Friday, December 17, 2010



The US economic outlook remains sluggish as economy would require time to recover. Might achieve a sub-par growth in 2011. In 2011, the U.S. economy will grow significantly more slowly than during recovery from previous recessions and unemployment will remain high. Business would hire few workers going forward. Its just like you are comparing it with the weather today: partly cloudy with a
chance of intense storms coming down the line, because we still have a
lot of fragilities out there. Recovery figures illustrate softness in the economy.

The projected “reasonable, but not extremely robust” growth of 3%
percent in real GDP and in optimistic terms, the country will weather
the current storms. However, the United State will be stuck
in low growth for a very long period of time because of high umemployment, high leverage and negative debt of the balance sheet of most corporates which are swimming in cash.

I spoke to some top executives in NEW YORK recently and there has been incredibly strong investment in equipment and software. Firms are still willing to invest, and part of the reason for that is productivity has remained quite high. The
bottom line is that the basic production machinery of the economy is
not broken.”

A 3 percent increase in consumption will power the recovery, but the country will see very little growth in jobs. Businesses are reluctant to hire permanent workers because of uncertainty about taxes, a ratio of government spending to GDP that is 2 percent higher than in the previous 50 years and is paired with declining revenue,
and concerns over health care costs.


Dollar may drop 9% percent versus the euro in 2011 as investors shun U.S. assets and drive bonds lower. It’s a bearish U.S. asset dynamic led by the bond market. This period has a set-up that is amazingly like what we saw in the 1970s, and is similar to what we saw around 1993.

The dollar will follow trading patterns from the 1970s, when the housing market experienced a decline similar to the recent drop, and the 1990s, which also saw a slump in the bond market. U.S. two-year yields doubled from a low of 3.7 percent in September 1993 to a high of 7.7 percent in December of 1994, pushing bond prices lower. Treasury yields would go higher in 2011 sending negative impact to the markets players in the global markets.

During 2011 the U.S. economy will be slowed by the effect of disillusioned behaviors causing the misallocation of economic resources during the boom years that preceded the recent recession. Housing prices will not recover in 2011 or anytime soon. It’s just not in the data. We are basically going to get many years of normal housing price growth, which is essentially zero to 1 percent in real terms. This is probably going to happen for the next decade. Recovery from this recession will continue to be less robust than after previous recessions because Americans must deleverage their
overspending during the economic boom and build up assets. Houshold debt to GDP ratio is 122%. In order to get this ratio down to 100% of GDP, would require $5-6 trillion and drag on the economy. Empirically proven.

It doesn’t mean we’re going to be sluggish forever; it just means we’ve got some work to do and it’s going to take a little bit of time. Unemployment will remain relatively high in the short run because the housing boom created a glut of construction workers — and, in some states, of mortgage workers — who must be retrained to meet demand in new fields. “The bulk of the unemployed are construction workers, but nobody’s hiring construction workers anymore.

Stockmarket investors should also think carefully before they celebrate too wildly over rising bond yields. After all, bulls were previously arguing that low yields were good news for equities, as they encouraged investors to move out of fixed-income assets in search of higher returns. On the best long-term measure, the cyclically adjusted price-earnings ratio, Wall Street looks overvalued on a multiple of 22, some 37% above the historic average. That already seems to price in a significant rebound in corporate profits.

The fundamental problem remains. In a normal American economy, with 2% inflation and 3% real GDP growth, government-bond yields ought to be around 5%. But yields at that level would be too high for the health of the housing market, the stockmarket and for other governments worldwide. The markets are no closer to resolving that dilemma than they were at the start of 2010.

Nature of economic recovery in the U.S. and Europe is quite worrisome. 41 states in USA are acting like Greece/Ireland. California, Florida, Michigan are experiencing default like situation. Moody's might cut the sovereign debt rating in the 12-18 months.

According to the survey and interviews with various amercians. People with incomes of $75,000 or more are more optimistic about the economy, while unemployment for people with college degrees is half as high as for those without degrees

These divisions across geographic and income segments cause a deterioration in political dialogue. In the U.S., the left does not want to talk to the right, which is a recipe for gridlock. In the past, government not working may not have been a bad
thing. But government not working when your fiscal deficit is 10 percent of GDP is not a good idea. Much needs to be done to bring things back under control, and that requires cooperation.

Disclaimer: This is just a research piece and not an investment advice. Investors are highly encouraged to execute their own due diligence before making any investment strategy or implementation.

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