Forecasts & Trends : GDP

Are We Sure the Recession is Really Over?

Gary D. Halbert — Tue, 10 Nov 2009 21:46:00 GMT

IN THIS ISSUE:

3Q GDP Report - Was It Really Better Than Expected?
What Else Was Missing in the 3Q GDP Report?
Worker Productivity Surges to Six-Year High
Latest Unemployment Numbers Not Encouraging
Roubini - Too Many People Are "Short" the Dollar

Introduction

When the government announced on October 29 that 3Q Gross Domestic Product surged 3.5% (annual rate), there was a collective sigh of relief around the world that the US economy had finally emerged from the most serious recession since the Great Depression. After all, the 3.5% number outpaced the pre-report consensus of around 3%.

On closer inspection, however, the latest GDP report was not nearly as rosy as the headline number of 3.5% seems to suggest. For example, if you consider all of the government's incentives for consumers to spend (think "cash-for-clunkers" which ended in August, the $8,000 first-time homebuyer tax credit, and huge stimulus spending), GDP growth in the 3Q would have been significantly lower.

These and other caveats from the latest GDP report suggest that while we have turned the corner on the recession - barring any big negative surprises - economic growth over at least the next several quarters is likely to be disappointing. For example, most estimates I see for 4Q GDP growth are in the 1-2% range.

Last Thursday, the Labor Department reported that US worker productivity soared to a six-year high in the 3Q, well above expectations. Rising productivity is a good thing, right? Not necessarily, especially when it means that companies are laying off their best and brightest, such as scientists and engineers, that are focused on new product development (R&D).

On Friday, the Labor Department reported that the unemployment rate surged from 9.8% to 10.2% in October, well above the pre-report consensus of 9.9%. 10.2% is the highest unemployment rate since 1983. 15.7 million Americans are officially out of work, and that does not include those who are working part-time by necessity and those who have given up looking for work.

This week, we will examine the latest 3Q GDP report in detail and what that means for the future of the economy. We'll also take a look at some subsequent economic reports which seem to suggest that 4Q growth will be tepid. Next, we'll delve into the latest worker productivity report and what that may mean for the economy and the markets. Also, we will dissect the latest unemployment figures.

Finally, I will bring you the latest dire warning from noted forecaster Nouriel Roubini. You may recall that he predicted the housing/credit crisis back in 2005. Now he warns that too many people around the world are "short" the US dollar, and this could spark a second credit crisis.

3Q GDP Report - Was It Really Better Than Expected?

As noted above, the Commerce Department reported on October 29 that US GDP grew at an annual rate of 3.5% in the 3Q. Pre-report estimates varied widely with a consensus of 3%, so the actual report was better than expected. Stocks rallied sharply and closed 200 points higher following the report's release. In the Commerce Department's report, it stated: "The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment." The 3Q boost in the economy followed four consecutive losing quarters, including the 2Q that saw a drop of 0.7%. The 3Q GDP report, the so-called "advance" report, will be revised two more times before it goes "final", and the next revision will be released on November 24.

While stocks rallied strongly just after the report, it did not take long for analysts to see that the number was artificially pumped up. For example, if you take out surging auto sales ("cash-for-clunkers" which ended in August), GDP rose only apprx. 1.5% in the 3Q. Take away the government's $8,000 tax credit for first-time homebuyers, which is scheduled to end on December 1, and economic growth was even weaker.

Consider also the fact that GDP was boosted by the federal "stimulus package" spending, which unlike cash-for-clunkers and home tax credits, is not going away anytime soon. But the point is, the GDP number would have been much lower without these artificial incentives. Actually, the White House admitted as much just after the report. Christina Romer, chairwoman of the White House Council of Economic Advisors, acknowledged that without all these government incentives, "real GDP would have risen little, if at all, this past quarter."

Looked at differently, the 3.5% GDP report noted that the overall economy rose to a seasonally adjusted $13.014 trillion (annual) in the 3Q, up from $12.901 trillion in the 2Q. In other words, the economy added apprx. $112 billion dollars in output quarter-over-quarter. Yet we have spent an estimated $173 billion worth of the $787 billion stimulus plan so far. This shows how heavily dependent the economy is on government spending.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

What Else Was Missing in the 3Q GDP Report?

There are a number of factors and trends that the government's GDP reports do not consider. For example, the official GDP statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, worker training, etc. There's plenty of evidence which indicates that companies are slashing this kind of spending, which is essential for innovation, in an effort to cut costs.

Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy over the long-run. Yet we don't see that plunge reflected in the GDP numbers which are still too focused on more traditional sectors, such as motor vehicles, construction, housing, etc.

There are more signs that companies are robbing the future to cut costs and improve profits. For example, over the past year, US employment of scientists and engineers has fallen by 6.3% according to BusinessWeek. For the most part, these are the people who create the next generation of products and make the US more competitive over the long-term. Again, this trend is not considered in the GDP reports.

Another clear-cut sign that GDP growth is being overestimated is the sharp drop in venture capital investment, which goes directly to new businesses. Venture capital firms invested about $12 billion in the first three quarters of 2009, barely half the $22 billion invested during the first three quarters of 2008. Some of this shortfall would have been spent on computers and other physical equipment, which would have been picked up in GDP. But most of the drop in VC money would have gone to pay for scientists, engineers, and new product development - all valuable intangible investments that don't show up in the GDP reports.

Similarly, many companies have slashed their reported R&D spending, which also doesn't show up in GDP. Just to cite a couple of examples, Alcoa announced recently that it cut its 3Q R&D spending by 36% from the year before. Johnson & Johnson has reduced its R&D by 13% over the past year. Such cuts are going on across industry sectors, with few exceptions. Again, these significant cutbacks are not reflected in the GDP data.

Another big problem not reflected in the GDP statistics is that many companies are retreating from development of new products, especially in stressed industries. In many sectors of the economy, companies have not only cut back on new products, but in many cases are reducing the number of models or options they currently offer.

Likewise, US companies are significantly cutting their spending on worker training. The drop started in 2008, when employers reduced their per-worker "learning expenditures" by 3.8% on average, according to the American Society for Training & Development. No data are available for 2009, but "from anecdotal evidence, obviously there's a lot of cutback," says Pat Galagan, executive editor of publications.

Ideally, a big burst of training would occur during a severe recession such as this so that people can acquire the skills needed for the jobs of the future. The problem is how to pay for that training, since unemployed people rarely spend money on long-term training when they're worried about short-term survival.

Worker Productivity Surges to Six-Year High

Last Thursday, the Labor Department announced that worker productivity surged to the highest level in six years in the 3Q. Productivity nationally rose 9.5% on average, well above the pre-report consensus of 6.5%. Non-farm productivity and costs provide measures of the productivity of workers and the costs associated with producing a unit of output.

The report also noted that overall output rose 4.0% in the 3Q, while hours worked fell 5.0%. Non-farm businesses continued to get lean and mean, finding ways to squeeze more output out of fewer workers (more on this below). Unit labor costs also fell 5.2%, which will help keep inflation contained.

Productivity growth has risen at an 8.2% average annualized pace during the last two quarters, the fastest two-quarter surge off a recession trough since 1961. Unit labor costs, typically the flip side of the productivity numbers, collapsed at nearly a 6% annualized rate during the last two quarters - the largest two-quarter decline off a recession trough on record. Since corporate profits are directly related to productivity growth and inversely related to unit cost growth, this data is good news for earnings.

Normally, it is considered a good thing for productivity to go up but the question is, why so much? With the unemployment rate continuing to go up every month, we know that companies continue to terminate and/or lay off workers. In doing so, they are demanding more productivity from those employees that remain on the job.

Actually, it is not unusual for productivity to rise in the early stages of a recovery as businesses continue to aggressively cut costs even as output begins to rebound. Companies are reluctant to hire near the end of recessions and even in the early stages of a recovery, as they are not sure the economy has really turned the corner, especially with the unemployment rate rising month after month.

On a related note, the Labor Department also published monthly data on the "average work week." The average work week shrank to a new all-time low of 33 hours in June, and it remained the same in October, as reported in last Friday's unemployment data (more on that report below). While the manufacturing sectors are averaging well above 33 work hours per week, the much larger service/retail sectors are averaging less than 33 work hours per week.

Many economists believe, however, that the recent productivity gains and the shrinking of the average work week are not sustainable. At some point, hours worked and payrolls will have to rise in order to meet stepped-up production schedules. As this occurs, income growth should recover, allowing households to spend more even if they are setting aside a larger fraction of their income in savings. Of course, the question is, when?

Latest Unemployment Numbers Not Encouraging

On Friday, the Labor Department reported that the US unemployment rate rose from 9.8% to 10.2% in October, the highest level since April 1983. The report noted that in October, the number of unemployed persons increased by 558,000 to 15.7 million, a record high. The largest job losses over the month were in construction, manufacturing, and retail trade.

Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points. Keep in mind that the official unemployment rate does not include those who are working part-time out of necessity, and does not include those who have given up on looking for a job.

The number of long-term unemployed, jobless for 27 weeks or more, and assumed to have given up on looking for work, was 5.6 million in October according to the latest report. The Labor Department estimates that 35.6% of unemployed persons were jobless for 27 weeks or more. Yet these people are not counted in the official unemployment rate.

The number of persons working part-time for economic reasons (sometimes referred to as "involuntary part-time workers") was 9.3 million. These individuals were working part-time because their hours had been cut back or because they were unable to find a full-time job. Here too, these people are not counted in the official unemployment rate.

If we include discouraged workers and those forced to work part-time, the unemployment rate surged to 17.5%, the highest on record.

The latest unemployment rate was considerably worse than expected. The pre-report consensus was for a rise from 9.8% in September to 9.9% in October. While many in the media have led us to believe in recent weeks that job losses were falling, the latest report clearly muzzles such optimism.

Most economists believe that the unemployment rate will continue to rise for at least a few more months. A Bloomberg survey of leading economists concludes that the unemployment rate will remain high for at least another year. The average forecast among the dozens of economists surveyed indicates that unemployment will average 9.7% for all of 2010.

If true, this is very bad news for the Obama administration and for Democrats who will be seeking re-election in 2010.

Is the World Too Bearish on the US Dollar?

There is now near-universal agreement that the US dollar will continue to fall for the foreseeable future. While not admitting to it, the Obama administration favors a weaker dollar as it is good for exports, just as the Bush administration did. The Fed is encouraging a weaker dollar by keeping short-term interest rates near zero for "an extended period."

As the dollar has fallen sharply since March, investors around the world have taken to "shorting" the dollar in various ways. Yet the US dollar is a commodity, after all, and commodities of all stripes have a way of not doing what the crowd expects. There is no way to know when the dollar will reverse higher, but when it does, it could well be explosive at least for a time.

Nouriel Roubini is a well-known professor of economics at the Stern School of Business at New York University and is chairman of RGE Monitor, an economic consulting firm. Roubini is best known for his public warnings in 2005 that we were in a housing bubble that was about to burst, and that it would lead to a financial crisis. At the time, he was called "Doctor Doom."

Last week, Roubini issued a serious warning that too many people around the world are "short" the US dollar, especially via so-called "carry trades" where investors borrow cheap dollars and then invest in other "risk assets" (stocks, etc.) that earn higher returns. Roubini believes that, at some point, the short dollar carry trade is going to blow up.

I have taken the liberty of reprinting his latest warning in the Financial Times (of London).

QUOTE:

Mother of all carry trades faces an inevitable bust

By Nouriel Roubini
November 1 2009

Since March there has been a massive rally in all sorts of risky assets - equities, oil, energy and commodity prices - a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.

The dollar and the sterling have weakened against a host of other currencies since the summer, promoting speculation that they could become the next carry trade currencies and supplant the yen as the ‘funding currency' of choice.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20 per cent annualised - as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius - even if they are just riding a huge bubble financed by a large negative cost of borrowing - as the total returns have been in the 50-70 per cent range since March.

People's sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade - you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed's policy of buying everything in sight - witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets - the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe - for now - for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest coordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate - as was seen in previous reversals, such as the yen-funded carry trade - the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a coordinated collapse of all those risky assets - equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever - its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

I titled this E-Letter "Are We Sure the Recession is Really Over" because I think this concern is still heavy on the minds of most Americans. Certainly, the latest 3Q GDP report is a welcome sign that we have turned a corner, at least for now. But as I have also pointed out above, the reported gain of 3.5% in the 3Q leaves many questions we should be concerned about.

There are still many weak spots in our economy. Most notable, the unemployment rate weakened even more than almost anyone expected in October, reaching the highest level in a quarter century, and is very likely headed even higher for a few more months at least. It will almost certainly remain high throughout 2010.

The worst of the housing and credit crisis appears to be behind us, but bank lending remains substantially below pre-crisis levels, even as short-term interest rates are at historical lows. The Fed continues to buy up toxic assets at unprecedented levels. At some point, this will have to stop and reverse itself, just as interest rates will have to be increased at some point.

The point is, while we may have emerged from the recession, there are many risks that could throw us right back into a further economic contraction in the next year or two. Nouriel Roubini's analysis just above regarding the US dollar is just one of several scenarios that could result in a "double-dip" recession in the next year or two.

As I discussed at length in my September 29 E-Letter, we are in the early stages of a commercial real estate bust that could very well be the next shoe to drop in the credit crisis. I will have a lot more to say about that next week, unless something more pressing comes about. In any event, we will be hearing a lot more about the commercial real estate problems in the weeks and months ahead.

While we all welcomed the latest GDP report, conflicted as it was, there are few indications that economic growth will continue at that rate going forward. As mentioned earlier, most estimates I am seeing on 4Q GDP growth are in the 1-2% range. Forecasts for 2010 are only marginally better.

Finally, the stock market overshoot since early March has surprised even the most optimistic forecasters. All of my most trusted sources believe that the equity markets are overbought and very susceptible to a downside correction, or worse anytime now. If Roubini's concerns about the dollar are realized, it could be much worse than a garden variety correction.

Everything I have discussed this week argues for having actively managed strategies in your investment portfolio, strategies that have the ability to move out of the markets, or hedge long positions, in case any one of the negative scenarios arises. If you agree, give us a call at 800-348-3601, or e-mail us at info@halbertwealth.com.

** If you are wondering just how bad the House healthcare reform bill that passed last Saturday is, be sure to read the link in SPECIAL ARTICLES below. It's awful!

Finally, our thoughts and prayers go out to all of the families of the innocent soldiers who were killed and injured in the tragedy at FortHood that occurred on November 5.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

What the Pelosi Health-Care Bill Really Says
http://online.wsj.com/article/SB10001424052748704795604574519671055918380.html

Dalbar Update: Investors Still Lagging The Market

Gary D. Halbert — Tue, 03 Nov 2009 23:04:00 GMT

IN THIS ISSUE:

Third Quarter GDP Surprises on the Upside
Why Investor Returns Can Trail the Market
The 2009 Dalbar QAIB Study Update
Investor Panic Leads to Poor Decisions
A Chink in Passive Investing’s Armor?
Same Study – Different Conclusions

Introduction

Since late 1994, studies have shown that many investors do not realize the same returns as the mutual funds in which they were investing. The first such study I saw back in the 1990s was one that Martin Zweig commissioned Morningstar to produce. This study analyzed cash flows in and out of stock mutual funds to see how the average investor did. I remember being surprised when I learned that over the period from 1989 through 1994, the average growth mutual fund returned 12.5% but the average investor in those funds actually lost 2.2%.

Soon, the Zweig/Morningstar study was joined by others, the most notable of which was the Quantitative Analysis of Investor Behavior (QAIB) Study conducted by Dalbar, Inc. in 1994. Dalbar confirmed that many investors were not participating in long-term mutual fund returns because of frequent switching among funds.

Until these studies were published, no one worried too much about what kind of returns investors were actually realizing. Everyone just assumed that whatever the large mutual fund firms reported as returns were what investors got. These studies, however, showed that many investors were chasing hot returns in order to get better returns. In other words, they’d jump from one hot fund to the other in hopes of increasing their return. But just the opposite occurred.

To say that these studies had a huge impact on my firm is an understatement, since they were the catalyst for the introduction of our AdvisorLink® Program back in 1995. Fortunately, Dalbar has continued to update its original study each year, and the general trend has remained the same – investors overall are not getting the kind of returns they should because of frequent switching among funds.

This week, I’m going to update you on the latest update of the Dalbar QAIB Study. It’s possible that you might see yourself in these statistics. After that, I’m going to discuss the original conclusion reached in the QAIB Study, and why we chose a different track when developing our AdvisorLink® Program.

