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http://www.joe-duarte.com
The True Meaning Of "Structural"
by Dr Joe Duarte
August 30, 2010
How We Got Here And Why We're Not Going To Get Out Of This Anytime Soon
The financial markets are at a crossroads. After two years of crisis and
two years in office for the Obama administration, the recovery seems
fleeting and patchy at best. And the market's performance shows it.
Corporations are holding record amounts of cash on their books.
Consumers have cut back spending. Those who have jobs are doing everything
possible to hold on to them. And the potential for losing a job is still
higher than many would want.
This is handcuffing central banks, such as the Federal Reserve,
whose job is to handle monetary policy, not fiscal policy. And it's the
fiscal policy that is keeping consumers and corporations from making
decisions that will likely spur the economy. It's that catch-22 that is
creating the current environment, where an uneasy wait and see attitude is
leading to stagnation for the U.S. economy.
If we take a very long term view of trends, political, economic,
and demographic, you can see how we got here. In the 1980s deficit spending
and tax cuts spurred economic growth. Yet, corporations used the rising
earnings to export jobs overseas, thus increasing their profit margins, but
leaving America with fewer manufacturing jobs. Those manufacturing jobs
that remained, via unions, put pressure on manufacturing companies to
increase wages and benefits. This in turn led manufacturers to move more
jobs overseas.
To be sure, the push toward globalization, in search of higher
corporate profits contributed to the exportation of jobs overseas. In the
U.S., housing became the engine of economic growth. Instead of building
cars, computers, and developing the next big thing, America became an
economy fueld by homebuilding, real estate speculation, and the service
industries, mortgage originators and processors, home improvement store
chains, and furniture designed and other housing accessory stores.
Television shows began to glorify "home flipping" as an alternative to more
mainstream jobs such as being a lawyer, or a physician.
And as the housing industry became central, no one thought of what
would or could happen if housing hit a down period. Meanwhile, Wall Street
invented more devious and arcane derivatives based on housing in order to
recycle money through the pipeline and collect fees.
That much of what happened was politically driven is not as
important as two basic facts. One, it was inconceivable that it could last
forever. And two, how could the world's biggest economy put all of its eggs
into one basket, without having a backup plan?
But as absurd as it sounds, that's what happened. America became
an economy driven by a cyclical industry that imploded as fraud and greed
reached their limits, leaving bond holders, and owners of stock as the bag
holders, as large off the book bets came due between billion dollar
entities whose only recourse was to sell off all assets, stocks, bonds, and
real estate in order to make good on their bets.
Meanwhile, there was no safety net. No, we're not referring to
unemployment benefits. What we're saying is that no one thought of what to
do with carpenters, framers, foundation layers, real estate brokers,
mortgage clerks, and the rest of the supporting cast of the housing
industry. So while the jobs that were exported to India, China, and
Malaysia in the previous decade were felt, at least they weren't seen, or
weren't as prominent.
Now, with the number of empty houses and subdivisions rising,
state and municipal tax revenues falling, and the U.S. national debt rising
astronomically, all of these things are coming to roost, making one thing
obvious: America has no plan to get out of the current mess. The only thing
it can do is hope that time bails it out.
And that's why the financial markets are a touch and go
proposition. What's more interesting and worth considering is that even as
the midterm election is expected to bring in new blood to Congress, the
influence of the special interest groups isn't likely to wane. Unions, Wall
Street, and corporations will lobby the next crop of Congressmen and women
and Senators into making the same kind of watered down decisions that got
us into the same situation that we're in now.
Conclusion
When money managers and pundits refer to "structural" changes in the
economy, they are sugarcoating the obvious. America got caught with its
financial pants down. Housing was a temporary boom, which has run its
course. Housing is not the answer to the recovery, although that's what
mainstream thinking continues to espouse.
The only way America's economy is going to get out of its current
funk is by fiscal policy which encourages three things: innovation, risk
taking, and manufacturing. It's going to take imagination and the likes of
Carnegie, Morgan and Rockefeller to emerge from this rubble to lead the way
forward. But no great leader in his or her right mind is going to stick
their head out in this political climate where attempts at greatness are
seen as pompous and self indulgent, unless you're Lady Gaga.
The people that could take America toward the next big thing are
in China, where it's still easy to make money if you've got ideas. They've
invested in technology companies in India, and in drug companies in Israel,
where the governments offer incentives. And they're taking many of
America's great minds with them, leaving little behind.
We may be wrong in this. But if anyone is expecting that the
Federal Reserve could bail America out of its current situation, they are
sorely wrong. In our opinion the true meaning of the world "structural," in
this context, is multifactorial encompassing terms such as fundamental,
political, philophical, and including a time component, nearly eternal.
If you're a stock market investor, your best bet it to time the
markets, to understand that rallies will be short in duration and low on
profits, and to appreciate the fact that there is no sin in owning more
cash than you grew accustomed to in the past few decades.
Goldman Sachs (NYSE: GS) Swoon May Have French Origin
The downward spiral in the stock price of Goldman Sachs (NYSE: GS) may have
started in France. Yet investors who waited to know what happened would
have lost 25% of their money over the first six months of 2010.
Chart Courtesy
of StockCharts.com
The market acts in mysterious ways, but the charts don't lie. And
the 25% price decline in shares of Goldman Sachs seems to be at least
partially related to selling by French insurance giant Axa, at least
according to SEC documents and a report by AFP.
According to reports, Axa sold 14 million shares of Goldman from
January to June of 2010, cutting its stake from 4.8% of Goldman to 2.8%.
The beneficiary was Wells Fargo, to whose shares Axa shifted the proceeds
from the Goldman sales, among other U.S. financial entities, according to
the AFP report. Others sold Goldman shares as well, including U.S. money
managers Blackrock and mutual fund family T. Rowe Price.
To be sure, Goldman, which according to "The Big Short" had a
central role in the subprime market crisis, has had its share of problems.
The company settled with the SEC and had to set aside hundreds of millions
to pay U.K. taxes on bonuses, which cut their last quarter's profit by 82%.
There is also the question about whether the current market can bring back
trading profits, and whether trading is even going to be a central piece of
Goldman in the future.
We're writing this article for two reasons. One is that the stock
is way down and that it may be oversold enough to consider. The other is
that a few weeks ago we noticed, in this space, that someone with big money
was clearly selling the stock. That validates chart analysis as a useful
piece of information. We didn't know who was selling. But it was clear
someone big was selling big chunks of stock.
What's our point? It's often better to act on the charts than to
wait to know what's happening. And in this market, that makes more sense as
each day passes.
To subscribed to Dr Duarte's market Intelligence
reports, which are emailed daily "before the open" to subscribers, please
visit our website at http://www.joe-duarte.com
Contact information:
email: support@joe-duarte.com
Phone: 434
823-8181
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