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  • US Economy to Get a Hollywood Makeover

    You may have heard that the government is going to make some major changes in how our Gross Domestic Product is calculated later this year. Your first thought might be that this is no big deal. However, I will argue today that it is a very big deal, the biggest in a decade, and you need to know why. So I hope you read what follows with more than a passing interest.

    Last week, the Commerce Department’s Bureau of Economic Analysis (BEA) announced it will be making some significant revisions to the way it calculates Gross Domestic Product in late July. This change is somewhat controversial in that it is expected to add a whopping 3% to GDP in one fell swoop in the last week of July. That’s about $1,500 worth of extra goods and services for every person in the US!

    The reason for the changes is the fact that our economy increasingly depends on the production of intangible goods, and we need to recognize that the production of ideas is an important form of investment. So in the future, the BEA is going to count a company’s research and development as a form ofinvestment just like the purchase of a new office building. And the creation of a lasting work of art – a painting, a movie, a television series, etc. – that can be sold year after year will, likewise, be treated as a capital investment.

    Today, I will talk about these sweeping changes and what they will mean for all of us.

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  • GDP Report Tanks – Is A Recession Looming?

    We will cover a lot of ground today. We begin with a new report from Goldman Sachs which argues that the US economy will remain the strongest in the world for many more years. The report rebuts claims that America is a nation in decline. This will be a very interesting discussion given that we have $16 trillion in national debt and exploding. Thank you President Obama!

    The upbeat Goldman report was delivered before last Wednesday’s surprising news that the US economy actually declined in the 4Q for the first time since 2Q 2009. While there are reasons to believe that the advance estimate of 4Q GDP (-0.1%) will be revised upward in subsequent reports, the surprise GDP report was not the only bad news in the last few weeks. We’ll take a look at the latest economic reports as we go along today.

    From there, we turn our eyes to the Fed. In December, there were rumors that some members of the Fed Open Market Committee (FOMC) were having doubts about the Fed buying a record $85 billion a month in Treasury bonds and mortgages indefinitely. Some even predicted that the FOMC might vote to end such purchases by the end of this year. Not so, as evidenced by the January Fed policy meeting. The Fed made it clear that the $85 billion in monthly purchases will continue indefinitely (unfortunately).

    Finally, we look at a new poll from Pew Research Center which found – for the first time ever – that a majority of Americans believe that the government is a threat to our personal rights and freedom! This is stunning! I will summarize this new poll which is loaded with eye-opening data.

    It should be an interesting letter. Let's get started.

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  • Obama Claims We Don’t Have A Spending Problem

    Most of the forecasters I subscribe to expect economic growth to average only 1-2% in the first half of 2013. Most believe that 4Q GDP fell sharply from the 3.1% rate in the 3Q of last year, largely due to fears about the fiscal cliff. They also expect growth to improve modestly in the second half of this year to 2% or slightly higher. That’s not too optimistic.

    One reason is that the end of the payroll tax holiday on December 31 means that workers’ pay went down by 2% on January 1, thus adding more headwinds to the economy this year. A person earning $50,000 a year before taxes, for example, will pay an additional $1,000 or more to the government this year.

    Add to that the fact that we are sure to have another nasty debt ceiling battle next month, which will once again be unsettling to consumers who drive the economy. We all remember the fiasco in the summer of 2011 when the Dow plunged over 2,000 points. For these reasons and others, at least the first half of 2013 could be very dicey.

    Actually there are three debt battles – the so called “trifecta” – that lie ahead. In addition to the debt ceiling battle, there is also the sequester/automatic spending cuts on March 1 and the “continuing resolution” to fund the government in the absence of a formal budget passed by Congress. That happens in late March. We will look at all three of these upcoming battles below.

    Today we’ll also touch on the pork-laden fiscal cliff bill that passed on New Year’s Day. And we will ponder the question of whether the US has a “spending problem” or a “taxing problem.” Let’s start with this last one first.

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  • Will America Be Greece in Four Years?

    The US national debt topped $16 trillion last week, and it was almost as if no one paid attention. At the rate we are going, the national debt will top $20 trillion just four years from now in 2016. Despite four years of trillion-dollar budget deficits, the US economy remains stagnant with sub-2% growth in GDP – the worst post-recession recovery since the Great Depression.