First, however, I’m going to briefly discuss the 3Q GDP report that came out last week after my weekly E-Letter had been published. To say the least, the number surprised most analysts by coming in on the high side of economists’ forecasts. I think you’ll find both subjects to be very interesting reading, so let’s get started.

Third Quarter GDP Surprises on the Upside

Last Thursday, the Commerce Department reported that 3Q GDP rose 3.5% (annual rate). This was above pre-report estimates which averaged around 3%. The government noted that the rebound in the 3Q was led by increased consumer spending (think "cash for clunkers"), higher exports and a continued increase in federal spending.

Most analysts concluded that the better than expected 3Q GDP report confirms that the US economy came out of the recession in the July-September quarter. However, the Consumer Confidence Index unexpectedly fell sharply in October, partly due to the continued rise in unemployment, which raises questions about economic growth in the 4Q.

Finally, keep in mind that the 3Q GDP report will be revised two more times in the coming weeks, and it will not surprise me if it is revised downward, what with the unemployment rate on track to top 10% by the end of the year. And for most of us, this economy does not feel like it's growing at the rate of 3.5%.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Why Do Investors’ Returns Trail the Market?

Before going into the most recent update of the Dalbar QAIB study, it is probably worthwhile to provide some background on exactly how investor returns and fund returns can differ. I would bet that many readers just assume that investors always earn returns in line with those of the equity and bond mutual funds they hold, but this is definitely not always the case.

In a nutshell, fund returns represent what someone buying and holding a particular mutual fund would have earned over a specific time period. Returns for the “average investor,” on the other hand, factor in behavioral measures that can (and do) affect the actual returns earned by investors in these funds. Dalbar explains it this way:

“…the [QAIB] study utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. These behaviors are then used to simulate the ‘average investor.’ Based on this behavior, the analysis calculates ‘average investor return’ …”

In other words, switching among investments has an effect on the eventual return received, both on a long-term and short-term basis. Dalbar and others have found that investors who tend to hop from one hot mutual fund to another not only fail to enhance their performance over industry benchmarks, but have been shown to actually end up earning a far smaller return because of their periodic switching among funds.

Why do investors hop from fund to fund so much? The reasons vary, but my experience has been that some investors panic when losses occur and get out of the market. Others frequently change their investments to chase the hottest returns. Unfortunately, this hot performance mindset is aided by financial publications that routinely list the top five or 10 or 20 best funds for the previous year. Investors often look at their own return during the year compared with the “hot” funds, and decide to switch and get in on some of that high-powered performance.

Unfortunately, the mass migration of investors to funds with the best previous performance often guarantees that those funds will not repeat as a top performer the next year. The end result is that funds with hot performance one year often lag behind other funds in subsequent years. Thus, those investors who flocked into these funds after their best performance often find that they would have been better off had they stayed in their old funds.

So, do investors learn their lesson and look for funds with consistent long-term performance? The answer for many of them is “no,” and they continue hopping to the next hot fund and hoping for a repeat performance that seldom happens. This is what we like to call becoming a “Dalbar statistic.”

The 2009 QAIB Study Update

The 2009 update of the original QAIB Study measures performance over the 20-year period extending from January 1, 1989 through December 31, 2008. Considering that this period includes both the 2000 – 2002 and 2007 – 2008 bear markets, one might conclude that investors who frequently switch among mutual funds on their own might have had better results than those of the actual mutual funds, but you’d be wrong.

Here’s what the most recent update to the Dalbar QAIB Study found:

Over the 20 years ending December 31, 2008, equity mutual fund investors had average annual returns of only +1.87% while the S&P 500 Index averaged +8. 35% over the same time period.
Fixed income fund investors had average annual returns of +0.77% over the same 20-year period, while the benchmark Barclays Aggregate Bond Index averaged +7.43%.
Note that both the equity and fixed income fund investors’ average returns were less than inflation, which clocked in at 2.89% over this 20-year period of time.
Confirming the “lost decade” concept, Dalbar’s study showed that the S&P 500 Index had negative returns over 10, 5, 3 and 1-year time windows. Fixed income investors, however, fared better with the Barclay’s Aggregate Bond Index averaging positive returns ranging from +4.65% to +5.63% over this period of time. However, neither the average equity fund investor nor average bond fund investor beat the benchmark returns over any of the 1 to 10-year time windows.

Thus, the QAIB Study again shows that investors’ own behavior is detrimental to their long-term investment goals. Following are graphic representations of the study’s findings. The first graph shows the performance of the various benchmarks used in the QAIB Study during various time windows:

The next graph shows the performance of the average equity, fixed income and asset allocation mutual fund investor over the same time windows:

To sum it all up, many mutual fund investors have been their own worst enemies over the last 20 years. The only bright spot, if you can call it that, was a statistic showing that the average asset allocation fund investor fared better than both the S&P 500 Index benchmark and average equity fund investors in 2008, losing “only” 30%. In fact, the average asset allocation investor lost less than the average equity fund investor in most time periods. Obviously, this is a function of having both equity and fixed income mutual funds in the typical asset allocation portfolio.

However, something even more interesting is that asset allocation did not enhance performance over the long haul. Note that the average asset allocation investor had an average annual gain of only 1.67% over 20 years, versus 1.87% for the average equity mutual fund investor.

News Flash – Investors Panic in Down Markets!

Another, rather obvious finding in this year’s QAIB Study update was the fact that “When the going gets tough, investors panic.” In all previous updates of the QAIB Study, Dalbar has pointed out that investors’ emotional behavior can significantly affect their returns. However, their advice has been to simply suppress this emotional behavior and stay in the market.

This advice tends to ring hollow in bear markets like we had in 2000 – 2002 and 2007 – 2009. It’s like being on the Titanic and Dalbar saying “please remain calm and proceed in an orderly fashion to the lifeboats.” Some may heed the call, but the average passenger, like the average investor, is likely going to panic.

Thus, Dalbar has finally realized that investors engage in irrational behavior despite scholarly advice to the contrary. To illustrate this behavior, Dalbar has developed a “Guess Right Ratio” that measures how often the average equity fund investor makes an accurate investment decision based on the market environment. In other words, this ratio measures how often the average investor buys low and sells high. Over the 20-year period covered in the study, Dalbar found that “Market declines caused panic and panic led to bad decisions. And bad decisions combined with declining markets resulted in exacerbated losses.”

What I find disappointing in all of this is why it took Dalbar so long to figure out that investors won’t necessarily heed a call to ignore losses and stay invested during bear markets and major corrections. When I read the first QAIB Study back in 1995, my initial reaction was that investors need professional management because they were not likely to have the discipline to remain invested in losing markets, no matter how many times their broker tells them to “stay the course.” After only 15 years, Dalbar finally sees the light.

A Chink in Passive Investing’s Armor?

Perhaps the most surprising revelation in the 2009 QAIB update compared to all previous years is that traditional passive buy-and-hold strategies are not seen as a solution to the problem. Not only did Dalbar decide against endorsing traditional asset allocation as a solution, they actually came to the realization that such strategies don’t work. Here’s how Dalbar put it in this year’s update:

“This year’s report … also demonstrates that simply adopting a one-size-fits-all asset allocation strategy will not suffice in the new investment paradigm.” [Dalbar QAIB, Page 2] “Portfolio performance during the market meltdown of 2008 is clear evidence that the current methods are ineffective, even independent of investor behavior. Current asset allocation and diversifi-cation strategies are based on uncorrelated asset classes that in 2008 became highly correlated, thus rendering all such strategies moot.” [Dalbar QAIB, Page 11, Emphasis added]

For a while, I thought that Dalbar may have been reading my E-Letters. After all, I have been making similar observations about buy-and-hold strategies for a very long time. However, I soon learned that they are not running plays from my playbook when I began reading their new recommendations to help investors keep from being their own worst enemies.

While space does not permit me to go into detail about each of Dalbar’s recommended solutions to inferior investment returns, I’ll discuss each of them briefly below:

1. Dalbar’s first suggestion to help investors get better returns was to consider using Dollar Cost Averaging (DCA) to ease back into the market. I have written about DCA in the past in the E-Letter, and it is essentially a method of investing where you gradually invest your portfolio in increments over time. This means that you buy into the market at different price levels and are somewhat less susceptible to a major market downturn. In fact, investing during these market downturns can result in buying at bargain prices, which should be good for your portfolio in the long run.

Of course, this only works if you have moved your money to the sidelines or are making periodic contributions to a retirement plan. I think that DCA can be a good idea if you are in a 401(k) or other type of plan where you have only mutual fund options and cannot access actively managed investment strategies. Obviously, this technique is not available for anyone who is already fully invested in the market. For those investors, Dalbar had other alternatives as discussed below.

2. The second strategy that Dalbar suggested was to consider a portfolio management technique known as Purpose-Based Asset Management, or PBAM. This strategy has the benefit of being available to both investors on the sidelines and those already fully invested. That’s the good news. The bad news is that this approach is little more than buy-and-hold “lite.”

According to Dalbar, traditional asset allocation strategies often assume only one level of risk tolerance for the entire portfolio. The main premise behind PBAM is that investors actually have multiple risk tolerances depending upon the particular investment goal. Investors may be more comfortable with higher risk on investments held for longer periods, such as for retirement, than they are for investments held for shorter-term goals.

Thus, investors are encouraged to allocate assets into separate strategic “compartments” based on the ultimate goal for that part of the portfolio, and then design an asset allocation strategy based on the appropriate risk level for each compartment. The hope is that money allocated more conservatively will lose less in down markets than the more aggressive compartments, resulting in less panic on the part of the investor.

In reality, this simply means that instead of having one big asset allocation portfolio, they will have multiple small buy-and-hold portfolios that will be subject to the same limitations as any other passive asset allocation strategy. My personal opinion is that PBAM is simply a marketing gimmick that will result in little difference in overall performance or emotional decision making.

3. A final recommendation from the Dalbar report is to explore the use of leverage within portfolio holdings, both at the portfolio and individual holding level. In essence, Dalbar is acknowledging that leverage, especially in the credit markets, played a big part in the subprime meltdown and resulting credit crisis.

Since this leverage can occur in the private sector, government and international markets, Dalbar suggests that investment experts begin requiring issuers of securities to compute and disclose their true leverage. Once disclosed, Dalbar suggests that leverage should be incorporated into computer models that screen investments as well as asset allocation models.

Same Study, Very Different Conclusions

While the conclusion reached by this most recent update of the QAIB Study pretends to offer a new approach to investing, it’s really just a tweak of traditional buy-and-hold. This really isn’t all that different than the findings in prior years when Dalbar recommended investors follow buy-and-hold strategies and suppress the emotional desire to exit mutual fund investments when (not if) they begin to lose money.

I noted above that the Dalbar and Zweig studies were the catalyst for the development of my firm’s AdvisorLink® Program. Yet, AdvisorLink® is anything but a buy-and-hold investment program, so how did we get from Dalbar’s recommendation to an innovative collection of active management strategies?

It happened this way: I reported the findings of these studies in my monthly client newsletter (remember when publications were actually printed on paper?), but pretty much dismissed its applicability to my audience since most were experienced investors in my managed futures funds. Anyone sophisticated enough to invest in futures funds must be able to handle their own mutual fund investments, right?

Wrong! Imagine my surprise when a very large percentage of my futures funds’ investors responded to my newsletter saying that the Dalbar QAIB Study described their own behavior. They resoundingly supported our research into a way to keep from becoming a “Dalbar statistic.”

We then had to develop a strategy to try to get investors to avoid emotional decisions in down markets. While Dalbar suggested just saying “no” to switching among funds, we knew that investor psychology would dictate moving away from equities when the pain became too great. As a result, we took a different track in addressing investor psychology.

First, we reasoned that investors who are doing everything on their own were becoming confused with all of the conflicting information in the marketplace. We called this “information overload,” and this was just the early days of the Internet. Thus, our first principle was that investors should seek out the help of professional money managers rather than trying to do everything themselves. This helps take some of the emotion out of the equation, since a third party is responsible for investment decisions. This first principle was the genesis of our AdvisorLink® name, since we were linking investors to qualified Investment Advisors.

The next principle we adopted was that all of the strategies in our AdvisorLink® Program had to be actively managed. We saw no benefit in strategies that would stay fully invested in the face of a bear market or major correction. It just makes sense to move to cash or hedge long positions when the markets are going against you. This, too, helped to reduce the emotional impulse to sell during bad markets. We even included more aggressive programs that were able to “short” the market with the potential to actually make money during down markets.

A final principle in the establishment of our AdvisorLink® Program was that it needed to be mutual fund based. While we were aware of active money managers using individual stocks and bonds, many had minimum investments in the hundreds of thousands of dollars, and some required over a million. By concentrating on Advisors who used mutual funds, we were able to bring the advantage of professional money management to our clients at reasonable minimum investment levels.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

The Dalbar QAIB Study has been a valuable tool in educating both investors and Advisors about the dangers of emotional trading. While QAIB is instructive in showing weaknesses of the average investor’s actions, it falls short on solutions. I predict that you’ll be hearing more about Purpose-Based Asset Management in the future as this marketing gimmick catches on with brokers who want their asset allocation programs to sound like something other than what they are. Just remember that PBAM is nothing more than buy-and-hold lite.

The purpose of my short history lesson about our AdvisorLink® Program is to give you some insight as to why it is structured the way it is and why we feel it’s important to have active management represented in your portfolio. These strategies not only address the issue of investor panic and emotional trading, but also offer additional strategic diversification over buy-and-hold.

If you would like more information about AdvisorLink® or the various strategies offered within that program, you can learn more by going to our website at www.halbertwealth.com. Or, feel free to give one of our Investment Consultants a call at 800-348-3601. I think you’ll be glad you did.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

How the Economic Crisis Changed Us
http://www.parade.com/news/2009/11/01-how-the-economic-crisis-changed-us.html

Election results today could signal political trends
http://www.nytimes.com/2009/11/04/us/politics/04nagourney.html?_r=2&ref=politics

Republicans to announce alternative healthcare reform
http://online.wsj.com/article/SB125711811707721639.html

Economic Recovery vs. Rising Unemployment

Gary D. Halbert — Tue, 27 Oct 2009 21:28:00 GMT

IN THIS ISSUE:

Overview of Recent US Economic Trends
Snapshot of the Latest Economic Data
Fed's "Beige Book" Sees Modest Improvement
Unemployment: The 800-Pound Gorilla in the Room
Conclusions - Storm Clouds on the Horizon

Eyes around the world are intently focused on this Thursday's advance estimate of 3Q GDP in the US. Everyone is anxiously awaiting the report which will signal whether or not the US economy moved into positive territory in the July-September quarter. Pre-report GDP estimates are all over the board, ranging from -1% to +3% or more. I can't recall another quarterly GDP report that was this uncertain in terms of pre-report estimates than this one.

As I have reported over the last couple of months, most economic reports of late have suggested that the US economy is coming out of the recession a little sooner than many of us expected earlier this year. In the pages that follow, we will review the latest economic reports in the hopes of giving us a little more insight as to what we may learn on Thursday with the release of the 3Q "advance" GDP estimate.

While the GDP report on Thursday is generally expected to be positive, we all know that the unemployment rate continues to rise, now at 9.8%, and likely headed even higher just ahead.

While most economists concur that the jobless rate will move even higher for at least several more months, recent data paint a grim picture for the likelihood of the unemployment rate falling significantly anytime soon.

And the truth is, the real unemployment rate in the US is now at 17%, if the government reported all of the people who are out of work and those who are having to work part-time because they can't find a full-time job. This week, I will give you all of the unemployment numbers, not just the official unemployment rate which now stands at 9.8% and rising.

Finally, most forecasters believe the economy will rebound, at least modestly in 2010, and I don't disagree. Yet few are offering forecasts beyond 2010 because no one knows what will happen if President Obama doubles the national debt in the next 5+ years. All I can say is that I don't believe this liberal experiment will end pretty, and I will have more to say about it in the weeks and months ahead.

Overview of US Economic Trends

Global attention will be intently focused on Thursday's 3Q GDP report as it is widely expected to show that the US economy emerged from the worst recession since the Great Depression. As noted above, not all pre-report GDP estimates are positive, but most are as I will discuss below.

But before we get to the latest estimates for Thursday's GDP report, let's quickly review the quarterly GDP data for 2008 and the first half of 2009. Here are the official annualized numbers:

1Q 08	2Q 08	3Q 08	4Q 08	1Q 09	2Q 09
-0.7%	+1.5%	-2.7%	-5.4%	-6.4%	-0.7%

On September 30, the Commerce Department released its third and final GDP report for the 2Q, showing the economy contracted at an annual rate of -0.7%, as compared to its prior estimate of -1.0%

As you can see, the worst of the recent economic slump occurred in the last half of 2008 and the first quarter of this year as the housing/credit crisis played out. But it should also be pointed out that the US economy was already slowing down its growth rate even before the latest recession. GDP growth was only 2.7% in 2006 and 2.1% in 2007 (annual rates).

