Benson's Economic & Market Trends Economic Recovery or Stimu-Less? Richard Benson November 3, 2003 This economic recovery is the most expensive on record and has yet to produce material results for corporate investment, or employment. So far, the recovery has cost 13 interest rate cuts, 3 tax cuts, and, a war! In addition, it has created a real estate bubble (the likes of which the world has never seen before), a reflation of the stock market bubble, and a policy designed to have average citizens support both bubbles by taking unprecedented personal risks when investing. Indeed, never before has a central bank cut rates so many times, nor has a federal government spent so much money resulting in such a small economic improvement, other than boosting consumer spending. Third quarter economic growth of 7.2% is impressive, yet this growth is a sign of gluttony fed by money borrowed by the US Treasury and the mortgage market. The spending is yet to be backed up by any growth in consumer wages and salaries. The US is experiencing the best year-over-year increases in corporate profits that will be seen in a long time. The magnificent third quarter consumption binge is in direct proportion to the change in tax rates, one time rebate checks mailed to households with children, and the peak of mortgage funding and cash-out REFI's. July and August were stellar months for consumption and September was already lackluster. All of this "Stimu-Less" proves only that a few months of growth can be purchased if the authorities are willing to pay any price. (The fact remains that if consumers are given money or access to credit, they will spend it.) Spending on consumer durables was up at a 26% annual rate in the latest quarter! The 4th Quarter of 2003, and the first Quarter of 2004, will truly suffer from "Stimu-Less." How will the current level of spending be surpassed, yet alone sustained, with no government checks in the mail, and mortgage REFI's dropping like a stone? The worst of economic job loss seems to be history for the US economy. However, the serious structural weaknesses in the economy that caused the recession and job loss in the first place have not only not been addressed - they have been made worse in an effort to encourage continued spending and consumption to create "prosperity." The economic policy of the Greenspan Fed and Bush Administration has been to use low interest rates and equity extraction from housing to keep the consumer propping up the economy until such time as business investment can take over as the leader of the economy. It does look like business investment is improving and is well above its lows and there is investment to replace depreciation. However, business investment in the US will clearly not lead the economy or even be sufficient to offset any slowing of consumer demand. Domestic capacity utilization is too low, and foreign investment in new Asian factories is too high to suggest there is any legitimate economic reason for a meaningful increase in business investment. Our domestic policymakers had not counted on the "dark side" of globalization in this economic cycle to send both new investment and job growth to Asia. Indeed, much of the productivity and profit growth in US corporations is merely a reflection of cheap Chinese labor, being substituted for expensive American labor, and some currency translation gains from a falling dollar. Moreover, the political earthquakes in California and the possible bankruptcy of the City of Pittsburgh are symptoms of the serious budget mess that remains at state and local governments. For the past couple of years, aligning revenues and expenses at the state and local level have been postponed by record borrowing. Any real reform to close budget gaps will mean more taxes, and less spending. Neither of these actions will spur the economy moving forward. Real Estate investment remains "artificially stimulated" because US interest rates are manipulated down by Foreign Central Bank money creation and purchases of Treasury and Agency securities. It is my belief that commercial and residential real estate will be subject to a price collapse when interest rates rise in the US. (Real Estate prices are leveraged plays in the price and availability of credit and building more now is a risk worth taking only with "other people's money.") Personal income growth is rising about 0.2% a month, and the most likely growth in employment in the months ahead will be "part time" workers. Without legislation, or a return of Patriotism and Nationalism, Globalization for Profit will keep the bulk of capital investment and job growth "off-shore." Even President Bush is against legislation requiring that more of America's defense supplies be Made in America. Isn't this an odd policy for a President who wants a strong America, and to be re-elected? Job, wage and salary growth remain the "Achilles Heal" of this recovery. While some jobs will surely be added, a great number of jobs will be leaving call centers and mortgage banking firms. Both industries have been "Pillars of Economic Strength" throughout the economic downturn, and the jobs that disappear will be sorely missed. In my view, there is nothing on the economic horizon that suggests actual increases in personal income will help spur the economy. Consumption, which will be up about 7% for the third quarter 2003 over third quarter 2002, has been lifted by tax cuts and increases in mortgage debt, not the growth of jobs or income. Indeed, when considering this tremendous increase in consumption, what's so incredible and disturbing at the same time is the lack of investment, jobs, and income growth that were associated with this spending binge. The question for the rest of 2003 and the first half of 2004 is, "now what?" Where is the self-sustaining investment? Where is the job growth? Where is the growth in personal income? What seems certain is there are no "checks for children" being mailed and the mortgage finance boom is winding down. For those who wish to take a look at the Flow of Funds data, the cash for the consumption spending binge was running at a rate of $800 billion a year in the second quarter. That pace of increase in mortgage debt is much bigger than the stimulus from the tax cut, and each quarter going forward will offer less and less for the economy from mortgage creation. Clearly, in looking forward, the US will need another round of stimulus. The Fed and the Bush Administration are counting on the positive effects of a falling dollar whereby they expect imports to decrease, exports to increase, and corporate profits to rise from multi-national companies translating foreign currency earnings back into dollars. President Bush has just returned from Asia on his "begging mission" to China and Japan to "let the dollar go." The problem is the President may get more than he wishes for if China, Japan, and the rest of Asia stop holding their currencies down, and stop buying all of those US Treasury and Agency bonds. If foreigners stop buying our debt, not only would that mean rising interest rates, but it would turn our mortgage bubble from a source of cash for consumption to a housing crash. Keeping the US economic recovery going is likely to be a far more difficult task than our policymakers, or the markets, currently realize. Richard Benson November 1, 2003 President Specialty Finance Group, LLC Member NASD/SIPC 2505 S. Ocean Boulevard - Suite 212 Palm Beach, Florida 33480 1 800-860-2907 eMail: rbenson@sfgroup.org ______________ 321gold Inc ref: 01878