August 2011 - Forecasts & Trends

Forecasts & Trends is much more than just investment blog posts. You need to know the "big picture;" you need to have a "world view," especially in the post-911 world; and you need more information than ever before to be successful in meeting your financial goals. Gary intends to help you do just that.

Forecasts & Trends

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    • On the Economy & the Fed - Now What?

      We touch on several bases in today’s letter. We begin with Fed Chairman Ben Bernanke’s key speech at the Fed symposium in Jackson Hole, Wyoming last Friday, which proved to be a yawner despite all the anticipation beforehand. Next, we look at last Friday’s disappointing GDP report which was revised lower, alonng with other recent economic reports.

      Following that, we look at the latest long-term budget forecasts from the Congressional Budget Office. As I will discuss below, the CBO uses so many optimistic assumptions in these forecasts that one wonders if they are even relevant anymore. In any case, I’ll give you the latest numbers.

      Next,I make the case that the US economy has now drifted once again into “stagflation” – defined as slow growth and rising inflation. Expect to hear more references to stagflation in the days and weeks just ahead, but you heard it here first. Finally, we look at the latest chaos in the stock markets.

    • Cut a Check, Mr. Buffett

      Last week, Warren Buffett again came out in favor of higher taxes for the rich like himself. The next day, President Obama echoed Buffett's comments, proving that they were no more than a carefully orchestrated piece of political rhetoric. Even so, Buffett's article is a good starting point for a discussion of why some people pay higher rates of taxes than those who are rich.

      This week, I'm going to dissect Buffett's statements about his own tax rates and those of his staff. I'll also review the various categories of income that qualify for preferential tax treatment and why they are set up that way. In the end, you'll find that special tax treatment is often associated with activities that provide capital for economic growth as well as the requirement to take the risk of losing all of your money.

      I'll end up by showing a way that individuals, including Mr. Buffett, can make voluntary contributions toward reduction of the national debt without the unnecessary step of raising taxes. If Mr. Buffett feels strongly that he should pay more for government, he can just send them a check. Unfortunately, the real issue isn't that taxes on the rich have become too small, but that the government's appetite for tax revenue has grown too big.

    • Who’s Worse Off - America or Europe?

      We touch on several topics in today's letter, but the main theme is the question of who is worse off financially speaking, the US or Europe. I have written extensively about the growing European debt crisis in recent weeks, which I considered much more important than the debt ceiling circus that played out in Washington in July. It is now obvious to even the man on the street that there is a debt crisis in Europe, of late including even Spain and Italy, with rumors swirling about France as well. A real solution is not yet in sight.

      Yet the US has plenty of debt problems of its own, with a national debt of $14.4 trillion, by far the largest of any nation on the planet and a president who thinks that trillion-dollar annual budget deficits are no big deal. Thus, it is only natural for observers to ask which is in worse shape - Europe or America? I will give you my thoughts on the question as we go along today. In a nutshell, Europe is worse off today, but the US is not far behind and is gaining ground at warp speed, sadly.

      Following that discussion, we will explore whether or not Ben Bernanke and the Fed are cooking up another round of quantitative easing (QE3), and if they are, when we might first hear about it. Think August 26 - I'll tell you why below. Next, I will give you my thoughts on gold, and specifically why I don't think most gold buyers today have any idea how much risk they are taking. I trust that my readers are not jumping into gold at today's nosebleed levels, but I will tell you why that might not be a good idea in any event.

      Lastly, we revisit the issue of Standard & Poor's recent downgrade of US debt from AAA to AA+ when none of the other credit rating agencies felt so inclined. Could there have been some political motivation behind the S&P's unilateral move? Surely not - wink, wink. Did the S&P mean to send a message to Congress about cutting spending? Maybe. Or was the S&P just trying to salvage its tarnished reputation after rating subprime mortgages AAA in the years leading up to the financial crisis? It should be an interesting discussion.

    • The European Debt Crisis is Spreading

      The debt crisis in Europe is intensifying with Italy and Spain falling into the mix, as I predicted in my July 19 E-Letter. You may recall that the European Union formed a bailout fund in June 2010, but as I will point out today, that fund is nowhere large enough to handle this crisis. Now even the European Central Bank has pledged to buy bonds from Italy and Spain, as well as the other PIIGS, but the ECB is also too small to vacuum up all of the troubled debt in Europe.

      In my July 19 letter, I wrote the following warning: "If this [Greek default] happens, I would expect the US stock markets to plunge again, perhaps as they did in 2008. And this could happen at any time." While I don't have a crystal ball, I had a strong sense that the markets and the investment public were all too focused on the debt ceiling battle and not on the deepening credit crisis in Europe. Unfortunately, my warning was right on the money.

      Equity markets around the world started falling severely last week, and yesterday's action saw the Dow Jones plunge by 635 points in what was one of the worst market days in history. Investors are selling stocks and equity mutual funds with abandon and are herding into Treasury funds and gold. This may prove to be a bad move since interest rates can only go so low, and gold has a long history of falling off a cliff whenever it turns down.

      The US stock markets moved higher this morning. The Federal Reserve met today and did NOT announce a new round of QE3 as was widely expected. As a result the stock markets all reversed sharply lower for a time. But as traders read that the Fed plans to keep short-term interest rates near zero until mid-2013, the markets reversed again to close sharply higher this afternoon. The wild market ride continues!

    • GDP Report Shows the Economy is Stalling

      It appears that the debt ceiling fiasco will finally be put to bed with a Senate vote later today, as I predicted. But not before our leaders in Washington led us to the brink of another financial crisis. Frankly, the new debt ceiling deal is UGLY as I will discuss below. But before we get to that, we have to look at last Friday's very disappointing GDP report - it was a shocker. So was the Fed's latest assessment of the economy last week. And so was yesterday's ISM manufacturing report which plunged in July. It is now clear that the US economy is very close to moving back into recession again.

      None of this is good news for the stock markets, which are down again today following a significant sell-off last week. The debt ceiling drama pointed out to millions of Americans just how dire our national financial situation is, and they are moving out of the stock markets in droves to the safety of Treasuries or cash. Is this an overreaction? I'll give you my thoughts as we go along.