Most economists agree that apprx. 3% annualized growth in GDP represents the average rate of growth in the US economy in the post-WWII era. Periods of growth below 3% represent "below-trend" time windows, while periods above 3% indicate "above-trend" examples. Clearly, the US economy has been growing at below-trend rates for the last several years.

With that perspective, let's look at the latest economic reports.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Snapshot of the Latest Economic Data

The consensus view based on recent economic and financial data is that the US economy is coming out of the credit crisis and recession. The National Association for Business Economics (NABE) recently surveyed leading economists, and over 80% believe the recession is over and an expansion has begun, but they expect the economic recovery will be slow as worries over unemployment and high federal debt persist.

"The survey found that the vast majority of business economists believe that the recession has ended but that the economic recovery is likely to be more moderate than those typically experienced following steep declines," said NABE President-elect Lynn Reaser, chief economist at Point Loma Nazarene University.

Most of the forecasters surveyed had upgraded their economic outlook for the next several quarters, but cautioned that unemployment rates and the federal deficit are expected to remain high through the next year. On balance, the economists now expect the economy, as measured by GDP, to advance at a 2.9% pace in the second half of 2009, after falling for four straight quarters for the first time in more than 50 years. On average, they expect GDP to gain 3% in 2010. I wish I were so optimistic.

The best news in recent months has been in the Index of Leading Economic Indicators (LEI), which has long been one of my favorite economic benchmarks. The LEI has risen for six consecutive months, with a strong increase of 1.0% in September, following +0.6% in August.

The LEI rise over the last six consecutive months, alone, would suggest - with the benefit of hindsight - that the recession was coming to an end. The six-month rise in the LEI gives credence to positive forecasts for the 3Q GDP number and perhaps the 4Q as well. Beyond that, it is anyone's guess.

For the benefit of our many newer readers, the Index of Leading Economic Indicators is, for the most part, a compendium of economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices. The LEI is maintained and reported by the Conference Board (www.conference-board.org).

Consumer confidence is arguably the next major indicator of the direction of the economy, since consumer spending accounts for roughly 70% of GDP. Since rising sharply in April-May-June, the Consumer Confidence Index has gone basically sideways since then.

The other widely followed measure of consumer confidence is the University of Michigan Consumer Sentiment Index. After reaching a new recent high of 73.5 in September, the UM Consumer Sentiment Index fell to 69.4 earlier this month as announced on October 16.

Consumer spending is generally gauged by two economic reports, both of which are generated by the Commerce Department. One is the monthly retail sales report which dipped slightly in September. However, if we revise this retail sales report to exclude auto sales (which plunged last month due to the end of the "cash-for-clunkers" rebate program in August), retail sales actually increased marginally (+0.5%) in September, following a 2.2% gain in August.

The other widely followed indicator of consumer spending is the Commerce Department's "personal consumption expenditures" (PCE) measure, which is a part of the quarterly GDP reports. Americans increased PCE by 0.6% in the 1Q, only to see it decline by 0.9% in the 2Q. We will get our first look at 3Q PCE on Thursday with the latest GDP report.

Regardless of which report we use to gauge retail sales, the results are not eye-popping. Yes, consumer spending is finally on the rise in the wake of the recession, but we are far from out of the woods.

On the manufacturing front, things continue to improve at least modestly. The ISM Index basically was flat in September at 52.6. Industrial production rose 0.7% in September. The factory operating rate rose to 70.5% in September from 69.9% in August. Construction spending rose 0.8% in August (latest data available). The ISM Services Index rose to 50.9 in September, another indication that the recession may be ending.

And finally, on the housing front, there was more encouraging news last Friday. The National Association of Realtors reported that sales of existing homes rose 9.4% in September. The inventory of existing homes on the market declined slightly last month, and the decrease in home sale prices was somewhat less than was expected.

Fed's "Beige Book" Sees Modest Improvement

The Federal Reserve publishes an economic report eight times per year (roughly every six weeks) that is based on surveys conducted by the Fed's 12 regional banks that continually collect economic data within their respective regions. This periodic economic report is called the Fed's "Beige Book," and the latest report was released last Wednesday.

Basically, the latest Beige Book indicated that the US economy is continuing to improve, albeit very modestly, in most (but not all) regions of the country. The survey indicates that the economy, while gaining momentum, has yet to overcome weaknesses in bank lending and employment. According to the report, unemployment continued to rise last month in 23 US states, giving the Fed additional reasons to hold the main interest rate at a record low to stoke a recovery.

In particular, Federal Reserve district banks identified commercial real estate as the weakest part of the economy, while most saw "stabilization or modest improvements" in areas including housing and manufacturing. All 12 district banks reported a weak or declining commercial real estate market. You may recall that I wrote about the problems in commercial real estate in great detail in my September 29 E-Letter, so my readers should not be surprised.

While the latest Beige Book tried to present a guardedly optimistic outlook for continued economic recovery, it included several prominent caveats, such as: "Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered." The report also demonstrated how heavily many businesses are relying on government spending in the face of huge contractions in the private sector.

Unemployment: The 800-Pound Gorilla in the Room

It is widely estimated that over 7 million jobs have been lost since the recession began in late 2007. The unemployment rate rose to 9.8% in September, with the "official" number of job losses at 263,000 last month. That is the highest unemployment rate since June 1983.

Most forecasters expect the US unemployment rate to continue to climb until sometime in mid-2010 when the rate is expected to peak somewhere north of 10%.

As many of you know, the official Labor Department unemployment rate is quite misleading in several ways. While it is useful as an indication of the trend in the unemployment rate, it actually understates the real percentage of Americans who are out of work.

The official unemployment rate that is announced every month does not include: 1) workers who have had to settle for part-time jobs because they can't find full-time jobs; and 2) Americans who have given up looking for a job.

If laid-off workers who have settled for part-time work or have given up looking for new jobs are included, the true unemployment rate rose to 17% in September. Here is the actual data from the Labor Department:

Table A-12.

Alternative measures of labor underutilization
Seasonally adjusted rates as of September 2009:

U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force	5.4%
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force	6.8%
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)	9.8%
U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers	10.2%
U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers	11.1%
U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers	17.0%
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. For more information, see "BLS introduces new range of alternative unemployment measures," in the October 1995 issue of the Monthly Labor Review. Updated population controls are introduced annually with the release of January data. (Source: Bureau of Labor Statistics Economic News Release - October 2, 2009)

All told, 15.1 million Americans (17%) are now out of work, the Department said. And an estimated 7.2 million jobs have been eliminated since the recession began in December 2007.

The Labor Department said 571,000 of the unemployed dropped out of the work force last month, presumably out of frustration over the lack of jobs. That sent the so-called "participation rate," or the percentage of the population either not working or looking for work, to a 23-year low. The unemployment rate would have topped 10% if the labor force hadn't shrunk again in September.

Older, laid-off workers are dropping out and requesting Social Security at a faster-than-expected pace, according to government officials. The Social Security Administration reported earlier this month that applications for retirement benefits are 23% higher than last year, while disability claims have risen by about 20%.

Meanwhile, the number of people out of work for six months or longer jumped to a record 5.4 million in September, and they now make up almost 36% of the unemployed, also a record. Making matters worse, weekly wages fell $1.54 to $616.11 in September, according to the Labor Department. Also, the average hourly work week fell back to a record low of 33 hours in September.

Unemployment to Remain High for Years to Come,
Even if the Economic Recovery Gets Stronger

With the unemployment rate so much higher than most expected, and headed higher still, more and more analysts are trying to determine how much job creation will be required to bring us down to 5% unemployment. Many economists and analysts consider that 5% unemployment is the equivalent of "full employment," since there will always be some percentage of the working population that is unemployed at any given time.

The job creation numbers required to get us from the current 9.8% unemployment to 5% unemployment, at this point, are simply staggering. And they are likely to get even worse, since we are likely headed for at least 10% unemployment in the months ahead.

As noted above, well over seven million jobs have been eliminated since late 2007. Most economists agree that most of these jobs have been eliminated permanently. Also as noted above, there are now 15.1 million Americans (17%) who were out of work, or forced to work part-time, as of the end of September.

In addition to the 15.1 million Americans who are out of work, most economists agree that apprx. 1 million new people enter the US job market every year (high school and college grads, legal immigrants, etc.). So not only does the economy need to grow by enough to re-employ 15 million unemployed, it also must create another 1 million jobs each year to provide for new entrants to the labor force.

With 15 million out of work already, and with the labor force expanding by more than 1 million new workers annually, economists Joseph Seneca and James Hughes of Rutgers estimate that even the robust job growth of the 1990s (2.4 million new jobs a year) wouldn't reduce today's 9.8% unemployment to 5% until 2017.

We increasingly hear about the so-called "jobless recovery" that we are likely facing. With the economy still losing over 250,000 jobs per month, it is a real stretch to assume that we will get anywhere near the 1990s pace of adding an average of 200,000 jobs per month (2.4 million annually). For example, the Business Roundtable, a group of CEOs from large corporations, said earlier this month that only 13% of its members expect to increase hiring over the next six months.

As these numbers continue to sink in, we are hearing new calls for more federal aid to state governments, a further extension of unemployment insurance (now up to 79 weeks) and a tax credit for companies that create new jobs. One such proposal would give employers a $7,000 tax credit for each additional worker hired (over some base period).

The W.E. Upjohn Institute for Employment Research thinks such a credit might create two million jobs. Sounds good on paper, perhaps, but the budgetary cost to the government would likely be $40 billion annually or higher.

As you will likely recall, President Obama rammed through his massive $787 billion "stimulus package" back in February, largely on the promise that it would create jobs. What he didn't tell us was that most of the money would not be spent this year, and that much of the money would go for pork-barrel spending programs over the next few years that won't create large numbers of jobs in the first place.

Supporters of the stimulus argue that without it, unemployment would be even worse than it is now and suggest that the stimulus spending in 2010 and 2011 will boost the economic recovery significantly. That remains to be seen, of course. I tend to doubt it.

Conclusions - Storm Clouds on the Horizon

Economic and financial reports continue to support the idea that we have seen the worst of the economic recession and the credit crisis, as I have suggested in recent weeks. Most estimates suggest that the economy, as measured by GDP, will show a positive number for the first time in over a year with this Thursday's advance 3Q GDP report.

Pre-report estimates are all over the board, and some analysts believe the report could show 3Q growth of 3% or more. Of course, we must all keep in mind that year-over-year comparisons of 3Q 2009 to last year's 3Q should make this year look pretty darned good in any event.

But the bigger problem is that unemployment continues to rise and is likely to do so until at least sometime in the first half of 2010, reaching well over 10% in the official number. As I have explained in detail above, the official unemployment rate significantly understates the real unemployment rate, which is now at 17%, as admitted by the Labor Department.

Despite the continuing unemployment trend, most forecasters believe that the US economy came out of the recession in the 3Q. Likewise, most mainstream forecasters believe that 2010 will be a year with at least modestly higher growth rates. Most estimates I read suggest the US economy will grow by 1.5%-3% in GDP next year. That remains to be seen, however.

Yet the most interesting thing for me is that we are seeing very few forecasts for 2011 and beyond. Usually, forecasters are more than happy to provide multi-year economic projections, so why not now? The reason is, in my opinion, that no one has a clue what the long-term effects will be as a result of President Obama's plans to run trillion-dollar deficits for the next several years at least and double the national debt in possibly the next five years.

The US dollar continues to fall as I discussed in detail last week. While I don't believe the dollar will be replaced as the world's "reserve currency" in the near-term, the long-term prospects for the dollar are questionable at best, especially if Obama doubles the national debt over the next 5-plus years. At some point, foreigners who buy our massive debt may decide to stop buying dollars, or worst case, begin to unload dollars.

If that were to happen, the implications for the US financial markets would be enormous. That could cause a financial crisis that dwarfs the one we've just been through. Maybe we do see an economic recovery in 2010 as most economists predict. But I want to go on record in predicting a "double-dip recession" in 2011 and perhaps beyond, especially if the dollar accelerates its decline. Space does not allow me to go into my reasons for this prediction this week, but I will be writing more about it in the weeks and months ahead.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Stocks Up 60% - Now What?

If the current troubling economic forecast doesn't call for a defensive investment approach, I don't know what does. Stocks have exploded since the March lows, with the S&P 500 Index up almost 60%. Now, more than ever, you may want to consider active management strategies that can move to cash or hedge long positions should stocks switch direction just ahead.

We recently sponsored live webinars featuring two of our recommended Investment Advisors. The overwhelming response we received shows us that investors are beginning to realize that the market can't continue to go up forever, and that market euphoria will run into economic reality at some point.

Increasingly, sophisticated investors are increasingly turning to professional money managers that can take advantage of whatever remains of the stock market upside, but that also have the ability to move to cash, or hedge long positions, when the current bull market rally plays out.

Fortunately, we recorded both of these webinars and have placed them on our website. I urge you to check out both the Potomac Fund Management and Niemann Capital Management webinars. Both of these Advisors have actual track records going back well over a decade, so they are not recent entrants in the field of active money management. Click on the following links to learn more about how these professional money managers add value to their clients' investments.

Potomac Fund Management Webinar

Niemann Capital Management Webinar

If you would like to discuss either of these managers, or learn more about our other actively managed investment programs, feel free to call one of our Investment Consultants at 800-348-3601 or send an e-mail to info@halbertwealth.com. We look forward to hearing from you!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Why Government Health Care Keeps Falling in the Polls
http://online.wsj.com/article/SB10001424052748704335904574495131591949574.html

Is the healthcare "public option" really back?
http://www.realclearpolitics.com/articles/2009/10/27/if_public_option_is_really_back_why_such_a_heavy_lift_98890.html

The Dethroning of King Dollar (an interesting read)
http://www.weeklystandard.com/Content/Public/Articles/000/000/017/124jwyuq.asp?pg=1

The Economy & the Commercial Real Estate Bust

Gary D. Halbert — Wed, 30 Sep 2009 00:43:00 GMT

In This Issue:

The Economy Continues to Improve Slowly
Plunge in Commercial Real Estate Values
More Trouble Ahead for the Banks
Glut of Commercial Mortgage-Backed Securities
Personal: Thinking Wrong, But Getting It Right

Introduction

There is broad agreement that we have seen the worst of the recession, and that GDP will show a positive gain for the 3Q when we get the first government estimate in late October. Most pre-report GDP estimates I have seen are in the +2 to +3% range for the 3Q. The actual number remains to be seen, of course.

There is also a growing agreement that we have seen the worst of the housing bust, as sales of new and existing homes rose briskly for the four months ended in July; however sales of existing homes unexpectedly fell slightly in August as reported last week.

Yet while the economy appears to be on the mend, at least for a while, and the housing market seems to be recovering, there is another serious threat to the economy and the credit markets just ahead - the continuing commercial real estate bust which is still getting worse.

This week, we will take a brief look at the latest economic reports, most of which are encouraging, and then I will summarize the very troubling situation in US commercial real estate. This problem has led numerous analysts to predict that the commercial real estate may well be the next shoe to drop in the credit crunch.

The Economy Continues to Improve Slowly

As noted above, most forecasters believe the US economy has expanded at healthy rate in the 3Q which officially ends tomorrow. If so, that will be a welcome relief following GDP declines of -6.4% in the 1Q and -1.0% (annual rates) in the 2Q.

The Index of Leading Economic Indicators (LEI) rose 0.6% in August, marketing the sixth consecutive monthly increase. This is perhaps our best indication that growth in the 3Q and the 4Q will be positive and could surprise on the upside, which is not surprising following the worst recession since the Great Depression.

Most analysts that I follow closely believe, however, that the economic recovery in 2010 will be rather anemic with GDP growth at or below 3% on average. Such estimates could prove too rosy, depending on what happens in the huge commercial real estate sector (details to follow).

Consumer confidence improved significantly in August after falling slightly in June and July. The Consumer Confidence Index rose to its highest level (54.1) since the recession began. The improvement continued into September with the University of Michigan Consumer Sentiment Index climbing to a new recent high of 70.2.

Higher confidence resulted in a nice rise in retail sales in August, up 2.7%. Unfortunately, durable goods orders, which were expected to have risen in August, fell 2.7% last month, following the big increase of 4.8% in July.

