Macro Lex Terra
For those of us not acutely aware of the global picture on the ground, then I-m going to lay it out again briefly here; put succinctly, it boils down to this - Fewer jobs, and those jobs are paying less and are more and more in the low end sector of the economy while in the higher wage sector there is likely to be wage competition, or arbitrage, coming via up and coming developing economies. Likewise, the lower wages impart a "direct hit" on taxation, i.e. lesser intake by the governments. Equally, the fear of job loss curtails personal consumption (at least in Europe it does). This in turn, gives the government less money to pay their long standing liabilities like Social Security, Medicare, etc. And on top of this gloomy scenario comes the double whammy of a greying population (demographics) with ever fewer offspring entering into the workforce thus putting even more pressure on the said fixed liabilities from a dwindling workforce, i.e per capita revenue generation versus per capita revenue extraction. In other words, the cookies are disappearing from the cookie jar faster than mom can replace them. The final nail in the tax equation coffin is Bush-s sustained tax cuts. In short, a negative balance sheet.
This in short, is the new Macro Lex Terra, or roughly translated, the new Macro Law of the Land.
The next point in the Macro Lex Terra is the follow-on consequence of wage stagnation. Not only does the wage picture of the so-called US recovery look weak, but compared to previous recoveries it is falling far behind the curve. What this means to me is twofold : as US consumers, on lower wages, are no longer in a position to save adequate amounts post taxation, i.e. take home money, they have been and will continue on turning to asset valuations for a means to keep, or generate, a high(er) standard of living. The immediate consequence of this fact is that the current account deficit cannot be lowered via the public savings and the asset prices will be forced consequentially higher (as is happening in real-estate). The one thing the US consumer is not showing are signs of cutting back on consumption. Why? Because the federal government has endorsed a policy of liquidity whereby the real interest rates are below the CPI, or in other words, money is free, or using the metaphor above, it doesn-t hurt to take cookies out of the jar, mom stopped caring a long time ago. I have mentioned this issue in previous articles as being a direct consequence of morality, in this case, the government-s funding the present consumption at the future expense to your children and/or younger workforce. Note: The EU is also a quick learner in this area of unbridled "liquidity creation", although there are hefty debates ongoing in Germany on this issue. Let-s call it the legacy of the Weimar Republic.
Only until a regimented and strict federal interest rate policy is in place can this circular game be broken. Recently somebody said, "This whole thing will either end in tears or will end when a Paul Volcker-type individual is in charge of the Federal Reserve". Right now it is not looking good for the Fed or for the US policy in that regard. Currently there does not seem to be a willingness to appoint a knuckle hard Chairman to run the Fed.
The other consequence of a non-saving US consumer weaned on easy money is the increasing deficit. If savings cannot be brought forth to lower the immediate deficits then this may lead the bulk of the effort to the currency markets, i.e. exchange rates and the bond markets, i.e. interest rates. Right now the interest rates are not signalling immediate inflation even while the CPI creeps higher. For the US dollar I believe it is still simply living off of "thin air" within the investment community. It takes TIME to secure a fundamental paradigm change. I believe that paradigm shift is underway with Asia leading the charge away from the Empire Dollar in light of the new macro world of an awakening Brazil, India and China. Whenever the worldwide community fundamentally wakes up to this realisation and starts to aggressively act on this it shall likely come to bear on the US Dollar and its exchange rate. This would then force the commodity prices much higher (in USD terms). Given that the US uses 20% of the worldwide oil, this would necessarily cause a recessionary US economic environment combined likely with a more volatile US response for securing energy.
In conclusion, I still believe my matrix from the 12/04 issue of the DINL Newsletter (available on the website) where I talk about the 21st Century House of Cards uniquely summarizes the issues challenging the US Dollar and the US administration. Until these issues are clearly and squarely addressed I feel the only long term trend to keep in mind is the US Dollar and its potential for risk/reward from the investment perspective. All my fundamental indicators are still pointing to more risk than reward in the intermediate and longer terms.
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