    You would think that our leaders in both parties would figure out that trillion-dollar deficits are NOT the answer, and that they are the problem. This is not really a political issue, because both parties in Washington have been guilty of spending us into oblivion. The difference is, now we're talking about trillions, not billions.

    Last week, I read a great article in Forbes on what to do about the economy. I wish I had written it myself. But since I didn’t, I have reprinted it for you today. The author really tackles what it will take to turn our economy around. Not surprisingly, the author's suggested solution does not in any way look like President Obama's economic policies.

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  • GDP Report: "Good News" - You’ve Got to be Kidding!

    I must begin today by thanking you for the overwhelming reader response we received to last week’s E-Letter. It was the largest response we’ve had in several years. Obviously, I struck a nerve with many of my readers last week! I’ll fill you in as we go along.

    Following that discussion, we dissect last Friday’s controversial 2Q GDP report, which most found disappointing but some in the mainstream media found encouraging (ie – at least we’re not in a recession). From there, we’ll discuss the Fed’s latest monetary policy meeting that ends tomorrow.

    The stock markets rallied strongly last week, partly on perceived good news from Europe, and partly because of renewed expectations that the GDP report would be weak enough to move the Fed to enact QE3. We’ll know one way or the other tomorrow afternoon. If Bernanke fails to announce more QE, stocks could tumble again.

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  • Fed Extends Operation Twist – Europe at the Brink

    For the last several months I have argued that the most likely time for the Fed to enact another round of stimulus would be at the June 19-20 FOMC meeting. I first suggested this in my March 13 E-Letter. My main reasoning was that Bernanke would not want to do it after June 19-20 for fear that it would be seen as a political move ahead of the November elections.

    As I’m sure you know by now, the Fed elected to extend “Operation Twist” last Wednesday, June 20. Operation Twist is the action whereby the Fed uses cash from the sale or maturity of short-dated Treasuries to buy longer-dated securities, in an effort to bring down long-term rates. The Fed says it will make $267 billion in such purchases and the Twist will continue until the end of this year.

    The Fed also revised its economic forecasts downward, suggesting even slower GDP growth in 2012 and 2013 than they predicted back in April. They estimate that the unemployment rate will remain at or above 8% all this year, and then be 7.8% - 8% in 2013. Not a very rosy outlook.

    The financial crisis in Europe is back on the front pages. Moody's downgraded 28 Spanish banks on Monday, and stocks cratered around the world. There is a major European summit this Thursday and Friday in Brussels, and this may be the last chance for a solution to the crisis before the Eurozone begins to break apart.

    Finally, I end with some thoughts regarding the Thursday's Supreme Court decision on ObamaCare. If the healthcare law is struck down by the High Court, I expect all hell to break loose! The mainstream media and those on the left will have a conniption. No doubt the Obama administration will weigh in on the bashing of the Supreme Court. If the healthcare law or the individual mandate are struck down, it will get very ugly!

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  • CBO Warns of Recession in 2013

    The non-partisan Congressional Budget Office (CBO) has calculated the expected negative effects on the US economy if the Bush tax cuts expire at the end of this year. Their numbers just released last week are eye-opening! To give us some perspective, US Gross Domestic Product rose by 2.2% (annual rate) in the 1Q of this year.

    The CBO now forecasts that if the Bush tax cuts expire at the end of this year, GDP in the first half of 2013 will plunge to-1.3%. Think about that. We don't know what the economy will do for the rest of this year, but the consensus expectation is that GDP will probably average around 2.5% for 2012, barring any negative surprises. So a drop from around 2.5% this year to negative 1.3% in the first half of next year – if the Bush tax cuts go away - is HUGE!

    For all of 2013, the CBO forecasts GDP growth of only 05.% – if the Bush tax cuts go away, and even that may be too optimistic. I wrote at length on this news from the CBO in my blog last Friday. I will give you a link to that blog posting at the end of today’s E-Letter so you can read it.

    What we want to focus on today is why this economic recovery is so weak. We will look at the latest economic reports and ponder why they aren’t stronger. We’ll look at the latest news on the housing market and find that there are some signs of improvement. I will also bring you an independent analysis of why the recovery is so weak (and what caused it) that I think you’ll find very interesting. It’s a lot to cover in one letter, so let’s get started.

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  • Is The Economic Recovery Stalling?

