The Short View The Rude Awakening
Laguna Beach, California
Wednesday, November 29, 2006 - Don't short the messenger…short the source!
- Sustaining the unsustainable - The American consumer continues to buy…or does he?
- A word from "helicopter" Bernanke, following the empire into debt and your free Rude housing report…
Eric Fry, reporting from Laguna Beach, California… The economy will probably get better, according to Federal Reserve Chairman, Ben Bernanke, but it might get worse. The thoughtful, Ivy League-educated Chairman also predicted that the nation's housing market would likely get better, provided, of course, that it does not get worse. A lesser man, lacking the benefit of a BA in economics from Harvard and a PhD in economics from M.I.T., might have simply thrown up his hands and said, "I've got absolutely no clue where the economy is heading, and absolutely no clue whether home prices will rise or fall." But Ben Bernanke is not a lesser man. He is a confident man. He's got theories and he's not afraid to use 'em. He knows, for example, that America's staggering current account deficit is not a problem. It is simply the natural outgrowth of a global "savings glut" - a glut that conveniently compensates for America's savings deficit. Bernanke's confidence and his theories do not enable him to predict the future, but they do embolden him to try. In a speech yesterday before the National Italian American Foundation in New York, Bernanke detailed the future course of the U.S. economy as if he were reading it from tomorrow's Wall Street Journal. Nothing is now happening, he explained, that the Fed did not expressly orchestrate or anticipate. And what will happen next, we are led to infer, will follow the Federal Reserve's proprietary timetable. "The deceleration in economic activity currently under way appears to be taking place roughly along the lines envisioned in the Federal Reserve's July report," Bernanke explained. "As anticipated, the slowdown primarily reflects a cooling of the housing market. Most other sectors of the economy appear still to be expanding at a solid rate… "Over the next year or so," Bernanke continued, "the economy appears likely to expand at a moderate rate, close to or modestly below the economy's long-run sustainable pace. Core inflation is expected to slow gradually from its recent level…"
Bernanke does admit that "substantial uncertainties" surround his forecast. But these uncertainties are not so substantial that they rendered him mute. He offered his forecast nonetheless. "Overall, the economy is likely to expand at a moderate pace going forward," he said. "A reasonable projection is that economic growth will be modestly below trend in the near term but that, over the course of the coming year, it will return to a rate that is roughly in line with the growth rate of the economy's underlying productive capacity. This scenario envisions that consumer spending--supported by rising incomes and the recent decline in energy prices--will continue to grow near its trend rate, and that the drag on the economy from the motor vehicle and housing sectors will gradually diminish…"
Bernanke's forecast, therefore, seemed as soothing as a summer breeze. But he did admit the possibility of sub-optimal outcomes. "Like all economic forecasts, this one is provisional," said the nation's highest-ranking economist, "and risks exist in both directions. On the downside, the correction in the housing market could turn out to be more severe and widespread than seems most likely at present. A deeper correction would directly affect economic activity through additional cutbacks in housing starts and through its effects on employment in construction and housing-related industries…any significant effect on consumer spending arising from further weakness in housing would have important implications for the economy. On the other hand, economic growth could rebound more vigorously than now expected… "I have focused today on the near-term prospects for the economy and the risks to the economic outlook," Bernanke concluded. "However, in reviewing the economic developments of recent years, one cannot help but be impressed by the dynamism and resilience of the U.S. economy. I have confidence, therefore, that however events play out in the short term, in the longer term the economy will grow at a healthy pace, raising living standards in the process. The Federal Reserve will continue to play its part by implementing policies designed to achieve its mandate of fostering price stability and maximum sustainable employment."
We hope he's right. We hope that long-term trends will be just swell. But we're a little concerned about the short-term trends. We're concerned about the country's $800 billion current account deficit. We're concerned about the swooning housing market. And we're concerned about America's cash-strapped consumers. We can't read the future any better than Bernanke. But we can read the past. And history suggests that the future will contain many surprises. It will contain surprises that might alarm even a confident, well-educated Federal Reserve Chairmen.