On the manufacturing front, the ISM Index rose to 54.1 in August, up from a revised 47.4 in July. Industrial production rose 0.8% in August, following a 1.3% gain in July. Factory orders were up 1.3% in July (latest data available). The factory operating rate rose to 69.6% in August.

As noted above, existing home sales dipped slightly in August following four consecutive monthly increases. New home sales in August were up fractionally (0.7%), well below expectations, following the 9.6% jump in July, the highest in almost a year.

Of course, any analysis of the overall economy would be remiss not to point out that, while things are improving on most fronts, the unemployment rate continues to rise - up to 9.7% in August from 9.4% in July - and will almost certainly continue higher for several more months at least.

Overall, it appears clear that the recession will end this year, and it is quite possible that we will see positive growth in GDP in the 3Q and 4Q. Most of the estimates I read for the 2Q are in the +2-3% range; most of the guesses I read for the 4Q are in the +3-4% range, which remains to be seen, especially in light of the potentially dangerous situation in the commercial real estate markets.

Plunge in Commercial Real Estate Values

US commercial real estate, valued at some $3.5 trillion, has experienced a 39% decline in prices on average from the peak in late 2007, according to the MITCenter for Real Estate.

This current drop is considerably worse than the 27% commercial real estate decline associated with the savings and loan crisis of the late '80s and early '90s. You will recall that the S&L crisis precipitated the government-run Resolution Trust Corporation and the resulting seizures and auctions of hundreds S&Ls around the country.

The same conditions that caused the residential housing bubble, including the Fed's easy credit, lax lending standards and booming mortgage-backed securities underwriting on Wall Street, also drove commercial real estate overvaluation.

Recently, MIT reported that commercial real estate prices plunged 18% in the second quarter, which was the largest quarterly drop in the 25 years since MIT first published its Commercial Real Estate Price Index. MIT also reports that most commercial properties bought or refinanced in the last five years are now upside down on their loans, with current property prices having fallen below the finance or purchase price. Real Capital Analytics reports that owners have lost their entire down payments on about $1.3 trillion worth of property.

According to several sources, nearly half of all the commercial real estate mortgage loans in the US are coming due within the next five years. Deutsche Bank, for example, believes that 65% or more of these loans will fail to qualify for refinancing. Existing high vacancy rates will continue or worsen as long as the unemployment rate continues to rise.

We are hearing more and more talk about the plunge in commercial real estate values these days because commercial real estate value trends tend to lag the overall economy. There are many reasons for this - too many in fact that it is impossible to cover them in this short space.

Susan Smith, who is the director of PricewaterhouseCoopers' real estate advisory practice notes: "The biggest problem is that commercial real estate lags what happens in the economy. Companies are looking for ways to cut costs, many are continuing to reduce workers and are continuing to reduce their space needs." As a result, commercial rental rates have taken a nosedive in most markets.

Ms. Smith and her team at PricewaterhouseCoopers conduct surveys each year of the commercial real estate market, and their latest survey concludes that the rise in vacancy rates and the plunge in rental rate are far from over and may well extend into 2011. Office rents in New York and San Francisco may drop 20% in 2010 alone, the survey found.

The National Association of Realtors projects that retail vacancy rates will increase from 11.7% in the 2Q of 2009 to at least 12.9% in the same period of 2010, the highest vacancy rates since 1991. Likewise, NAR projects that office building vacancy rates will rise from 15.5% to at least 18.8% by this time next year.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

More Trouble Ahead for the Banks

All of the above suggests the following: many of the banks that made commercial real estate have only realized a fraction of their losses. And as those losses continue to mount, we're likely to see more and more bank failures. Commercial real estate loans are not just concentrated among the nations largest banks; these loans are widely made by regional banks and even smaller banks.

Of the largest banks, San Francisco-based Wells Fargo has the largest share of the apprx. $3.5 trillion commercial debt securities, reportedly with 16.5% of its $821 billion loan portfolio invested. JPMorgan Chase is reportedly a distant second with 5.4% of its portfolio invested in commercial loans, followed by Citigroup with 3.4%.

However, smaller banks - 92 of which have already folded this year as of mid-September, according to the FDIC, compared to 25 last year - are even more at risk because they will likely have a harder time accessing the crucial capital to offset rising defaults on commercial real estate loans, according to the TARP-inspired Congressional Oversight Panel's August Oversight Report. The Oversight Panel noted:

"Unlike large banks that can sustain a certain number of defaults, even of large commercial loans, smaller banks may have far more difficulty in absorbing more than a few large loan losses. The FDIC's statement that ‘banks have been able to raise capital without having to sell bad assets through the LLP' may not reflect the reality for these banks."

Indeed, the number of smaller banks expected to be seized by the FDIC is forecast to accelerate later this year and next year. The FDIC's "problem list," of banks that run a higher risk of failure, grew to 416 in the 2Q, up from 305 in the 1Q. That's the highest number since the 2Q of 1994, following the S&L crisis, when there were 434 banks on the list.

As noted above, the S&L crisis resulted in a 27% decline in commercial real estate around the country. This time around the losses are even greater (39% so far) because the apprx. $3.5 trillion is over three times what it was during the early 1990s - meaning the potential for losses is steeper than ever before.

Glut of Commercial Mortgage-Backed Securities

Federal Reserve and Treasury officials are scrambling to prevent the commercial real estate sector from delivering another knockout punch to the US economy just as it struggles to get up off the mat. Yet their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. These loans are known as Commercial Mortgage-Backed Securities (CMBS).

As discussed above, many US banks have high exposure to commercial real estate debt that they initiated through their own internal loans. In addition, many banks also bought CMBS and now have additional default risks that I will discuss in more detail as we go along.

Similar mortgage-backed securities (Sub-prime, Alt A, etc.) created out of home loans played a huge role in undoing that sector and triggering the global economic recession and credit crisis. Most sources estimate that there is around $700-$900 billion of CMBS outstanding at this time. These complicated products are being tested for the first time by the massive downturn real estate values discussed above, and so far the outcome so far hasn't been pretty.

A typical CMBS is stuffed with mortgages on a diverse group of properties, often fewer than 100, with loans ranging from a couple of million dollars to more than $100 million. A CMBS servicer, which is usually a large financial institution like Wells Fargo or JPMorgan Chase, collects monthly payments from the borrowers and passes the money on to the institutional investors that buy the securities.

The CMBS sector is suffering from two major problems, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is major problem is that many of these mortgages were simply poorly underwritten. In the era of looser credit in recent years, Wall Street's CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren't generating enough cash to make principal and interest payments.

The other major problem is the growing inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Unfortunately, other sources estimate that twice that many CMBS loans will come due between now and 2012; and double the amount that will be difficult or impossible to refinance.

Even though the cash flows of many of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS - including hedge funds, pension funds, mutual funds and other financial institutions - thus exacerbating the economic downturn.

Many banks that hold traditional commercial real estate loans have chosen to extend the maturities and/or renegotiate the terms (this is one reason we haven't heard too much about it until recently). Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.

Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Unfortunately, CMBS are held by scores of investors, and the servicers of CMBS loans have limited flexibility to extend or restructure troubled loans like banks do.

Mounting foreclosures in the CMBS sector will likely depress values even further as property is dumped on the market. And this, in turn, will likely put pressure on banks to write down the myriad of commercial loans on their books, thereby exacerbating the problem.

The $64 Question: Why Are Bank Stocks Soaring?

At this point, the logical question to ask is, how is it that we have this enormous commercial debt problem, yet bank stocks have been on a tear for the last couple of months? Frankly, I think most bank shares are wildly overbought at this point, but then I'm not a stock picker.

Some of the largest US-based multinational banks saw their share prices plunge to the level of "penny stocks" over the last year. CitiGroup at one point fell to below $1 per share (97¢) on March 5. Yet shares of these mega-banks have rebounded significantly in recent months, albeit from the lowest levels ever recorded for many of the largest banks. In other words, they were due for a significant rebound.

Another reason the large money center banks have seen their shares soar is the widespread belief that President Obama will not allow any of the major financial institutions fail on his watch. The turmoil that erupted after the Lehman failure will not be allowed to happen again, so investors have more confidence in the large bank stocks. The recent spike in bank stocks has also helped the regional bank stocks which, in most cases have seen their share prices rise as well.

None of this, however, makes the commercial real estate debt problem go away, and it will get worse before it gets better. There is virtually no market for CMBS. Potentially hundreds of billions in commercial mortgage loans will not be able to be refinanced over the next couple of years. I fully expect this to weigh heavily on the banks - small and large - in the weeks and months ahead.

If I had very large profits in banks stocks over the last 2-3 months, I would be taking money off the table. But again, I'm not a stock picker.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Thinking Wrong, But Getting It Right

If you have been reading this E-Letter all year, you know that my calls on the economy and the stock market have been off the mark for the most part. Earlier this year, I expected the economy would remain in negative GDP territory all year and not recover until sometime next year. I expected consumer confidence to stay in the dumps pretty much all year.

Despite my forecast, the economy did begin to rebound during the summer, and it now looks reasonable to expect positive growth in the 3Q and 4Q, assuming there are no more big negative surprises. Just how negative the commercial real estate debt problem will be remains to be seen.

In a similar vein, I did not see the recent surge in the stock markets coming. Of course, I don't know anyone else who predicted stocks would spike 50% higher back in March either. Back in early March when the Dow had literally collapsed to 6500, I did feel that the panic was probably over. Yet I never would have imagined that the Dow and other major market indexes would soar over 50% in relatively short order. But they have.

I openly admit to those misgivings to make the following point. I don't manage any of my own money that is in the stock market or in bonds. I haven't made a personal trade in years. I figured out a long time ago that I am too emotional to do it myself.

If I had been managing my own money in stocks or mutual funds, I would probably have bailed out sometime late last year or early this year, as millions of investors did. Given my views of the economy and the stock markets earlier this year, I can all but assure you I would not have jumped back in when the markets turned up in late March and April.

I would still be on the sidelines like millions of other investors, and I would have missed out on the huge gains that followed. By the way, estimates are that there is still $3-$4 trillion in money that bailed out that is still sitting on the sidelines in money market funds, T-bills, etc.

But since almost all of the money I have in the stock markets is managed by professionals, I have been able to participate in this recovery.

If you have read these letters for long, you know that my firm is in the business of finding successful professional money managers to recommend to our clients. As a long-time critic of Wall Street's "buy-and-hold" mantra, I have always preferred "active" or "tactical" money management strategies that have the ability to move to cash (money market) or "hedge" long positions during down periods.

The reality is that my equity managers lost far less than the market during the bear market that began in late 2007, and they have been able to participate in the bull market that began earlier this year. (As always, past performance is no guarantee of future returns.)

My goal has always been to avoid the 40-50% losses that often occur during bear markets. Remember, if you lose 50%, you must make 100% just to get back to breakeven.

If avoiding big losses is a big concern to you, then maybe it's time to checkout some of the active managers I recommend. Hopefully, you read my E-Letter two weeks ago on the Columbus High-Yield Bond Program.

Please feel free to give one of our Investment Consultants a call at 800-348-3601 or click on the following link to complete one of our online request forms. If more convenient, drop us an e-mail at info@halbertwealth.com or visit our website at www.halbertwealth.com to learn more about our actively managed investment strategies.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Healthcare: Doubling Down on a Flawed Model (read this)
http://online.wsj.com/article/SB10001424052970204488304574426872264215790.html

On the Economy & Obama's Trillions

Gary D. Halbert — Tue, 08 Sep 2009 20:33:00 GMT

IN THIS ISSUE:

The Economy - More Signs of Recovery
Is the Recession & Credit Crisis Over?
Obama Adds $2 Trillion to Debt Forecast
Economic Assumptions Still Too Optimistic
What in the World Are They Thinking?
Do They Want Control Even If It Ruins The Economy?

Introduction

In my June 16 E-Letter, I reprinted the non-partisan Congressional Budget Office's (CBO) projections of annual federal budget deficits over the period from fiscal 2009 to fiscal 2019, which estimated that the national debt will more than double over that 11-year period - not including over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over the next decade.

The White House Office of Management & Budget (OMB), which is partisan, runs budget deficit projections similar to those of the CBO. The OMB's deficit projections over the same period, 2009-2019, showed the national debt increasing over $2 trillion less than the CBO's forecast of $11.11 trillion. However, on Friday, August 21, the White House quietly announced that the OMB had revised upward its deficit projections to fall in line with the CBO's. So, it's official.

The only good news on the deficit front is that both the CBO and the OMB recently revised downward the fiscal 2009 budget deficit, which closes out at the end of September, from the earlier reported $1.8+ trillion to around "only" $1.6 trillion. Time to break out the bubbly, right? Wrong! We will look at the latest deficit projections as we go along, but the problem is still the same; Obama seems intent on spending this country into financial ruin.

But first, there is more good news on the economic front. More and more forecasters now believe that GDP has moved into positive territory in the 3Q, and perhaps it has. Unfortunately, we don't get our first 3Q GDP estimate until the end of October. The latest GDP estimate for the 2Q was unchanged at -1.0%, which was better than expected. I will cover the latest encouraging (and not so encouraging) economic news just below.

The Economy - More Signs of Recovery

We have seen considerably more positive signs than negative over the last month. Let's begin with the ISM manufacturing index which rose sharply to 52.9 in August, up from 43.4 in July. It is the highest reading since June 2007. A reading above 50 in the ISM index indicates that the economy is recovering. The ISM "new orders" index jumped 9.6% in August to 64.9, which confirms that inventory rebuilding is intensifying, albeit from very depressed levels.

Durable goods orders jumped 4.9% in July (latest data available) following -1.3% in June. Industrial production increased 0.5% in the same period. The factory operating rate also increased modestly in July. Construction spending, however, was still down slightly in July.

The Index of Leading Economic Indicators rose for the fourth consecutive month in July (latest data available) with a rise of 0.6% following a gain of 0.8% in June. Four consecutive up months in the LEI is quite encouraging, indicating that the worst of the recession is likely behind us, and the economy may move into positive territory before year-end.

The Consumer Confidence Index bounced back in August to 54.1 versus 47.4 in July. After rising sharply in the spring, the Index drifted lower in June and July so the latest recovery was welcomed. The University of Michigan Consumer Sentiment Index also closed out higher at the end of August.

Unfortunately, the rise in consumer confidence that began in the spring has not translated into significantly higher consumer spending. Retail sales in July fell 0.1%. Personal consumption expenditures, another measure of consumer spending, were up only 0.2% in July. Most Americans are still very concerned about the economy, and many are choosing to save rather than spend. The Commerce Department reports that the personal savings rate rose to 5% of disposable income in the 2Q, the highest rate in over a decade.

On the housing front, there was some good news in the last month. Pending home sales rose 3.2% in July following a gain of 3.6% in June. Actual sales of existing homes rose 7.2% in July to an annual rate of 5.24 million units. Sales of new homes rose 9.6% in July, the largest monthly gain since February 2005. Much of the increase in home sales in recent months is attributed to the up to $8,000 in tax incentives for first-time home buyers; yet no one knows what will happen when this stimulus program ends later this year.

The Labor Department announced last Friday that the US unemployment rate jumped to 9.7% in August, up from 9.4% in July, and above pre-report expectations. In August, the official number of unemployed persons increased by 216,000. The Labor Dept. also reported that there are now 14.9 million unemployed Americans, and this number is likely headed even higher in the months ahead.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Is the Recession & Credit Crisis Over?

In the 30 years that I have been writing about the markets and the economy, a "recession" has consistently been defined as two or more consecutive quarters of negative growth in GDP (or GNP back in the old days). Likewise, two consecutive positive quarters meant that the recession was over. Be that as it may, if the initial GDP report for the 3Q is even mildly positive (which we won't get until the end of October), you're going to hear virtually everyone declare that the recession is over - whether or not that proves to be the case.

While I remain a bit skeptical, most of my trusted sources believe at this point that 3Q GDP will be at least mildly positive, and that the 4Q will be as well, in large part due to inventory rebuilding. But most of these same sources are not predicting a strong recovery in the economy. Some believe that there is still a real chance that we will slip back into recession in late 2010 or 2011, especially if consumers continue to save rather than spend.

As for the credit crisis, I think it is fair to say that it is no longer a crisis. But as anyone who is trying to get credit for a business knows, the banks are still not lending remotely as they were before the subprime blowup occurred. New lines of credit are few and far between. Many banks still have too many bad loans on their books, so they're not looking for new ones.

According to the FDIC, 84 US banks have failed so far in 2009, a record pace. So while it may be safe to say that the credit "crisis" is over, we are still far from being out of the woods. There are now 416 banks on the FDIC's "problem list" (up from 305 in March), so there will continue to be multiple bank failures every month for some time to come.

