Terra Infirma

Eric Dickson
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Posted: Aug 23, 2010 11:33 AM

The Fed’s goal on Tuesday was not to rattle the markets, but I can’t help but get the feeling of Terra Infirma.

Here’s what’s shaping our markets:

Exports are declining – widening our trade gap to $49.9 billion in June. Exports dropped 1.3%, while imports rose 3%. The $7.9 billion gap is the highest since record keeping began in 1992. It was 18.5% more than median forecasts of $42.1 billion.

Economists are now downgrading their forecasts for GDP… they are now expecting that in the second half of the year that Gross Domestic Product will expand at an annual rate of 2.55%, down for previous estimates of 2.8%. Household Purchase also got downgraded to a 2.25% growth rate, compared with the prior 2.6% estimate.

A month ago analysts had predicted that consumer spending would grow by 2.4% - today, they’re forecasting it will only grow by 1.5%. This data is bolstered by consumer purchases, which, for the first time since the beginning of WWII, dropped 1.2% last year after rising 3% on average over the past 30 years, according to Bloomberg.

Payrolls, which drive consumer spending, have done a u-turn to an average of 51,000 over the past 3 months, after a couple hundred thousands of jobs were added on average in March and April. Unemployment is expected to remain above 9% through next year.

So what does all this mean?

Well for starters the global economy is cooling and this is bad news for domestic companies relying on export revenues. Foreign consumers aren’t demanding U.S goods at a pace that was anticipated – and this means that inventories will grow, creating a shift in supply/demand. This could lead to further jobs losses as companies will be forced to deal with lower revenues and might have to offset losses by trimming their workforces.

It will then have a ripple effect on consumer markets, as hard-working Americans will be forced to cut back on spending, as their salaries will remain below average and those looking for work will continue to find it hard to get back on payrolls.

“Unemployment is high, income growth has been pretty slow,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co told Bloomberg. “Household wealth is a lot lower than it was three years ago.”

From here things can get scary given the penchant for government intervention in our recovery, as seen by the Fed’s most recent language.

Unlike private businesses, local and state governments, the federal government has an artificial weapon they use in times like these – and that’s the funny money printing press. They’ll fire it up, inflate the markets with investments (think treasury purchases) and from there the dollar will continue to lose value against its major competitors – the Euro and Yuan.

So what do we do? Well there is nothing we can do about international demand for American goods without addressing domestic issues first. America companies competing domestically and internationally need to have an edge – and this is severely battered when they’re being federally and locally taxed out the wazoo. How are these companies supposed to raise payrolls and hire more people when health care costs and taxes are eating away at their bottom lines?

The American consumer drives the market. And this originates with private business working efficiently in an open market. Businesses are thriving when people are spending… and people are spending when they’re making more money, keeping more of the money they earn and not worried about their job security.

The government can’t step in and artificially keep our economy afloat by taking more of the money every day Americans earn. It’s the social fabrication that the government will take care of its citizens that will hinder our recovery – meaning the more people rely on the government for health care and unemployment benefits the more taxpayers suffer. We should promote self worth – working, spending, investing… not sit back and wait for Obama checks in the mail.

America is the greatest country in the world because of our hard-working citizens – not our government. Incentives work, let us keep more of the money we earn and from the ground up our economy will improve because American we’ll spend and invest more.

Call me old fashion but I want less government and lower taxes and I think that’s just what the doctor ordered.

We can get back on Terra Firma – but only if everyday Americans lead the charge – not the federal government.

I, for one, am tired of people sticking their hands out. It’s time to put that hand on a shovel and dig ourselves out of this mess with hard work.

Editor’s note: Eric writes commentary for Trinity Investment Research’s daily e-letter, The Daily Market Beat – an investment newsletter that focuses on financial analysis, contrarian insights and emerging equity ideas.

To learn more, visit: www.trinityinvestmentresearch.com

Editors Note: Eric writes commentary for Trinity Investment Research’s daily e-letter, The Daily Market Beat – an investment newsletter that focuses on financial analysis, contrarian insights and emerging equity ideas.