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Belt Tightening
New York: June 21, 2010
By John Stephenson

As the West fell into the worst financial crisis since the Great Depression during the 2008/09 collapse, governments stepped in as spenders of last resort. With consumers running scared and businesses slashing and burning their way to profitability, governments around the world stepped in to plug the spending gap. Shovel ready infrastructure projects and unemployment insurance premiums were rapidly expanded, to help slow a contracting world economy.

n the US , the Federal Reserve took unprecedented steps to breathe life back into the American economic machine—expanding its balance sheet from $800 billion before the collapse to a whopping $2.3 trillion today. With interest rates at rock bottom lows and 20 percent of all US income coming from Uncle Sam in the form of social security and other transfer payments, is there any wonder that we had a recovery? No.

To pay for the party, Western governments issued boatloads of debt over the past year, which banks were all too eager to lap up. Big money center banks around the world bought up all the debt that governments had been peddling, without much regard to the credit quality of the issuer. And as the European Union and its bankers are now discovering, not all governments and banks are created equally.

With Europe mired in debt and the Bush era tax cuts just beginning to roll off, the global economy should begin to slow later this year. Making matters worse, much of the stimulus money has been spent and May's US unemployment report showed some pretty tepid job growth—the vast majority of it coming from temporary census hires. The private sector only added a meager 41,000 jobs in May, most of it in the temporary help category.

While the stock market has salivated over strong corporate earnings growth, the story in the real economy has been anything but stellar. The stock market may be anticipating a V-shaped economic recovery, but the job market is signaling a longer, slower drawn-out recovery. While US job growth has been disappointing, what's more worrisome is the composition of employment growth by age. Since December, 2007, the only age cohort to show net job gains is those aged 55 and over.

But the more nagging question is: why are people who should be enjoying early retirement heading back to work? For most of these people, their McMansions were supposed to be their retirement nest egg. But, with real estate prices in a slump, most owners can't sell their monster home at any price, let alone for a profit—a situation that has forced many to jump back into the job market to help fund their retirement.

With sluggish job growth in America and European governments up to their eyeballs in debt, investors should anticipate weak global economic growth for at least the balance of this year. A global debt super-cycle that has been two decades or more in the making will not be extinguished by a couple of years of belt tightening by consumers. And that will challenge investors who are gambling on a robust global recovery.

In times of sluggish economic growth, investors should focus on high quality companies with low debt and reliable dividend growth. A focus on safe yield is more important than usual when markets are volatile and challenging. Utilities, telecoms and consumer staples such as stocks of grocers are generally good bets. The trade into commodity producing stocks will be back in vogue in the future, but in the near term, investors should exercise caution and play solid defense.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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