Then there's the 800-pound gorilla in the room - the Fed. At some point, the Fed will have to unload the $2+ trillion in questionable securities and toxic assets on its balance sheet. The Fed can't continue to print money ("quantitative easing") indefinitely; likewise, it will have to shrink the money supply at some point; and finally, short and medium-term interest rates will have to be allowed to rise somewhere down the road, especially if the economy rebounds.

Obviously, no one short of Ben Bernanke knows when this will happen. My best sources believe that because of the deflationary forces created by deleveraging, the Fed has at least a year to maintain its current stimulative policies without risking higher inflation. Similarly, they believe the Fed can wait a year or so before having to begin unloading assets and trim its balance sheet.

Virtually, everyone I read in the financial/investment world agrees that the Fed faces a daunting challenge when the time comes to unload these assets. This problem, above all, will continue to hold the threat of a double-dip recession over the economy and the markets. We all need to keep this in mind even if the economy goes positive for a few quarters.

Obama Adds $2 Trillion to Debt Forecast

2009	$1.845	trillion	2015	$785	billion
2010	$1.379	trillion	2016	$895	billion
2011	$970	billion	2017	$945	billion
2012	$658	billion	2018	$1.023	trillion
2013	$672	billion	2019	$1.189	trillion
2014	$749	billion

TOTAL $11.11 Trillion

As noted in the Introduction, both the CBO and the White House Office of Management & Budget (OMB) recently reduced the budget deficit forecast for fiscal 2009 from the $1.845 trillion noted in the table above to apprx. $1.6 trillion. So, the $11.11 trillion shown above would now be reduced to apprx. $10.87 trillion (if the latest projections prove to be correct).

Note that this astronomical amount does not include over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over next decade as the Baby Boomers retire. Nor does it include the existing national debt of $11.7 trillion. The $10.87 trillion is merely the sum of annual budget deficits over the 11 years from 2009 to 2019.

Given that September is the end of fiscal 2009, the talk is now focused on record budget deficits for the 10 years from 2010 to 2019. Never mind that the 2009 deficit will be apprx. $1.6 trillion, almost four times larger than our previous worst deficit in history, which was $438 billion in fiscal 2008 under President Bush.

If you take out the $1.845 trillion 2009 deficit from the table above, the CBO deficit estimate for 2010-2019 is $9.02 trillion. This is $9 trillion that we will add to the national debt over the next 10 years, based on Obama's budget projections. Yet for months now, the Obama administration has taken flack because its own OMB has maintained that the 2010-2019 deficits would only total apprx. $7 trillion. But that has recently changed.

Now if you're the President of the United States, and you have some news that is not flattering to release to the public (especially in a recession), you might decide to quietly release that news at the end of the day on a Friday, and hope that it doesn't get much play on the weekend news shows. That is exactly what happened on Friday, August 21.

At the end of the day on Friday, August 21, a senior White House official announced that the Office of Management & Budget had revised its deficit forecasts for 2010-2019 from $7 trillion to apprx. $9 trillion. At long last, that puts Obama's forecast in line with the CBO's forecast.

Obama Administration officials acknowledged that they relied on overly optimistic assumptions about the economy when they forecast in March that President Barack Obama's budget plans would generate deficits of $7.1 trillion over the next 10 years. After factoring in the severity of the recession and the prospect of a more sluggish recovery, the White House concluded that the budget outlook is significantly worse and revised the 10-year tally of deficits to $9.05 trillion.

Some in the media welcomed the presumably more accurate deficit forecast; some even went so far as to note that such huge spending will be just fine, such as liberal commentator Paul Krugman of the New York Times. Others, however, were quite critical and seriously questioned how the Obama Administration could have been off by $2 trillion in its forecast.

The conservative Weekly Standard published a scathing article on August 31. Here are some excerpts:

"What's $2 Trillion Among Friends?

$2,000,000,000,000. That's the amount by which the Obama administration raised its ten-year estimate of the nation's budget deficit from the one it made only a few months ago. Now, $2 trillion is a lot of money. But even more significant is the fact that this revision represents almost a 30 percent increase -- no tiny percentage of the earlier $7 trillion figure. It seems that expenses are higher -- up 24 percent this year, the largest increase since the height of the Korean War -- than originally estimated, and revenues are lower. The resulting deficit, says Peter Orszag, Obama's budget director, is ‘higher than desirable'. He might have added that the administration's critics had it right when they claimed that the earlier estimate represented a turn around the dance floor with that old seductress, Rosy Scenario.

There's worse: the new estimate assumes that Medicare and Medicaid spending will be cut by $622 billion, even though Congress has made it known that it is reluctant to make any such cut. Then there is the $600 billion in revenue included for the sale of [carbon] emission permits, despite the fact that the House has given away so many permits in order to buy support for the cap-and-trade emission-reduction that the program will produce at most $450 billion. Those two items alone come to almost another trillion dollars in red ink. Throw in another trillion-plus for Obamacare, and it is no surprise that senior economist Bill Gale, at the liberal Brookings Institute, says that the deficit will hit over $10 trillion over the next decade, a figure he finds ‘deeply alarming'.

This year, the deficit will come to 11.2 percent of GDP, and by 2019 the [national] debt will be equal to 76 percent of the [projected] value of the nation's output of goods and services, almost double the 41 percent when Obama took control of the nation's finances. No problem, say White House economists. Unsustainable, says Warren Buffett, among others."

Economic Assumptions Still Too Optimistic

Warren Buffet is absolutely correct. Whether it's $7 trillion or $9 trillion, it's way too much and unsustainable. Over the next five years alone, 2010-2014, the debt swells by $4.5 trillion. In fact, these projections could actually be too low based on the economic forecasts used in the projections. I should point out that this is not just an Obama phenomenon. White House budgets, whoever was president, have been laced with optimism, and no president has forecast a recession in these 10-year projections.

(By the way, all presidential administrations produce these 10-year forecasts on spending, revenues and the budget deficits/surpluses, even though they won't be in office 10 years from now.)

Consider the latest OMB projections for growth in GDP in the next several years in real terms, exclusive of inflation. The White House projects that GDP will grow by 3.8% in 2011 and climb above 4% a year for the next three years, followed by two years above 3%. This is far higher than historical norms; the economy has not seen such a period of growth since the 1960s.

And we can almost be assured of at least one more recession, if not two, over the next 10 years, what with the government running massive deficits every single year. Remember, the Fed will have to unload some $2 trillion in troubled assets at some point in the next few years. And, most forecasters agree that at some point, foreigners are going to curtail US dollar purchases, which will likely drive interest rates higher, at the least, or a currency crisis at the worst.

Excessive Obama optimism is not limited to economic growth. Despite the enormous monetary stimulus pumped out by the Federal Reserve in 2008-2009, bank credit that is widely regarded as potentially inflationary, the Obama administration assumes that inflation will actually decline from 2.1% in 2008 to 1.5% in 2009 and then to 1.3% in 2010 and 2011, and not rise above 1.8% through 2019. While it is true that inflation is declining now, thanks largely to the big drop in energy prices over the last year, we are almost certain to see higher inflation down the road.

What in the World Are They Thinking?

Most Americans that keep up with the economy and rising government spending, even remotely, are very alarmed about the exploding debt that President Obama has proposed for the next decade. Many of us wonder, what in the world could they be thinking? Do they want to purposely wreck the US economy? Frankly, I'm beginning to think so, as I will discuss later on.

Here is a snapshot of how many liberals on the left think about the perpetual rise in government spending and exploding deficits over the next decade. What follows is an August 23 editorial in the New York Times by liberal commentator Paul Krugman. He boldly attempts to explain why Obama's massive spending and deficits won't be a problem. He is wrong, of course, and I have inserted many bracketed words to help his column be more readable. I will elaborate afterward:

"How big is $9 trillion?

There's been some hysteria [no kidding] about the [Obama] administration's new estimate that the cumulative deficit will be $9 trillion over the next decade. Don't get me wrong: this is bad. But it's being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn't. [really?]

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion [annually]. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we're talking about adding debt that's equal to around 40% of GDP [this figure is bogus - see comments below].

Right now, even if we do run these [trillion dollar annual] deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s. (There are some technical issues in comparing these various numbers — gross debt versus net (mainly about Social Security) and overall government debt versus federal, but they don't change the basic picture.)

Again, the debt outlook is bad. But we're not looking at something inconceivable, impossible to deal with; we're looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with."

Wow! So record trillion dollar deficits don't matter, Mr. Krugman? There are so many ways to debunk this article, I almost don't know where to start. Let's first look at Krugman's most egregious misrepresentation. In the second paragraph, he states that the $9 trillion in new debt will be only 40% of GDP by 2019. What he fails to note is that we already have $11.7 trillion in national debt today. If we add another $9 trillion, the debt will be $20.7 trillion - or 94% of GDP - by 2019!! Nice try, Mr. Krugman.

Second, it's a lame attempt to compare the economy today with the period just after World War II. We had the most robust economic growth in history just after WWII when we were rebuilding Europe, veterans were buying homes, durable goods, cars, etc. as never before and our manufactured goods faced very little foreign competition. May I remind you, Mr. Krugman, that we are not in that position today!

Third, why should we all just assume that the US economy will average 2.5% annual growth over the next 10 years, despite doubling the national debt, just because it is some historical average? As discussed earlier, we will almost certainly see another recession in the next decade, as foreign buyers of our massive debt may require higher interest rates or dump the US dollar.

Do you honestly believe the US economy will grow by 2.5% annually for the next 10 years when consumer spending is stagnant and Americans are increasing savings at the highest rate in over a decade? We've just been through the worst financial crisis since the Great Depression, and we are very likely looking at several years of below-trend economic growth. On top of that, if we spend the $9 trillion, taxes will have to go up on almost all Americans at some point, which is also bad for the economy.

Like your liberal cronies, you make these assumptions and leave out certain facts to justify your belief that bigger government and higher taxes are the answer to all of our problems. Mr. Krugman, take a look at Social Security, Medicare and Medicaid - and more recently President Bush's prescription drug program. Give me one example of how these government-run programs have been anything but a fiscal disaster. You can't.

Finally, Mr. Krugman (in case you happen to read this), let me say that I enjoy reading your columns and watching you on the TV talk shows. You give me insight and understanding as to the thinking of those on the far left.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Do They Want Control Even If It Ruins The Economy?

As noted earlier, I have thought about this question for many years. Why do the liberals want the government to control most everything in the economy and our lives? While members of Congress have the best healthcare in the world, they will have dozens of family members and friends and countless colleagues that will be subject to the House healthcare bill, if it is passed. So why are they so hell-bent on passing it?

The answer can only come down to two questions. Question #1: Do they really believe that their proposed national heathcare program is the very best we can offer the American people? And if so, why doesn't Congress adopt it for themselves? Or Question #2: Is this really just a massive power grab that puts the government in control of our healthcare and our lives?

President Obama would like us to believe that nothing will change if healthcare reform is passed - that if you like your current insurance plan, you can keep it. But that is patently false and abundantly clear if you read the onerous House healthcare bill, or even just the highlights that are readily available on the Internet. If they ram this down our throats, I firmly believe that the quality of our healthcare will suffer and the costs will far exceed any estimates being put forth by President Obama and the Democrats.

At the end of the day, I have to conclude that nationalizing healthcare (one-sixth of the US economy) is nothing more than a giant power grab by the liberals. In addition, if our government racks up $10+ trillion in cumulative deficits over the next 10 years, as Obama proposes, we are on our way to financial ruin.

Bill Clinton never scared me; he was too much of a political animal to swerve too far from the center. Unfortunately, the same could be said of George W. Bush, who routinely strayed from his supposedly conservative principles. Not so with President Obama. Sadly, many of those who voted for him did not do their homework or they would have known that he is a left-wing ideologue, as I warned in these pages last year.

Sorry to end on such a negative note, but it is what it is.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Federal deficits to bankrupt America
http://washingtontimes.com/news/2009/sep/04/looking-behind-the-curtain/

ObamaCare's Crippling Deficits
http://online.wsj.com/article/SB10001424052970203585004574393110640864526.html

Massachusetts & the ObamaCare Mistake
http://www.realclearpolitics.com/articles/2009/09/05/obamacare_increases_costs_wait_times_98176.html

Obama Cannot Escape Hard Choices in September
http://www.realclearpolitics.com/articles/2009/09/07/obama_cannot_escape_hard_choices_in_september_98192.html

When Does the Spending Charade End?
http://www.ibdeditorial.com/IBDArticles.aspx?id=336955542241664

Is The Recession Over? Don't Bet On It

Gary D. Halbert — Tue, 18 Aug 2009 22:12:00 GMT

IN THIS ISSUE:

Economic Signs of Improvement
Fed Vows to Keep Rates Low
Market Comments from John P. Hussman, Ph.D.
Conclusions

Introduction

We have seen some encouraging economic news in recent weeks, and President Obama and his cronies in the mainstream media have declared that the worst recession in post-war history is all but over. The advance estimate of 2Q GDP was down considerably less than expected (-1.0%); the unemployment rate actually fell slightly in July to 9.4%; and the ISM manufacturing index posted a nice improvement last month.

While these reports were better than expected, and continue to suggest that the worst of the recession is behind us (as I have suggested often in recent weeks), this economy is far from out of the woods yet. Growth prospects continue to look muted, although a growing number of forecasters are suggesting that GDP will register a positive number in the 3Q due largely to the rebuilding of inventories, as I discussed in my August 4 E-Letter.

This week, we will look at the latest economic reports, as well as the Federal Reserve's latest decision on interest rates and purchases of Treasury securities. Also, the Fed says it will end its record large purchases of government agency debt in October. If indeed this happens, it will be the first step in ending the Fed's massive stimulus spending.

Next, so that we don't all get caught up in the latest hype that the recession is over, I will reprint excerpts from a recent Weekly Market Comment written by John P. Hussman, Ph.D. Dr. Hussman is best known as the president of Hussman Investment Trust, and he manages the Hussman Strategic Growth and Hussman Strategic Total Return Funds, which are actively managed and can go to cash in bear markets.

Dr. Hussman's latest analysis is consistent with the view many of us have that the recession, while improving in some areas, is not over yet, and that the ensuing economic recovery over the next year or longer will be disappointing -- even if there is a bump up in the 3Q. All of this should make for interesting reading, so let's get started.

Economic Signs of Improvement

Over the last several weeks, we've seen some encouraging economic reports. In some cases, "encouraging" simply means that the reports weren't as negative as expected. That was certainly the case with the advance 2Q GDP estimate at the end of June, which showed a decline of only 1% (annual rate) versus pre-report estimates which were considerably worse. Some analysts expect that number to be revised downward somewhat when the second estimate is released later this month.

On the manufacturing front, the ISM Index rose more than expected in July to 48.9, up from 44.8 a month earlier. Industrial production rose 0.5% in July, and construction spending and the factory operating rate both rose modestly last month as well. These are all signs that the recession may be leveling out.

On Thursday of this week, we get the latest Index of Leading Economic Indicators (LEI) for July, and the pre-report consensus is for a rise of 0.6%, following +0.7% in June. If the LEI is up for July, that will mean the fourth consecutive monthly increase. That would be very encouraging and a sign that we will likely be out of this recession by the end of the year.

The US unemployment rate unexpectedly dropped from 9.5% in June to 9.4% in July, as employers slashed 247,000 jobs, the slowest rate of decline in nearly a year. This news temporarily sent stocks to their highest level of the year since the pre-report consensus was for a rise to 9.6%

However, the July decline in the jobless rate came about not because more people had jobs, but because almost 800,000 "discouraged workers" - people who have essentially given up on looking for a job - were not counted as unemployed, thereby allowing the official unemployment rate to fall modestly in the latest jobs report. The number of long-term unemployed people - those who have been out of a job but looking for more than 26 weeks - rose by another 584,000. Thus, it appears we are still headed for 10% employment before this cycle reverses.

Despite the still troubled employment situation, investors welcomed the reports above, and more and more forecasters have apparently decided that the recession is over. I continue to believe that we are still at least a few months from concluding that the recession has ended. The Consumer Confidence Index fell for the second month in a row in July, and retails sales were down slightly last month. Therefore, it is premature to declare that the recession is over.

Fed Vows to Keep Rates Low

To no one's surprise, the Federal Open Market Committee (FOMC) announced last Wednesday that it will continue its policy of keeping interest rates at their historically low levels. The FOMC also maintained its position that interest rates could remain historically low for an "extended period of time." In other words, the floodgates of liquidity are still wide open.

