Stocks can be a hard habit to kick. After all, from 1982 through 2000 during the biggest bull market in U.S. history, the market spoiled investors with annual returns that often topped 20% a year and setbacks that were only temporary and relatively mild. Hey, who couldn't get hooked on that? The NASDAQ, home of the darlings of the tech world like Cisco, Microsoft, Intel and eBay, has been an even better way to lose money; it's still down 55% from its peak in 2000. That's like giving somebody $100 ten years ago and having them give you back $45 ten years later. Nobody's going to retire doing that except the guy taking your money! Just look across the Atlantic at the boiling cauldron of currency and debt troubles called Europe. The bailout of Greece—and the likely bailouts of Spain, Portugal, Ireland and maybe more nations—shows that the global economy is still wrestling with serious problems that will sabotage economic growth for many years to come. The massive stimuli that have propelled GDP growth recently are temporary. Don't expect the rosy numbers to continue for the rest of 2010. Excess inventories will keep housing subdued. In fact, I now believe that there are over one million housing units in inventory that have been hidden from the "official" housing inventory numbers reported by the government. This overhang will push the housing market lower in the months to come. Besides housing problems, vacant commercial real estate and excess industrial capacity portend weak plant and equipment spending. Exports depend on economic growth abroad much more than on the dollar. And U.S. consumer retrenchment will subdue the growth of the many foreign export-led economies, including China. Also, the buck looks ready to rally. So don't count on a V recovery. That would require the U.S. consumer to return to their profligate free-spending ways. We continue to believe, however, that they have reached a watershed and after a quarter-century borrowing-and- And labor markets will remain depressed due to consumer retrenchment- I believe that the recession will probably stretch into late-2010, and will only end if the massive fiscal stimulus results in job creation. That will disappoint stock optimists and probably be followed by a slow, jobless recovery. In this atmosphere, deflation will likely be chronic. So my advice is to take profits in stocks now while you still can. Here is the situation that we now face: Government spending and borrowing are what kept the economy from going completely into a ditch in the past year, but the longer term impact of all of this government aid and growth in the size of government will choke our economic growth for several years to come. It's tempting to conclude that the fallout from the financial crisis and housing bust are behind us, but what we now face is a period of economic stagnation similar to what we went through in the late 1970s under Jimmy Carter. Years of Stagnation Six forces will slow U.S. and global economic growth in the next decade. First and foremost is retrenchment by American consumers. Also at work will be financial sector deleveraging, weak commodity prices, increased government regulation and economic involvement, protectionism and deflation. The combination of these forces should result in 2% annual growth in real GDP. That's considerably less than the 3.3% needed to keep the unemployment rate steady. We'll see it leap from a tad below 10% this year to 23.2% in 2018. Dangerous Levels of Government Dependence High and chronically rising unemployment is clearly unacceptable politically and will spawn massive federal job-creating projects—and many more Americans who are dependent on the government for major parts of their income. They already numbered 58.2% of the population in 2007. From 1950 to 1980, those with their feet planted firmly in the government feeding trough swelled from 28.7% of the population to 61.2% as state and local aid programs brought on tens of millions of new food stamp recipients. By 2018, 67.3% of the population will be financially dependent on government. Think about that for a moment. If the livelihood of two-thirds of the U.S. population relies on government money, what does this imply about the size of our national debt...or for that matter the solvency of the U.S. government? Private sector job growth will continue to be restrained by globalization and outsourcing abroad. In contrast, U.S. governmental bodies have no foreign competition and no incentives to promote productivity or efficiency. I've noted many times over the years that government productivity ranks with military intelligence, vegetarian vampires, beloved mothers-in-law, congressional ethics, postal service, jumbo shrimp, tax simplification, airline food, wild game management, the usual suspects, and working vacations in the realm of great oxymorons. What's amazing, and perhaps speaks well of Americans' conservative fiscal instincts, is that the river of government goodies isn't already a flood with more than 50% of the population on the receiving end. Why haven't voters already voted themselves more handouts? And what will it be like if the ratio climbs above 60%? Will the threat of runaway deficits and worries over an increasingly government-controll Our investment themes continue to center around a further weakness in housing and the deepening recession that is now the longest since World War II. The collapse in house prices eventually will benefit rental apartments and manufactured houses. We also believe that a faltering economy will put more pressure on profits and stocks, and initiate chronic deflation, supporting lower Treasury yields. We expect the dollar to rally as economic weakness abroad exceeds that in the U.S. and as commodities resume their weakness. Increased government regulation and economic involvement here and abroad are the normal results of severe economic and financial problems. By curtailing risk-taking and efficiency, they will impede economic growth. With most nations still zealous to produce and export while the U.S. is no longer the big importer, protectionism is a serious threat, too, especially with sluggish global business activity. Just look at the trade war that has erupted between the U.S. and China over tyres.I hope you get the picture. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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