--- American Consumer Crisis --- Foreseeing Fed Follies Detailed In This Report Are The Three Predictions That Led The World's Greatest Living Economist To Determine The State Of The U.S. Economy To Be In. Have they come to fruition? Decide for yourself right here. ---------------------------- The Short View
By Eric J. Fry The American consumer is the world's worst short sale. Somehow, despite imposing statistical improbabilities, the American consumer always seems to devise new ways of spending money he may or may not have on things he may or may not need. Betting against the consumer, therefore, has been a terrible idea for more than 60 years. But just maybe, it will pay to bet against the consumer THIS year. Just maybe, it will pay to bet against the retailing stocks that comprise the Retail HOLDRs Trust ETF (NYSE:RTH). The top five names in this ETF are Wal-Mart, Home Depot, Target Corp., Lowe's Corp. and Walgreen's. Not since the Great Depression has the American consumer paused to take a break from his tireless borrowing and spending. Neither the Korean War, nor the Cold War, nor the Vietnam War, nor the Oil Embargo, nor the Carter stagflation, nor the mid-80s oil bust, nor the post-2000 stock market bust, nor the unfolding housing bust has succeeded in curtailing his consumption. To the contrary, each new episode of adversity seems to foster ever-more creative ways of financing consumption. If this epic consumption has a limit, the American consumer has not yet found it. But we wonder if that day might soon arrive. The American consumer has never before shouldered as much debt as he does today. And yet, post-Thanksgiving holiday sales surged almost 19% from last year. In a stunning act of consumerism, shoppers spent a record $360.15 billion over the course of the Thanksgiving weekend. "Nearly every current financial trend is telling us to slow down our spending," explains Addison Wiggin, author of Empire of Debt, "but we are clearly bent on living beyond our means." We do not know where this money comes from, exactly, or how long it will continue to arrive. We only know that Americans spend a lot more money than their paychecks provide. Today, "savings" have become a museum piece. At some point, therefore, Americans should begin to spend less. As the nearby chart illustrates, consumer spending has been trending steadily higher for more than 30 years. For the first 15 of those 30 years, household savings increased in step with spending. But in the early 1990s, Americans began to "dis-save," and to do so with abandon. Throughout the 1960s and 1970s, American spent about nine dollars for every dollar they saved. But over the last five years, Americans have spent more than 60 dollars for every dollar they saved! 
We here at the Rude Awakening do not begrudge our fellow citizens their debt-financed pleasures. We have financed one or two pleasures of our own, on occasion - on many occasions, in fact. We do not stand in judgment, therefore, but in awe. We are awed by the magnitude of American consumption. We are awed that so many Americans manage to sustain unsustainable lifestyles. We are awed that foreigners continue to finance our epic consumption. We are awed that the world's premier capitalistic nation borrows billions of dollar every year form the world's foremost Communistic nation. We are awed that our country can spend one trillion dollars on a foreign military campaign, but cannot seem to save a dime. We do not completely understand these curiosities. And we certainly don't understand why they should continue. Given the trends before us, we would expect U.S. assets to decline in popularity. We would expect U.S. stocks to fall and U.S. bonds to fall and the U.S. currency to fall. And we would also expect Americans to begin trimming their consumption. If home prices are falling, and if savings are disappearing and if debts are already unmanageable, how will we continue to spend what we do not have? Maybe we won't. Maybe, finally, we consumers will run out of ways to spend more than we earn. In fact, maybe we've already begun to exhaust our mechanisms for borrowing and spending. Wal-Mart's first-ever drop in same-store sales this month suggests that low-income consumers, at least, as cutting back. 
The price action of most retailing stocks tells a similar tale. Over the last two years, the Retail HOLDRs trust (NYSE:RTH) has merely bounced along, without ever gaining ground. Over the same timeframe, the S&P 500 has gained nearly 20%. Does the lackluster action of retail stocks anticipate lackluster consumption from consumers? We do not know, but we wouldn't rule it out. Selling short the U.S consumer has been a bad idea for about six decades. But selling short retailing stock may not be as bad of an idea. [Joel's Note: Along with his Daily Reckoning cohort, Bill Bonner, Addison Wiggin has been keeping a watchful eye on the state of the U.S. economy. In their book, "Empire of Debt: the Rise of an Epic Financial Crisis" they detail the dire state of U.S. dollar and the unpleasant trajectory of the world's most profligate empire. If you haven't already read it, you can pick up a copy by following this link. For his part, your senior Rude Awakening editor has compiled a report on the state of the empire's housing market. Take a few moments and read through this special Rude Awakening report to know what's in store for your greatest asset. Housing Bubble: A Rude Awakening White Paper Special -------- Turning To GOLD ------- The Rally Is Back On! The U.S. Dollar may be poised for a Rude Awakening of its own…sending this precious metal soaring once again. Detailed in this special report are FIVE SPECIFIC WAYS you can safeguard your wealth by nabbing bullion at a fraction of the cost other investors will pay. Learn how here. | 