About the only new revelation was that the Fed announced that it will stop buying long-term Treasuries in October of this year. This could be the ultimate case of good news/bad news, in that it's good that the Fed may no longer be printing money to buy Treasuries, but bad in that these securities will soon have to compete in the open market, and this could lead to higher interest rates. Remember that this is why the Fed committed to start buying Treasuries in the first place.

However, the Fed's printing press will not be idle as it said it will continue to purchase up to $1.25 trillion in agency mortgage-backed securities and other agency debt from Fannie Mae and Freddie Mac. The Fed's hope here is to keep a lid on mortgage rates in an effort to stimulate the housing market.

From an economic standpoint, the latest FOMC statement notes that US economic activity is "leveling out," meaning that the rate of descent has slowed. However, this simply means that the recession may not get deeper. The Fed's prospects for recovery, however, were modest, at best. The Fed expects economic activity to remain weak "for a time" (whatever that means) and a return to sustainable economic growth is likely to be gradual.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Market Comments from John P. Hussman, Ph.D.

Dr. John Hussmanis best known as the president of Hussman Investment Trust (a mutual fund family), and he manages the Hussman Strategic Growth and Hussman Strategic Total Return Funds. Dr. Hussman is also the chairman, president and controlling shareholder of Hussman Econometrics Advisors, Inc. which has published his Weekly Market Comment letters for years, and they always have some interesting points about the economy, the markets, etc.

As a mutual fund manager, Dr. Hussman is somewhat unique in that he not only actively seeks the best opportunities in the stock market, but will also move to neutral positions in his funds during market downturns. In other words, the investment strategies he employs are similar to those used by the active money managers my firm recommends.

The following excerpts are from Dr. Hussman's August 10, 2009 Weekly Market Comment. [Note that we have removed discussions about specific funds where possible.] Pay particular attention to Dr. Hussman's outlook for the economy.

QUOTE:

The U.S. economy lost a quarter of a million jobs in July. Meanwhile, over 400,000 workers abandoned the labor force (and are therefore no longer counted among the unemployed), which prompted a slight decline in the unemployment rate despite the job losses. In the context of an economy still strained by high levels of consumer debt and still record delinquency and foreclosure rates, labor market conditions are still troublesome. Still, the pace of job losses and new unemployment claims has clearly softened from the pace we observed early in the year.

If we knew that this was a standard economic downturn, we might conclude that the recent improvements are durable. However, nothing convinces us that this is a standard economic downturn. As for market action, the major indices have generally been strong, as has breadth (as measured by advances versus declines), but the "investor sponsorship" evident from trading volume has been uncharacteristically dismal compared with initial advances of past bull markets. So here too, we have very strong concerns that the recent advance may not be as durable as investors appear to believe.

All of that said, we aren't inclined to fight even what we view as errant analysis, and the Strategic Growth Fund has about 1% of assets allocated to near-the-money index call options -- about enough to gradually close down about 40% of our hedge in the event that the market advances markedly higher from here, but without putting us at risk of much loss in the event of failure. With investors now anticipating and pricing in a sustained economic recovery, as well as a spectacular earnings rebound, a lot of things will have to go right from here in order to sustain higher prices than we currently observe.

Frankly, our call option allocation here is something of a paean to a notion -- a sustained economic recovery and new bull market -- that I have no belief in whatsoever. But at this point, the broad strength in the major indices, even lacking volume sponsorship or favorable valuation, requires that we allow for the possibility of additional investor speculation. Even if we do observe such an outcome, it's difficult to envision that the S&P 500 will clear the 1000 level for all time, without revisiting it again in the months (not to mention years) ahead. To the extent that we don't clear 1000 permanently, establishing investment exposure here with anything but call options amounts to a game of trying to "ride" the market higher and to get out before it returns to or below current levels. With the market strenuously overbought already, that game strikes me as exquisitely difficult to get right. Hence the use of a modest allocation to call options only, without closing our downside hedges.

Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP. That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.

Moreover, it might be enticing to look at a chart of the S&P 500 and envision a quick return to 2007 highs and beyond, but it is important to recognize that those highs were based on profit margins about 50% above historical norms, combined with an elevated P/E multiple of about 19 against those earnings. Even if the economy is poised for a sustained recovery here, the belief that those joint outliers will be quickly re-established goes against historical precedent.

In any event, we've got some call option coverage to gradually allow participation if this run continues.

Post-Crash Dynamics

When markets crashes are coupled with changes in the fundamentals that supported the preceding bubble -- as we observed in the post-1929 market, the gold market of the 1980's, and the post-1990 Japanese market, and currently observe in the deflation of the recent debt bubble -- they typically do not recover quickly. Indeed, the hallmark of these post-crash markets is the very extended sideways adjustment that they experience, generally for many years.

The chart below updates the position of the S&P 500 (red line) in the context of other post-crash bubbles. The horizontal axis is measured in months. Note that very strong and extended interim advances have been part and parcel of similar experiences.

The intent here is not to argue that the U.S. stock market must by necessity follow the same extended adjustment that followed prior burst bubbles. Rather, the intent is to underscore that it is dangerous to infer that structural difficulties have vanished simply because a market enjoys a strong post-crash advance.

My friend James Montier at SocGen draws a similar pattern from a larger historical collection of post-crash bubbles - including the above instances, as well as others such as the South Sea Bubble and the Railroad Bubble of the 1840's. The underlying theme is that the adjustment period following the bursting of a bubble tends to be very extended.

I understand the eagerness of investors to put the entire credit crisis behind them and look ahead to a recovery of the prior highs, but these hopes are based on the assumption that a positive boost to GDP, once achieved, will propagate into a full-fledged recovery. Again, however, no economic improvement is evident in the behavior of consumer demand and capital spending, once you adjust for the impact of government spending (particularly transfer payments).

Yes, we have observed a massive reallocation of global resources from savers (who have bought newly issued Treasury debt) toward mismanaged financial institutions that made bad loans. Yes, there are certainly favorable short-run economic numbers that can be achieved by running a year-to-date federal deficit equal to seven percent of the U.S. economy. The problem is that this money does not come from nowhere. We have effectively sold an identical ownership claim on our future production to those individuals and foreign governments who bought the Treasuries. Government "stimulus" is not free money. The continued attempt to bail out bad loans with good resources (largely foreign savings) will end up costing our nation some of our most productive assets, which will be acquired by foreign countries and investors for years to come.

From my perspective, investors have gotten entirely too far ahead of themselves with the assumption of a sustained recovery. Nevertheless, we again have about 1% of assets in index call options to allow for further market strength if it emerges. I expect that if they move "in the money," we will leave their strike prices unchanged unless market internals deteriorate measurably. Leaving our call option strikes fixed would open us up to losing on any subsequent downturn whatever we make on a further advance, but again, our opening exposure is fairly limited. We'll let the market put us into a more constructive position if investors are inclined to continue their exuberance here. [Emphasis added, GDH.]

Market Climate

As of last week, the Market Climate for stocks was characterized by unfavorable valuation and mixed market action, but enough evidence of speculation (reasonable or not) to own about 1% of assets in index call options. We are otherwise hedged.

During earnings season, there are often days where most of the performance of the Fund is driven by significant movement in a small handful of Fund holdings. These movements can be positive or negative, and may cause the Fund to move differently than one would expect that the Fund "should" move based on our investment position, and on what the market did on a particular day. As I've frequently noted, short-term movements, particularly day-to-day, are not effective indicators of the Fund's investment position, or predictors of Fund performance. Performance is always best measured from the peak of one market cycle to the peak of the next, or over an extended period of years representing neither a peak-to-trough nor trough-to-peak movement in the market.

Based on our standard methodology, which considers normalized earnings (not the far more depressed level of current earnings) the S&P 500 is now priced to deliver 10-year total returns in the area of 6.9% annually. This is a figure that has historically been associated with bull market peaks, including 1969 and 1987. In most instances, such valuations turned out badly in reasonably short order. It is, however, true that prospective returns were even worse prior to the 1929 crash, and during the bulk of the period since 1996, so there have been some historical periods where speculators have driven valuations to higher levels, and during these times, it has not been particularly effective to stand in front of speculators saying ‘no, stop, don't.' [Emphasis added, GDH.]

Ultimately, all of those periods where valuations were driven to higher levels were followed by poor long-term returns, with stocks generally trading at lower levels at some point one or more years later. So we can say with a reasonable degree of confidence that even if the present advance continues, investors will most likely observe current levels again either within the current market cycle or (worse) several years out. Overvalued markets simply do not "run away" for good. Still, it can be painful or at least unenjoyable to remain defensive during a speculative advance.

In bonds, the Market Climate last week was characterized by relatively neutral yield levels and moderately unfavorable yield pressures. As usual, we will tend to increase our bond durations on spikes in yield (weakness in bond prices), and these are becoming more interesting -- though not strongly attractive. Our most recent extension of durations was in the 3.9%-4% area for 10-year Treasuries, and a push materially above that level would represent enough of a yield pickup to move a modest amount of short-maturity Treasury allocations into mid-maturities. As I've noted in recent weeks, we don't anticipate much in the way of extended directional movement in the bond market, so most of our portfolio activity will probably tend to be modest reallocations in response to yield fluctuations. At the point where we observe either fresh inflation pressure or general declines in Treasury yields (i.e. general downward pressure on real interest rates), I expect that we'll observe fresh pressure on the U.S. dollar and upward pressure on precious metals shares. For now, those markets are likely to be somewhat range-bound as well.

We've got an extended economic adjustment ahead. Most probably far longer than most investors presently expect. As always, we'll take our opportunities as the evidence emerges, with the objective of outperforming our respective benchmarks over the complete market cycle, and an additional emphasis on defending capital over the course of that cycle. [Emphasis added, GDH.]

END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

While we have seen some encouraging economic reports over the last few weeks, it is premature to declare that the recession has ended. As discussed above, the unemployment rate is very likely to rise even higher before this cycle is over. Remember that consumer spending is still the main driver of this economy, and retail sales fell slightly in July well below the pre-report consensus. The Consumer Confidence Index fell a second month in a row in July.

On the positive side, the Fed remains committed to keeping interest rates very low for an extended period, and liquidity is plentiful for now. If this Thursday's Leading Economic Indicators report is positive, that will market the fourth consecutive monthly increase, which will be a very good sign that the recession will end by the end of the year.

I agree with Dr. Hussman that stocks are overbought at this point, as many investors who bailed out in February and March are now jumping back in. The stock market has felt like a mini-bubble since the March lows and especially in July. Thus, I would not be surprised to see the downward correction that began last week to continue in the weeks ahead.

Finally, I recently told you about our online webinar featuring the Potomac Guardian Program on August 6th. We had hundreds of investors register for the webinar and it was well-received. If you were unable to attend this webinar but would still like to learn more about the Potomac Guardian Program and its investment strategy, you can now find a recorded version on our Internet website at www.halbertwealth.com.

Wishing you profits in a difficult market,

Gary D. Halbert

SPECIAL ARTICLES

Stocks: Five Key Signals for Investors
http://www.businessweek.com/investor/content/aug2009/pi20090817_099111_page_2.htm

Why Obama's Ratings Are Sinking
http://online.wsj.com/article/SB10001424052970204683204574354383543314054.html

Public Spending's Day Of Reckoning
http://www.forbes.com/2009/08/12/public-spending-finances-economy-debt-opinions-contributors-desmond-lachman.html

Recession May End But Growth Prospects Low

Gary D. Halbert — Tue, 04 Aug 2009 21:25:00 GMT

IN THIS ISSUE:

Finally, Some Good News For The US Economy
More Insights From The Latest GDP Report
Media & Obama Declare The Recession Is Ending
Consumer Spending Is Still The Key
100+ Hedge Fund Managers Offer Their Predictions

Introduction

The Commerce Department announced last Friday that the US economy contracted less than expected in the 2Q. According to the "advance" estimate, Gross Domestic Product declined at an annual rate of only 1% in the April-June quarter. This is considered to be good news since the rate of decline was below the pre-report consensus. Never mind that the better than expected number was almost entirely due to greatly increased federal spending in the 2Q. Also, never mind that the government announced that 1Q GDP was worse than previously reported.

The latest GDP report has caused many economists and analysts to declare that the recession is ending. Yet the report noted that most sectors of the economy and consumer spending are still contracting. While I would say that it is still too early to declare that the recession is ending, the latest data strongly suggests that we've seen the worst of this recession/credit crisis. We will look at the latest economic numbers and draw some conclusions as we go along.

While it is possible that the recession will end in the 3Q and GDP could go into mildly positive territory, the unemployment outlook is likely to get worse for at least the rest of this year and possibly through the first half of 2010. Even President Obama conceded recently that the unemployment rate will almost certainly rise above 10% by the end of this year. Thus, we're looking at another "jobless recovery" if we indeed pull out of this recession later this year.

Next, as we all peer into the likely economic outlook for the balance of this year and next year, and try to formulate our investment strategies accordingly, I will summarize the latest survey of the nation's largest hedge fund managers. What are they thinking about the economy and the investment markets; where are they positioning their assets now; and what do they think are the greatest risks down the road? I think you'll find their predictions very interesting.

Finally, Some Good News For The US Economy

Last Friday, the Commerce Department announced that the US economy contracted less than expected in the 2Q. According to the "advance" estimate, Gross Domestic Product declined at an annual rate of only 1% in the April-June quarter. The GDP report came as a surprise to many, since the pre-report consensus suggested a decline of at least 1.5%, and many (including your editor) expected a decline of 2-3% for the 2Q. Of course, this is the first of three estimates on 2Q GDP, so it could well be revised lower over the next two months. Even so, this is good news for the economy.

According to the latest report, GDP fell less than expected in the 2Q primarily due to the large increases in government spending. The Commerce Department report cited that the decrease in real GDP in the 2Q primarily reflected negative contributions from business investment, personal consumption expenditures, inventory contraction and exports. According to the report, these negative influences to GDP in the 2Q were mostly offset by positive contributions from the increase in federal government spending and to a lesser extent by state and local government spending, and a decrease in imports.

The fact that the economy declined by less than expected in the 2Q primarily due to increased federal spending and falling imports is certainly not the desired scenario. But after four consecutive quarters of negative GDP growth, investors were happy to see a drop of only 1% in the 2Q. Consumer spending, which makes up apprx. 70% of GDP, continued to fall in the 2Q, but again not as much as had been feared. Personal consumption expenditures fell 1.2% in the 2Q, which means that consumer spending is still on the decline, but somewhat less than pre-report estimates.

The latest GDP report was indeed better than expected, even if most of the improvement was due to increased federal spending. Unless you've been hiding under a rock over the past few days, you have no doubt heard the mainstream press cheering that the recession is ending and that happy days lie ahead. While we probably have seen the worst of the recession, we need to look at the latest numbers to get a better insight as to the bigger economic picture.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

More Insights From The Latest GDP Report

As noted above, last Friday's 2Q GDP report was better than expected, even though it showed that the economy contracted at a -1% annual rate in April-June. All the news in the report, however, was not so encouraging. The Commerce Department revised down its GDP report for the 1Q of this year from -5.5% to -6.4%. This means that the January-March quarter was considerably worse than earlier reported.

I should also note that the Commerce Department upwardly revised GDP for the 4Q of last year from –6.3% to –5.4%, which largely offsets the downward revision for the 1Q of this year as noted in the previous paragraph. Most notably, however, the Commerce Department also substantially revised the GDP number for the 3Q of 2008 downward to a negative 2.7% annual rate. This was a huge revision that was not expected. Thus, we have seen four consecutive negative quarters in GDP in the last year alone: 3Q 2008 – down 2.7%; 4Q 2008 – down 5.4%; 1Q 2009 – down 6.4%; and 2Q 2009 – down 1.0%.

This makes the current recession the worst since WWII, eclipsing even the previously worst recession in 1981-82.

In addition to the headline GDP numbers noted above, last Friday's report also revealed that consumer spending declined in the 2Q. Personal consumption expenditures (PCE) fell by 1.2% in the 2Q following the very modest increase of 0.6% in the 1Q. This was well below the pre-report consensus that was looking for an increase of 2.4% in consumer spending in the 2Q. So much for the widely heralded rebound in consumer spending, but we should not be surprised given that consumer confidence turned lower once again in June.

Other indicators in the latest GDP report also suggest that the recession is not over yet. Durable goods orders decreased 7.1% in the 2Q, while non-durable goods orders decreased 2.5 percent, in contrast to an increase of 1.9% in the 1Q. Non-residential fixed investment decreased 8.9% in the 2Q, while non-residential structures decreased 8.9%. Equipment and software purchases decreased 9.0%. Exports of goods and services decreased 7.0%, while imports of goods and services decreased 15.1% in the 2Q. And the list of negatives goes on.

