the belt substantially and decrease its budget deficit.  Only with a real commitment to fiscal discipline that becomes obvious to the markets can the dollar stabilize and U.S. government bonds once again be considered a genuine store of value for investors.

 

Sign of the times: The International Monetary Fund predicts that China will surpass the U.S. as the world’s largest economy by 2016.

 

 

Our Current Recommendations

 

We’ve been seeing the current string of events coming for years and have repeatedly recommended selling bonds and buying gold, oil and food-related commodities.  This same view along with our close monitoring of world markets have led to our persistent predictions of inflation.  U.S. investors should continue to protect themselves by owning other currencies along with gold, oil, and foreign stock markets.  Avoid U.S. bonds.

 

It’s interesting to note that in addition to individuals, countries are still buying gold.  Russia bought 600,000 ounces last quarter.  We remain very bullish on gold.  Gold is acting very well, technically near $1,500 per ounce, and it looks as if it’s poised to move above $1,600 and $1,700 per ounce soon.

Please see the table below for our current and closed recommendation.

Investment	Date	Date	Appreciation/Depreciation
	Recommended	Closed	in U.S. Dollars
Commodity Market Recommendations
Corn	4/20/2011	Open	-1.5%
Gold	6/25/2002	Open	+371.1%
Oil	2/11/2009	Open	+214.0%
Corn	12/31/2008	3/3/2011	+81.0%
Soybeans	12/31/2008	3/3/2011	+44.1%
Wheat	12/31/2008	3/3/2011	+35.0%
Currency Recommendations
Short Japanese Yen	4/6/2011	Open	-4.8%
Long Singapore Dollar	9/13/2010	Open	+8.9%
Long Thai Baht	9/13/2010	Open	+8.3%
Long Canadian Dollar	9/13/2010	Open	+8.1%
Long Swiss Franc	9/13/2010	Open	+15.3%
Long Brazilian Real	9/13/2010	Open	+8.3%
Long Chinese Yuan	9/13/2010	Open	+3.8%
Long Australian Dollar	9/13/2010	Open	+16.8%
Short Japanese Yen	09/14/2010	10/20/2010	-3.3%
Equity Market Recommendation
India	4/6/2011	Open	-2.2%
Malaysia	4/6/2011	Open	+.08%
Canada	3/24/2011	Open	+1.1%
Colombia	9/13/2010	Half Original Position sold	+3.4%
Australia	2/15/2011	Open	+8.6%
Japan	2/15/2011	Open	-8.3%
U.S.	9/9/2010	3/11/2011	+18.1%
Canada	12/16/2010	3/11/2011	+7.9%
South Korea	1/6/2011	3/3/2011	-2.9%
China	9/13/2010	1/27/2011	+5.0%
India	9/13/2010	1/6/2011	+7.9%
Singapore	9/13/2010	12/16/2010	+4.8%
Malaysia	9/13/2010	12/16/2010	+1.3%
Indonesia	9/13/2010	12/16/2010	+9.5%
Thailand	9/13/2010	12/16/2010	+11.9%
Chile	9/13/2010	12/16/2010	+8.9%
Peru	9/13/2010	12/16/2010	+32.2%
Bond Market Recommendations  30 YR Long Term U.S. Treasury Bond			0.0%

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Conflicts of Interest

As of the date of this newsletter, GIM’s investment advisory clients or GIM’s principals owned positions in equities and etfs in areas that are the subject of the commentary, analysis, opinions, advice, or recommendations contained in this newsletter.  These positions are equities and etfs of the following countries: U.S., Canada, India, China, Singapore, Thailand, Malaysia, Indonesia, Brazil, Chile, Colombia, and Peru, as well as other countries not mentioned in this newsletter.  In addition, GIM’s investment advisory clients or GIM’s principals owned equities and etfs related to the following commodity markets: gold, silver, oil, copper, and agriculture.

GIM and its principals have certain conflicts of interest in its relations with its investment advisory clients and its newsletter subscribers resulting from GIM or its principals holding positions for its clients or themselves which are also recommended to its clients. GIM may change the positions of its clients or GIM’s principals may change their positions (increasing, decreasing, and eliminating them) based on GIM’s best judgment at any given time, including the time of publication of the newsletter. Factors that lead GIM to change or eliminate its positions may include general market developments, factors specific to the issuer, or the needs of GIM or its advisory clients. From time to time GIM’s investing goals on behalf of its investment advisory clients or the personal investing goals of GIM’s principals and their risk tolerance may be different from those discussed in the newsletter, and the investment decisions made by GIM for its advisory clients or the investment decisions of its principals may vary from (and may even be contrary to) the advice and recommendations in the newsletter.

In addition, GIM or its principals may reduce or eliminate their positions in an investment that is recommended in the newsletter prior to notifying the newsletter subscribers of such a reduction or elimination. The publication by GIM of a "target price" or "stop loss" for a particular security or other asset does not necessarily represent the price at which  GIM intends to sell or will sell any such assets for its advisory clients or the price at which GIM’s principals intend to sell any such assets.

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