    Economic reports in recent weeks have been disappointing overall, and there are growing concerns that the economic recovery may be slowing following 3% GDP growth in the 4Q of last year. Thus, all eyes will be focused on this Friday’s first report on 1Q GDP. Only a month or so ago, some worried that the 1Q GDP number could come in below 2% due to the slowdown in inventory rebuilding this year. But as you’ll read below, most pre-report estimates for 1Q GDP are north of 2%.

    Whatever the GDP number is on Friday, there is a feeling that the economic recovery is stalling a bit. Some of the same spoilers that interrupted the recovery in 2010 and 2011 have emerged again this year, raising fears that the winter’s economic strength might dissipate in the spring and summer.

    In addition, the Fed Open Market Committee is meeting today and tomorrow. Since we won’t see the policy statement from the meeting until tomorrow, we can only speculate as to whether the Fed discussed any new stimulus at this meeting. I still don't believe that QE3 is off the table. I’ll give you my thoughts below.

    Finally, a record 5.4 million workers and their dependents have signed up to collect federal disability checks since President Obama took office. Many unemployed apply for disability benefits as soon as their unemployment benefits run out. There are now a record 10.8 million Americans on disability. This is a real travesty on so many levels!

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  • Our National Debt Is Scarier Than You Think

    Our national debt has now reached a record $15.6 trillion, thus eclipsing our gross domestic product of $15.1 trillion. Of this $15.6 trillion in debt, $10.8 trillion is held by the public (including investors, the Fed, state and local governments and foreigners), and the remaining $4.8 trillion is held by various government agencies and trust funds (including Social Security).

    Our national debt consists of Treasury securities ranging from 30-day T-bills to 30-year T-bonds. Surprisingly, the average interest rate on our national debt is now down to only 2.2%. The average maturity on our national debt is only 62.8 months. What this means is that 71% of our privately-held Treasury debt must be rolled over in the next five years. The US now surpasses Greece, Portugal and Spain when it comes to relying on short-term borrowing to finance our national debt.

    The question is, will there be ample buyers to roll over all this debt in the next five years? This may shock you but the Federal Reserve bought up 61% of all net Treasury issues in 2011. This makes the Fed the largest buyer of US Treasury securities! What happens when the Fed has to stop this practice? Higher interest rates come to mind, especially when you consider that foreign buyers of our debt have started to scale back their purchases. China, which is the largest foreign holder of our debt, actually decreased its holdings of Treasuries by $156 billion in the second half of 2011. This is scary!

    What, you haven't heard all this in the media? Of course you haven't. But I will give you the facts and the dangerous implications in today's E-Letter. Please read it carefully. We need to get this information to as many people as possible. Let's jump right in.

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  • The Truth Behind High Gasoline Prices

    Being in the business I am, people frequently ask me why gasoline prices are so high. Of late, people have also been asking me if President Obama has any idea whatsoever about how the energy markets work. As it turns out, the Heritage Foundation just released an excellent report that addresses both questions. It also lists five specific actions that Congress and the Obama administration should undertake to increase energy production in this country.

    But before we get to that, I will summarize the latest economic reports which continue to give mixed signals. While the latest report on 4Q GDP came in a bit better than expected, most economists agree that growth in 2012 will not be as good as the 4Q of last year. Following that, we look at some remarks from Fed Chairman Ben Bernanke in his recent Senate testimony. While he defended quantitative easing, it doesn’t sound like the Fed is going to do QE3 anytime soon.

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  • On the Economy, Tax Rates & Millionaires

    We touch several bases today. We begin by looking at some recent economic reports which are encouraging. We also preview this Friday's very important first report on 4Q GDP. The pre-report consensus is for a number in the 3-4% range (annual rate), following only 1.8% in the 3Q. Following that discussion, I will bring you the latest estimates from the Blue Chip Economic Indicators, a monthly survey of 50 leading economists and forecasters.

    From economics, we shift gears and take a look at income tax policies. I will attempt to explain how some wealthy Americans (think Warren Buffet, Mitt Romney, etc.) can legally pay a lower tax rate than rank-and-file Americans who earn "ordinary" (W-2) income. I will also explain the difference between the "marginal" tax rate and the "effective" tax rate. The two rates are significantly different, yet the media often refer both in the same breath without making the distinction.