How is it then that GDP fell only 1% in the 2Q? Answer: increased federal spending. According to the GDP report, federal government consumption expenditures and gross investment increased 10.9% in the 2Q, compared to an increase of 4.3% in the 1Q. While we can all be happy that GDP fell less than expected in the 2Q, there is little comfort in knowing that the main reason for the better number was increased government spending.

Media & Obama Declare The Recession Is Ending

Many in the mainstream media wasted no time last Friday in predicting that the recession is ending, if it hasn't ended already. Since the 2Q GDP number was only down 1%, many now predict that 3Q GDP will almost certainly be a positive number. Predictably, President Obama took to the microphone on Friday afternoon to announce that we are now seeing the light at the end of the economic tunnel, and he attributed the better than expected GDP report to his $787 billion stimulus plan, even though only around 10% of the money has been spent.

[Editor's Note: FYI, more and more analysts are coming around to the idea I suggested in my July 21 E-Letter, that the government should scrap the apprx. 90% of the $787 billion that has not yet been spent. As an example, see the Investor's Business Daily editorial in SPECIAL ARTICLES below. Of course, this will never happen because Obama and the leaders in Congress can't wait to spend that money on their pork barrel projects.]

The latest argument for the recession ending now goes as follows. Since the Commerce Department revised 3Q 2008 GDP down sharply to -2.7%, this means that the worst of the recession started sooner than we thought. For some reason that I cannot discern, this is supposed to mean that the recovery from the recession will end sooner than we think – as in now.

Adherents to this suggestion point to the fact that the Index of Leading Economic Indicators has risen for the last three months in a row. Likewise, home sales and housing starts have risen modestly over the last three months in many parts of the country. No doubt, these are signs that the worst of the recession may be behind us, but they are no guarantee that the recession has ended. Nevertheless, there are now widespread forecasts that GDP will go positive for the 3Q.

There is, actually, a credible reason that GDP could manage a positive uptick in the 3Q. Given the severity of the recession and the credit crisis, businesses across America have slashed inventories dramatically. According to the latest GDP report, US businesses have cut back inventories by almost $300 billion in the four months ended in June. Most analysts had expected that inventory rebuilding would have begun in the 2Q, but in fact inventories continued to contract in the 2Q.

At some point, businesses will have to rebuild inventories, and some of my best sources believe that a modest rebuilding has begun in the 3Q. Companies that have weathered the worst of the recession and remain afloat will likely have to rebuild their inventories at some point just to stay in business. Plus, federal spending will remain high going forward, so it would not be a surprise to see a positive number in 3Q GDP. But we will not see the first advance report on 3Q GDP until late October. Unfortunately, a modestly higher GDP number for the 3Q will not necessarily mean that the recession is over.

Consumer Spending Is Still The Key

Personal consumption expenditures fell sharply in 2008 as a result of the housing slump, the credit crisis and the bear market in stocks. While there was a modest bump (+0.6%) in consumer spending in the 1Q of 2009, as noted above the latest GDP report showed that personal consumption expenditures declined 1.2% in the 2Q, well below expectations.

As I have noted in recent letters, not only are consumers holding back on unnecessary expenditures, they are also boosting their savings. It is now estimated that the national saving rate has climbed to 7% and may be headed even higher. Consumers remain fearful about the rising unemployment rate and the continued record rise in home foreclosures.

Unemployment typically continues to rise even after GDP starts to increase, so pain for workers is far from over. As noted above, even President Obama concedes that the US unemployment rate is headed to 10%, and it may well go even higher next year. The Labor Department noted that already 144 of America's 372 largest metropolitan areas reported unemployment rates of at least 10% in June. Rising unemployment will mean less shopping and a slower recovery.

While we have seen some mildly encouraging reports on home sales over the past few months, the home foreclosure rate continues to set new record highs. Just two years ago, the prediction was that only about two million Americans would lose their homes to foreclosure, a prediction based on the number of subprime mortgage loans with pending interest rate resets.

As we know now, however, more than five million homes have been foreclosed on since 2007, and there were more than 336,000 foreclosure filings in June alone according to RealtyTrac. Thus, it is now predicted by some that ten million homes will be foreclosed on before this cycle is over. If that is remotely correct, we are only about half way through the cycle.

With the unemployment rate and the foreclosure rate continuing higher, I don't think we will see consumers boosting spending significantly anytime soon. The latest consumer confidence numbers show that Americans are still jittery, with the Confidence Index falling from 49.3 in June to 46.6 in July.

Bottom line: The recession may well end later this year, but the recovery is likely to be disappointing. Those who are suddenly predicting 2-3% GDP growth in the 3Q and 4-5% in the 4Q are way too optimistic in my opinion.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

100+ Hedge Fund Managers Offer Their Predictions

The accounting firm RSM McGladrey recently published the results of their inaugural Hedge Fund Industry Survey. The survey, representing the thoughts and opinions of 102 hedge fund managers, offers some interesting findings about the state of the industry and their predictions for the economy, the investment markets and real estate.

You may be wondering why you should care what hedge fund managers think. After all, the mainstream press continually demonizes them with terms like "secretive," "risky," "unregistered" and a whole host of other dubious adjectives. In the latest stock market crash, hedge funds were singled out for their shorting of bank stocks (a strategy that can actually make money on a falling stock), which some said helped to accelerate the stock market's fall in the last quarter of 2008.

And let's not forget notorious hedge fund managers such as George Soros, who is known for being the man who "almost broke the Bank of England" in 1992, or Long Term Capital Management, a hedge fund managed by Nobel Prize-winning economists that almost caused a global financial crisis in 1998. These and other widely publicized implosions, coupled with the complexity and restricted availability of such investments, have generally cast hedge fund managers in a bad light, at least in the mainstream media.

Yet the 102 hedge fund managers surveyed by McGladrey represent some of the brightest and most successful minds in the investment world. Some of these managers are very adept at reading the economic tea leaves, especially as they relate to the markets. This not only helps them to make money for their clients, but to make money themselves since they typically base their fees on a share of client profits. No profits, no pay. Thus, you can bet that the future prospects for the global economy continue to be where hedge fund managers are concentrating their research, and why we want to peek over their shoulders through this survey.

A good portion of the survey deals with the new regulatory oversight of hedge funds that Obama has proposed and the managers' reactions to it, since heretofore hedge funds have been largely unregulated. It was surprising to see that 42% of the respondents felt that the SEC needs additional regulatory authority to do its job effectively, while 50% said the agency should simply be better funded to enforce existing rules, not make a lot of new ones.

While we might think all hedge fund managers would resist additional regulation of the funds they manage, another surprising result was that 37% of respondents believe there should be more regulation of hedge funds versus only 18% who said less regulation is needed. 43% of respondents believe that the current regulatory environment is the right amount.

However, hedge funds are now in the crosshairs and Congress will no-doubt put them on a shorter leash. Knowing this, 75% of those surveyed worried about the regulatory pendulum swinging too far and becoming so restrictive that it stifles the markets. Note that this includes some of those managers who believe that additional regulatory oversight is needed.

All in all, these results actually seem to indicate that a much larger segment of hedge fund managers are open to greater regulation than we might have thought. However, I think the real meat of the survey is in their outlook for the future of the economy and markets. 60% of respondents think that the current economic environment presents more investment opportunities than challenges. Knowing that some hedge funds "short" stocks in declining markets, a bear market expectation could be viewed as an investment opportunity for some funds. Thus, we need to look deeper into the survey's findings.

To begin with, 57% of hedge fund managers surveyed believe that the economy is now headed in the right direction (recession ending fairly soon), even though 83% of hedge fund managers believe that the unemployment rate will continue to rise, and 65% believe that consumer spending will decrease in the next 12 months. Over 80% of hedge fund managers believe that government spending, the Fed's balance sheet and tax rates (income and capital gains) will all continue to increase over the coming year. This explains why 42% believe the economy is still headed in the wrong direction.

Elsewhere, 59% believe that the stock markets have bottomed and are on the right track. However, respondents also acknowledge that there are still dangers lurking in the bushes that could derail the recovery. For example, 82% of respondents see both interest rates and inflation rising over the next year. While less than 20% expect either to increase "a lot," they acknowledge that the Fed faces a very difficult challenge on both fronts.

Since prospects for the stock markets generally depend upon the health of the economy, the survey asked hedge fund managers when they thought the US economy would return to positive growth. 33% of respondents felt that the economy would have positive growth by the end of 2009. 58%, however, believe that the US economy won't return to positive growth until sometime in 2010.

Of course, what we really want to know is what hedge fund managers expect the stock markets to do. After all, that's where most of us feel they have the greatest area of expertise. To get a better perspective of their predictions, it's important to note where the market stood when the survey report was written in mid-June 2009. Keep the following figures in mind as I discuss the stock market outlook of these hedge fund managers:

Dow Jones Industrial Average:	8,612.13
Russell 2000 Average:	511.83
S&P 500 Average:	923.72

To make a long story short, most hedge fund managers surveyed expect little or only moderate growth to occur in the major market indexes over the next year. For the Dow, the opinions are pretty evenly split among four general ranges of future values. 22% of hedge fund managers believe that the Dow will be under 8,000 a year from now. Another 22% believe it will be between 8,001 to 8,500 and yet another 22% believe it will be between 8,501 and 9,000. The next largest group of 21% believes that the Dow will end up between 9,001 and 9,500 in 12 months.

Clear as mud, right? About all we can glean from these predictions is that 87% of hedge fund managers think that the Dow will be between 8,000 and 9,500 in a year or so. Being so evenly split, I believe that these predictions fall in line with my best sources who think that the market will be in a trading range over the next year and possibly much longer than that.

Predictions of the future value of the S&P 500 were somewhat less concentrated, but still followed the same general pattern. 64% of respondents expected the S&P 500 Index to be between 851 and 1,100 a year from now, again pointing to a trading range market.

The Russell 2000, generally representing the small-cap stock universe, had the widest range of expectations with respondents fairly evenly spread among expectations ranging from under 400 to over 850. This result seems to say that anything can happen in small-cap stocks over the next year. What else is new?

As this is written, I find it interesting that the major market indexes are near the upper estimates reflected in the survey. With the Dow currently near 9,300 and the S&P 500 Index breaking above 1,000 yesterday, the markets have benefited from a significant rally since the McGladrey survey was taken. Perhaps this means that these hedge fund managers were too pessimistic in their views. However, if you believe that we're in for a trading range market, these levels could mean that we may experience some downward pressure on stock prices in the near future.

While we typically think of hedge funds as being only involved with financial instruments such as stocks, bonds, derivatives, etc., hedge fund managers also weighed in on the future of real estate values. 70% of respondents expect residential real estate values to continue to fall over the coming year, while a whopping 83% believe commercial real estate values will continue to fall. If they are correct, this will continue to have a chilling effect on the credit markets.

We all know that everyone from political candidates to the media leveled criticisms at the hedge fund industry for its part in the subprime meltdown and resulting credit crunch. The survey turned the tables and allowed hedge fund managers to rate the government on the job it's done during the recent economic malaise. So, how do the managers of these funds feel about the government's performance so far?

Interestingly, the Fed and its Chairman, Ben Bernanke, both fared well in the eyes of hedge fund managers as did the FDIC. President Obama and Treasury Secretary Tim Geithner got mixed reviews, but sentiments were overall positive. At the bottom of the barrel we find the SEC, which has been under a lot of criticism for its delayed response to the economic crisis.

One final question I'll highlight from the survey dealt with who hedge fund managers thought would ultimately clean up the "toxic assets" at the core of the financial crisis. 41% of respondents felt that the public sector (i.e. – the government and taxpayers) would end up holding the bag. I think that many of us are in this same camp.

However, 56% of managers felt that the private sector would provide the solution to cleaning up these hard-to-value securities. If that's the case, then hedge funds are likely to be at the epicenter of these private efforts to rid the financial system of these toxic assets.

Earlier on, I asked why we should care about the opinions of hedge fund managers. Perhaps the possibility that hedge funds may relieve taxpayers from some of the burden of having to clean up these toxic assets is the best reason of all to care about the opinions of those who manage these specialized investments.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

While investors welcomed last Friday's GDP report showing growth contracting only 1% in the 2Q (with two more revisions to come), we must keep in mind that this marked improvement from the 1Q was largely due to the large increase in federal spending. Consumer spending continued to fall in the 2Q and is unlikely to rise substantially anytime soon, as consumer confidence fell in June. Unemployment is likely headed over 10% well into 2010.

There is now a broad consensus that GDP in the 3Q will actually be at least mildly positive. That may indeed occur as businesses are forced to rebuild inventories at some point, and federal spending will certainly remain high in the 3Q and beyond. However, one quarter of positive GDP does not necessarily mean that the recession is over. Even if the recession is ending, economic growth is going to be weak due to decreased consumer spending.

Finally, there is the question of the stock markets. The meteoric rise of stocks since the lows in early March has obviously been a prediction that the credit crisis would ease somewhat and that the worst of the recession was behind us. Yet having risen apprx. 50% in just five months, even though the economy is likely to remain sluggish, this suggests that stocks may be testing their upper limits.

While it looks doubtful that stocks will retest their March lows, given how much money is still on the sidelines, I would be hesitant to recommend that investors jump back in the market now – unless you do so with a professional money manager(s) that has the ability to move to cash or hedge long positions.

Wishing you profits in a difficult market,

Gary D. Halbert

SPECIAL ARTICLES

Pull Back Unspent Part Of The Stimulus
http://ibdeditorials.com/IBDArticles.aspx?id=333152018981557

The Stimulus Lesson (why it isn't working)
http://www.weeklystandard.com/Content/Public/Articles/000/000/016/791ucyiq.asp

Has the Market Gotten Ahead of the Recovery?
http://www.smartmoney.com/investing/short-term-investing/has-the-market-gotten-ahead-of-the-recovery/

Second Stimulus - Good Money After Bad

Gary D. Halbert — Tue, 21 Jul 2009 21:20:00 GMT

IN THIS ISSUE:

The Latest Assessment of the US Economy
The Real Unemployment Rate is 16.5%, Not 9.5%
Nine Reasons the Economy is Not Getting Better
Where I Disagree With Mr. Zuckerman
Conclusions -- "The New Normal"

Introduction

Over the last few weeks, most polls have shifted to indicate that a majority of Americans now believe President Obama's massive $787 billion stimulus package that he signed into law on February 17 has been a failure in terms of restarting the economy. I could not agree more. Rather than making the money available to immediate job-creating projects and programs, Obama and the Democrats in Congress loaded the stimulus up with pork-barrel projects that will take years to come about, and the recession will likely be over well before that.

I warned about this repeatedly in my February 10, 17 and 24 E-Letters. I was not a fan of the massive $787 billion stimulus package, but most of my best sources agreed that the government needed to step in with some kind of stimulus to at least partially fill the gap left by the marked slowdown in consumer spending. But the $787 billion spending package, which was spread out over 3-4 years, was not what we needed to jump-start the economy. It is now estimated that only about 10% of the stimulus money has been spent at this point. No wonder unemployment is 9.5% and rising fast.

Now we have widespread talk in Washington and elsewhere of a second huge stimulus package. Oh, but this time the politicos in Washington claim that they've learned their lesson, and a second stimulus will be focused only on "shovel-ready" programs that will create new jobs right away. To that I say (as my kids often do): yeah, right! I have a different suggestion: forget a second stimulus and redirect the remaining 90% of the $787 billion first stimulus to projects that will create jobs now. And include a payroll tax holiday for six months or so to boot.

In addition to the second stimulus issue, we will touch several other bases in this week's E-Letter. We will begin with the latest economic reports which remain mixed to negative. The theme of "green shoots" and an economic recovery that became popular in April and May has since turned more negative in June and so far in July. Consumer confidence is falling once again as it increasingly becomes clear that this recession will not be over anytime soon, and that the recovery will almost certainly be tepid over the next couple of years.

Following that discussion, we will look at a recent article which details why the real unemployment rate in the US is much, much worse than the monthly Labor Department reports depict. Most of you, I suspect, are aware of this, but the report I will share with you below puts the situation in much clearer terms, and explains why the economic recovery is likely doomed to be lackluster over the next couple of years or longer.

While this definitely won't be one of my more upbeat E-Letters, the circumstances are what they are and you need to know about it, especially as you try to manage your money and plan for retirement in this very challenging environment. Let's get started.

