Monday, December 7, 2009

ECRI Longer-Term More Bearish than Bullish; Implications for Asset Classes

In Unemployment Is Down, But Business Cycles Are Key , the chiefs at the Economic Cycle Research Institute make the case that the likely path of the U. S. economy for the intermediate term is one of more frequent economic ups and down than that envisioned by the proponents of the "Great Moderation". Here is an excerpt; please read the entire article:

Since World War II, there has been a clear easing pattern in the trend rate of economic growth during expansions, culminating in the 2001-07 expansion, which showed the slowest trend rate of growth on record — especially in terms of jobs. Ominously, during expansions following the initial year of revival, growth in non-manufacturing employment has been falling in a parabolic fashion since the 1970s. A continuation of this pattern would lead a much worse job market than almost anyone expects.

The "great moderation" of business cycles once extolled by many economists, including Chairman Bernanke, is history. The trend rate of growth is shriveling. In other words, business cycles are back with a vengeance.

I would ascribe much of the decreased growth rate to demographics. My parents are shrinking; if I live long enough, I will too. My grandparents were deceased at my parents' ages. Japan, here we come?

In any case, rather than accept that decreased economic growth may be as much of a blessing as a curse, and considering that leisure time and time for different forms of work is a positive, the current powers that be are likely to also follow the Japan model and try to "stimulate" the unstimulatable.

Thus we see just today the sudden news that not all of TARP is needed, therefore the deficit is not so bad, therefore there is money for a jobs program, etc. Anyone with a decent memory will, however, remember that when the deficit projections were made many months ago by Team O, a large fudge factor for TARP was put in, with the overt statement that much of it may well not be needed.

In any case, the case for gold is that jobs trump sound money whether you are a statist or free markets President.

In that vein, the MSM is in full-throated cry with a truly idiotic and unfair Bloomberg.com article this morning titled Gold Can’t Beat Checking Accounts 30 Years After Peak.

Its premise is that the few bars of gold that traded at $850 per ounce in Jan. 1980 should be compared with what may or may not be a current major peak around $1200. The fact that taxable cash beat non-taxable holdings of gold by only double is highly unimpressive. More impressive is that gold went from $42 per ounce in 1971 to a current $1150 or so in 38 years. This is a 9% yearly return. This is almost a 30-bagger. And you never had to trade, pay taxes or whatever. The article asserts that the S&P 500 gave a 22X return since 1980, and we know how well it did between 1971 and 1980! But the S&P index is theoretical, ignoring transaction costs, taxes, etc. With gold, buy it once and put it in a bank safe, bury it under a tree in the back yard, etc; and let paper money depreciate. An ounce of gold bought a nice men's suit in 1920, and it does so today (but fiat money must be used to pay for it in America, though perhaps not in Hong Kong).

With all the enthusiasm for gold recently, it is refreshing to see that the real powers that be-- meaning the publication of the financier who has been reinstalled as Mayor in large part to see that New York stays on top of the financial heap--want the public to accept stupid debating points to keep on believing in stocks and bonds.

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