    Next we look at a recent poll of over 500 millionaires. Believe it or not, 71% said they believe the "rich" should pay higher taxes. But in the same survey, 49% said that the higher tax rate should NOT apply to them but only to super-rich types like Warren Buffett. There are several other interesting insights from this poll of millionaires which I will point out.

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  • On the Economy, Europe & the Super Committee

    We begin this week with the latest GDP report which came out this morning. The Commerce Department reported that Gross Domestic Product rose only 2.0% (annual rate) in the 3Q, down from 2.5% in its previous report last month. This was below pre-report estimates but still suggests that the economy is not falling into a new recession. A new report from Credit Suisse estimates that the chance of the US economy going into a recession next year have dropped from 36% in September to only 24% today.

    In another new report, Fitch Ratings warned that large US banks face "serious risk" in regard to the European debt they hold. Specifically, Fitch claims that the six largest US banks had at least $50 billion in loans to Portugal, Ireland, Italy, Greece and Spain at the end of September. This suggests that the European debt crisis could cause serious problems for US banks if any defaults occur in the Eurozone. This should not come as a surprise to my regular readers - I've been warning about this since July.

    Next, we revisit the so-called "Super Committee" which announced late yesterday that it has failed to reach an agreement to reduce federal deficits by at least $1.2 trillion over the next decade. This, too, should not have come as any surprise to my readers. There are those who believe that the (not so) Super Committee was designed to fail from the beginning. I happen to be one of them. The Super Committee was an embarrassment! Our national debt will continue to explode.

    Finally, with this being Thanksgiving week, I close with some personal thoughts on what I'm thankful for.

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  • On the Economy & the Fed - Now What?

    We touch on several bases in today’s letter. We begin with Fed Chairman Ben Bernanke’s key speech at the Fed symposium in Jackson Hole, Wyoming last Friday, which proved to be a yawner despite all the anticipation beforehand. Next, we look at last Friday’s disappointing GDP report which was revised lower, alonng with other recent economic reports.

    Following that, we look at the latest long-term budget forecasts from the Congressional Budget Office. As I will discuss below, the CBO uses so many optimistic assumptions in these forecasts that one wonders if they are even relevant anymore. In any case, I’ll give you the latest numbers.

    Next,I make the case that the US economy has now drifted once again into “stagflation” – defined as slow growth and rising inflation. Expect to hear more references to stagflation in the days and weeks just ahead, but you heard it here first. Finally, we look at the latest chaos in the stock markets.

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  • GDP Report Shows the Economy is Stalling

    It appears that the debt ceiling fiasco will finally be put to bed with a Senate vote later today, as I predicted. But not before our leaders in Washington led us to the brink of another financial crisis. Frankly, the new debt ceiling deal is UGLY as I will discuss below. But before we get to that, we have to look at last Friday's very disappointing GDP report - it was a shocker. So was the Fed's latest assessment of the economy last week. And so was yesterday's ISM manufacturing report which plunged in July. It is now clear that the US economy is very close to moving back into recession again.

    None of this is good news for the stock markets, which are down again today following a significant sell-off last week. The debt ceiling drama pointed out to millions of Americans just how dire our national financial situation is, and they are moving out of the stock markets in droves to the safety of Treasuries or cash. Is this an overreaction? I'll give you my thoughts as we go along.

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  • America May be in Its Own "Lost Decade"

    When most people hear the term “Lost Decade,” they immediately think of Japan during the 1990s after it incurred its own financial crisis.Now, however, there are legitimate concerns that the US may be facing its own Lost Decade. In fact, we're already halfway through it. From the 1Q of 2006 to the 1Q of 2011, the US economic growth rate (GDP) averaged less than 1% a year. As I discuss below, we may be looking at a slow economy and continued high unemployment for several more years as consumers continue to pay down debt and curtail spending.

    Clients and readers regularly ask me what it's going to take to get this economy moving once again. Normally the economy is growing at 5-6% by this point after a recession. But there are several dynamics that are different this time, most notably the fact that many of the 10 million US jobs that have been lost over the last few years are never coming back. There are numerous reasons for this, and I will point them out as we go along.

    We will also revisit the issue of the debt ceiling. While the politicians working on this issue say they're making progress on an agreement, there's no hard evidence that the two sides are remotely close to making a deal before the deadline of August 2. While interest rates have been falling due to the slowdown in the economy, things could get quite wild in the financial markets in the weeks just ahead if the debt ceiling is not raised in time. Stay tuned.

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