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Economics: What is Going On?
New York: March 01, 2004
By John R. Stephenson

Things couldn't be more confusing. A whole host of indicators seems to be pointing to better days (ISM numbers, productivity etc.) and yet others seem to be pointing to worse days. The economy appears to be heading back up after three years of tepid performance and yet there aren't all that many jobs being created, certainly not enough to close the gap from the start of the recession. Both white collar and blue-collar jobs (11,000 manufacturing jobs lost in January alone) are being sent overseas to low wage countries. What jobs are being created are in residential construction and in retail sales. Today's non-farm payroll number was further confirmation of the weakness out in job land. But what should investors focus on?

The US dollar is under attack and continues its slide, even with considerable intervention in the currency markets by the Japanese. In the first 28 days of January, the Japanese spent a record $67.7 billion ($813 billion annually) to keep the Yen from rising against the dollar (buying Dollars/selling Yen). This current pace of intervention cannot possibly be sustained leading to one conclusion ? a weaker dollar in the future.

Bank Credit Analyst, a respected economic newsletter, is calling for US economic growth to slow considerably over the next twenty-five years from an average growth rate of over 3% to 2% by 2025. The outlook for Europe? Even worse. They are calling for growth rates in the 1.4% range over the next twenty-five years and Japan should see its economy slow to almost nothing in the next twenty-five years as 23% of their working age population retires. The problem at home and in Europe and Japan? Far too many old people demanding products and services and not enough young workers to provide them. Why is this a problem that will shape our economic prospects for decades to come? It takes three times as many resources to support a retiree as it does to support a child. The potential tax burden on the young workers is quite possibly, immense. The solution: cut services or raise taxes. Either solution will chock -off economic growth.

Rising corporate profitability has led stock markets higher, but jobs and a strong dollar are nowhere to be found. So what should you do? First and foremost, don't believe all the rosy commentary out of Wall Street. The structural changes (aging demographic, outsourcing of jobs) are unstoppable and cannot be reversed. The aging population and huge government indebtedness in the US cannot be sustained and short-term optimism will yield to long-term realism. The stock markets and the housing market may well head higher for the next six months or so, but eventually they will correct as these macro trends continue to wind their way through the economy. So what's your action plan?

Get yourself to higher ground by cutting debt now. No point playing Russian roulette with your finances by betting on a rising economy. Where possible, try and get a little diversity in your investments and income. Consider a part-time job or some dividend paying stocks as possible ways to be less dependent on a rising stock and real estate market. Look for gold to strengthen and the dollar to weaken. By all means, spread your bets around, now is not the time to concentrate your bets.

 

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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