The Latest Assessment of the US Economy

On June 25, the Commerce Department released its final report on 1Q GDP at -5.5% (annual rate). That was slightly less negative than the prior estimate of -5.7%. The 1Q decline followed the 6.3% decline in the 4Q of 2008. Most analysts now expect that GDP will be negative for the 2Q as well, but not nearly as bad as the 1Q. A good number of analysts and economists continue to believe GDP will return to mildly positive territory by the 3Q, but that remains to be seen.

The Index of Leading Economic Indicators (LEI) rose for the third month in a row in June, up 0.7% following the rise of 1.2% in May. This is encouraging and seems to confirm that we have seen the worst of the recession and the credit crisis, but it does not suggest that this deep recession is over yet. Retail sales also increased modestly in June, up 0.6% following a gain of 0.5% in May, a sign that things are improving but we are not nearly out of the woods yet.

Unfortunately, the Consumer Confidence Index fell from 54.8 in May to 49.3 in June. The index had risen for three months in a row until the June decline. The University of Michigan Consumer Sentiment Index fell from 70.8 in June to 64.6 so far in July. I believe it is clear that consumers are coming to realize that this recession, while we've likely seen the worst of it, is not going away anytime soon.

As we will discuss in detail below, the unemployment rate surged to 9.5% in June, above expectations. Most analysts, including President Obama, now predict that the unemployment rate will go above 10% in the months ahead and will not likely peak until sometime in the second half of 2010. As we will explore later on, the "headline" unemployment rate published by the Labor Department significantly understates the true level of unemployment.

Factory orders and durable goods orders both rose for the second month in a row in May (latest data available). The ISM Manufacturing Index rose modestly in June to 44.8, up from 42.8 in May. Remember, any ISM number below 50 indicates recession. Industrial production fell by 0.4% in June, and the factory operating rate (capacity utilization) continued to fall in June to only 68.3%, down 13.6% over the last 12 months.

Sales of new and existing homes appear to be bottoming out with a very modest rise in May/June. Housing starts actually rose slightly in May/June as well. Unfortunately, the home foreclosure rate continues to soar, rising 4.6% in June and 33% over the last 12 months. The housing crisis is still far from over.

While it is encouraging that we have had some positive economic reports over the last several weeks, most economists continue to lower their forecasts for the last half of the year. I continue to believe that this recession will last longer than the current consensus predicts.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Real Unemployment Rate is 16.5%, Not 9.5%

I have known for more than two decades that the official Labor Department "unemployment rate" significantly understates the number of Americans who are out of work each month. Most likely, many of you are also aware of this longstanding disparity. A number of other official government reports contain similar disparities. But since the markets react to these government reports as if they are accurate, I report them in these pages accordingly.

With that in mind, I was pleasantly surprised to read an article last week by the Editor-in-Chief of U.S. News & World Report, Mort Zuckerman, that very accurately described the fallacies in the Labor Department's monthly unemployment report. I don't think I have ever seen these fallacies reported so accurately and concisely in one place. Mr. Zuckerman also reveals what he sees for the future of the US economy and the jobs market in the years to come.

So, I will reprint it for you below. While I don't agree with Mr. Zuckerman's conclusions as to what should be done now, I trust you will find the following of great interest.

QUOTE:

Nine Reasons the Economy is Not Getting Better
Jobs data paint a discouraging picture of more pain to come
By Mortimer Zuckerman
Posted July 13, 2009

We are now looking at unemployment numbers that undermine any confidence that we might be nearing the bottom of the recession. The appropriate metaphor is not the green shoots of new growth. A better image is to look at the true total of jobless people as a prudent navigator looks at an iceberg.

What we see on the surface is disconcerting enough. The estimate from the Bureau of Labor Statistics of job losses for June is 467,000. That increases by 7.2 million the number of unemployed since the start of the recession. The cumulative job losses over the past six months have been greater than for any other half-year period since World War II, including demobilization. What's more, the job losses are now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all employment growth from the previous business cycle.

That's bad enough. But here are nine reasons we are in even more trouble than the 9.5 percent unemployment rate indicates.

One. June's total included 185,000 people who were assumed to be at work, many of whom probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation: finance, for example. When the official numbers are adjusted over the next several months, look to some of the 185,000 boosting the unemployment totals.

Two. More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll.

Three. No fewer than 1.4 million people wanted or were available for work in the past 12 months. They were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey. The assumption is that they had found work or don't want it, but there are other explanations: school attendance, family responsibilities, sheer exhaustion.

Four. The number of workers taking part-time jobs because of the slack economy, a kind of stealth underemployment, has doubled in this recession to about 9 million, or 5.8 percent of the workforce. Add those whose hours have been cut to those who cannot find a full-time job, and the total of unemployed and underemployed rises to 16.5 percent, putting the number of involuntarily idle workers in the range of an overwhelming 25 million. [Emphasis added, GDH.]

Five. The inside numbers are just as bad. The average workweek for production and nonsupervisory private-sector employees, around 80 percent of the workforce, dropped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level of activity since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water and factories operate at only 65 percent of capacity. If American workers were still putting in those extra 48 minutes a week now, 3.3 million fewer employees could perform the same aggregate amount of work. With a longer workweek, the unemployment rate would reach 11.7 percent, not the official 9.5 percent (which in turn dramatically exceeds the 8 percent rate projected by the Obama administration).

Six. The average length of official unemployment increased to 24.5 weeks. This is the longest term since the government started to track these data in 1948. The number of long-term unemployed (those out of a job for 27 weeks or more) has now jumped to 4.4 million, an all-time high.

Seven. The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.

Eight. The jobs report is even uglier when you consider that the sector producing goods is losing the most jobs—223,000 in the last report alone.

Nine.The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers to full-time status.

Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because more layoffs in this recession have been permanent and not temporary. Instead of shrinking operations, companies have closed whole business units or made sweeping structural changes in the way they conduct their business.

For example, General Motors and Chrysler shut down hundreds of dealerships and reduced brands; Citigroup and Bank of America cut tens of thousands of jobs and exited many parts of the world of finance. In other words, we could face a very low upswing in terms of the creation of new jobs, and we may be facing a much higher level of joblessness on an ongoing basis. Job losses may last well into 2010 to hit an unemployment peak close to 11 percent. And then joblessness may be sustained for an extended period.

Can we find comfort in knowing that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power because employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled from 4.8 to 9.5 percent in just 16 months, a record rate so fast it may influence future economic behaviors and outlooks.

Bear in mind that the lackluster increase in inventories suggests that there's little prospect in the pipeline of real growth in consumption, investment, and exports. So the terrible state of the labor market is likely to be a strong head wind against consumer spending for a long time as wages and overall income growth are decelerating and households, within a fairly short period, will have received their full portion of the [$787 billion] stimulus package.

How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments—Medicaid, jobless benefits, and the like - that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10 percent of the stimulus package today.

Second, the stimulus package may have been well intentioned, but it was [arguably!] too small and [definitely!] too badly constructed to get money into the economy fast enough to replace lost consumer and business spending and to slow unemployment. Workers' pessimism is justified: About 40 percent believe the recession will continue for another full year. As paychecks shrink and disappear, consumers are more hesitant to spend and won't lead the economy out of the doldrums quickly enough.

It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden told it as it is when he said the administration misread how bad the economy was. The administration inherited the problem, but then it failed to understand how ineffective its solution would be. The program was supposed to be about jobs, jobs, and jobs. It wasn't. The recovery act may have been a single piece of legislation, but it included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases the funds with typical inefficiency. [Emphasis added, GDH.]

An additional $150 billion, which was allocated to state coffers so as to continue existing programs like Medicaid, did not add new jobs. Hundreds of billions of dollars were set aside for tax cuts and for new benefits for the poor and the unemployed, and that did not add new jobs. Now state budgets are drowning in red ink as jobless claims and Medicaid bills climb.

Next year, state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending or raise taxes, or both. The complete state and local government sector, which makes up about 15 percent of the economy, is beginning the worst contraction in postwar history in the face of a [combined state] deficit gap of $166 billion for fiscal year 2010, according to the Center on Budget and Policy Priorities, and a cumulative gap of $350 billion in fiscal year 2011.

Similarly, households overburdened with historic levels of debt will be saving more. The savings rate has already jumped from zero in 2007 to almost 7 percent of after-tax income now, and it is still rising. Every dollar of saving comes out of consumption. Because consumer spending is the economy's main driver, we are going to have a [continued] weak consumer sector, and many businesses simply won't have the means or the need to hire employees.

In the aftermath of the 1990-1991 recession, Americans bought houses, cars, and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won't be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so.

In recent times, Americans found myriad ways to fuel spending, even as incomes stagnated: borrowing against the once rising price of their homes and tapping plentiful credit cards. No longer. The paycheck has returned as the primary source of spending, and pay is eroding even for those who have jobs. This process is nowhere near complete, and, until it is, the economy will barely grow, if at all, and may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of the excessive debt has been completed. Until then, the private economy will be deprived of adequate profits and cash flow, and businesses will not start to hire. Nor will they race to make capital expenditures when they have vast idle capacity.

In other words, there are many more reasons today to expect the downturn to continue than to expect a turnaround. Consumer spending and residential investment could be even weaker than most estimates, and, as the level of fiscal stimulus begins its decline in the second half of 2010, we may be facing an even more difficult future. [Emphasis added, GDH.]

No wonder poll after poll shows a steady erosion of confidence in the stimulus measures. One survey even showed 45 percent believe the limited [stimulus] results suggest they should simply be abandoned midway. The disappointment is understandable - but that would only make things worse. So what kind of second-act stimulus program should we look for? This time, it should not be an excuse to pass a lot of programs like those in the first stimulus package that do not really have the kind of multiplier effect on job creation and on economic growth that was intended.

In any event, given the trends, it is absolutely critical that the Obama administration not play politics with the issue but really begin to prepare a second stimulus program, so that if the economy does take a major downturn, it will be possible this time to provide much more rapid government support to infrastructure spending that will maximize the creation of jobs. The time to get ready is now.
END QUOTE

Where I Disagree With Mr. Zuckerman

It is now clear that President Obama's initial $787 billion stimulus package was badly misguided. We can agree or disagree on whether it should have been passed in the first place. But what is not in question any longer is that the bulk of the near-$1 trillion spending package was made up of pork-barrel spending that will be years in creating any meaningful jobs.

Now, Mr. Zuckerman and others are calling for another large stimulus package. Who knows how large the next one will be, but I would guess that it will be at least another $500 billion to $1 trillion. The new stimulus we're hearing about will, they say, somehow be successful in creating large numbers of jobs in the near-term. But why in the world should we believe that? I certainly do not.

My suggestion is as follows. As reported widely, only apprx. 10% ($60-$70 billion) of the $787 billion stimulus package has actually been spent thus far. How about we reallocate the remaining $700+ billion from long-term liberal spending programs to job-creating programs in the short-term, and forget about a second stimulus program?

Of course, this is just wishful thinking on my part -- it will probably never happen, unfortunately. If the economy continues to languish, as I expect it will for another year or two, there will very likely be another stimulus package that will likely add another trillion or so to our already bulging national debt.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions -- "The New Normal"

It is becoming increasingly clear to economists, market analysts and investors that the US economy is not going to come roaring back from this severe recession and credit crisis anytime soon. In light of the sharp increase in the personal saving rate, consumer spending no longer accounts for 70-72% of GDP and is not likely to do so for the foreseeable future as Americans are increasingly paying down debt (deleveraging) and hoping they can hang onto their jobs.

We are not going back anytime soon to the go-go days of the late 1990s when tech stocks exploded and we saw the greatest stock bull market in history when equity gains fueled record large consumer spending. Likewise, we are not going back to the real estate/refinance boom of the 2000s when home prices exploded and consumer spending hit even new record highs anytime soon.

I agree with Mr. Zuckerman that the most likely scenario when we finally come out of this recession is a "range-bound" economy that fluctuates back and forth from slightly negative growth to slightly positive growth for the next several years. Analysts are increasingly referring to this scenario as "The New Normal."

Meanwhile, President Obama is spending trillions after trillions that we do not have on big government programs that may or may not work, but will certainly increase government control in our lives and our pocketbooks (ie- higher taxes). Another huge new stimulus package may be just around the corner, along with nationalized healthcare at an estimated cost of $1.5 trillion (and we all know how good the government is at estimating costs). Never mind that we have a massive Social Security and Medicare crisis facing us in the next 5-10 years.

I don't pretend to know exactly where all of this is headed, but I cannot see it ending pretty on any front. The stock markets have rallied a fair amount since the March lows, which is not surprising given how hard they plunged since this recession began in late 2007. Maybe the March lows were the bottom, maybe not.

It has long been argued that stocks tend to lead the end of major recessions by 6-9 months. In the past, this has been true on numerous occasions. But as Mr. Zuckerman opined above, things are very different this time around. The "New Normal" is definitely new and is anything but normal.

If we are destined for an extended period of "range-bound" economic growth as I believe, that very likely means an extended broad trading rage in stocks, and probably bonds as well. All of this suggests, more than ever, that you need some alternative investment strategies that can move among different market sectors and can move to the safety of cash (or hedge long positions) when market conditions turn ugly.

If you agree, you know where to find us: 800-348-3601 or www.halbertwealth.com.

Wishing you a great summer,

Gary D. Halbert

SPECIAL ARTICLES

The Squandered Stimulus
http://www.realclearpolitics.com/articles/2009/07/20/the_squandered_stimulus.html

Obama's Summer of Discontent
http://www.commentarymagazine.com/viewarticle.cfm/obama-s-summer-of-discontent-15208

Why Toxic Assets Are So Hard to Clean Up
http://online.wsj.com/article/SB124804469056163533.html

Is America On The Road To Financial Ruin?

Gary D. Halbert — Tue, 23 Jun 2009 19:53:11 GMT

IN THIS ISSUE:

Obama's Government Takeover Continues
Editorial: "Too Big to Fail, Or Succeed"
Americans More Concerned About Deficits
Economy May Have Seen the Worst of It
Conclusions

Introduction

The more I think about it, I believe that last week's E-Letter which revealed President Obama's plans to double the national debt over the next decade was one of the most important e-letters/newsletters I have ever written. If by chance you did not read last week's E-Letter, you need to click on the link above and do so now, since Obama's planned explosion in US debt will be a continuing theme in these weekly E-Letters for some time to come.

I sincerely believe that if our current $11.4 trillion national debt doubles over the next 10 years (and possibly even sooner), it will bankrupt America and send us into an even worse financial and economic crisis. President Obama's plans to run trillion dollar annual budget deficits for at least the next few years are almost certain to wreck the US dollar, which in turn will be very bad news for the stock and bond markets, not to mention the long-term inflation implications.

I have warned for over 25 years that politics are intimately intertwined with the course of the economy, the markets and thus our investments. This argument has never been clearer than today, and more and more Americans are coming to realize this. A Wall Street Journal/NBC News poll late last week found that 58% of respondents now believe that Obama's trillion dollar deficits are a greater concern than the recession in the economy. Maybe I'm making some progress!

President Obama has made public statements in recent weeks that he would prefer a smaller government had he not "inherited" this recession and financial crisis from George W. Bush. He has also said that he does not want to run (own) companies like AIG, GM and Chrysler. Yet his administration continues to promulgate new regulations that will make it even more likely that the government will eventually own much larger stakes in the private sector.

Obviously, Obama's plan to have the government take over national health care is a prime example of his intentions to greatly expand an already bloated, inefficient government and run unprecedented trillion dollar budget deficits. I have not chosen to weigh-in on the healthcare debate so far, partly because polls show that a majority of Americans want major healthcare reforms. All I will say at this point is, be careful what you wish for.

Last week President Obama announced sweeping regulatory changes that will dramatically affect the financial and investment markets for years to come. These so-called "reforms" could result in the government and/or the Fed owning some of our big banks and financial institutions that are deemed to be "too-big-to-fail." While the recent financial crisis suggests that some reforms are needed, having the government own or control many of our largest financial institutions is not the answer.

I will discuss these sweeping new financial regulations as we go along. I will also discuss the latest economic indicators which remain mixed, along with my thoughts on the investment markets. It's a lot to cover, so let's get started.

Obama's Government Takeover Continues

Last Wednesday, President Obama announced the most sweeping financial industry reforms since the Securities and Exchange Commission was created in 1934. Obama unveiled new proposals that would refashion the federal rules governing almost every corner of finance, and will push the government and the Federal Reserve much more deeply into banks and the private markets. The administration's 85-page "white paper" on financial reform sounded the opening salvo in a likely overreaching regulatory process that could expand for several years.

Most importantly, government supervision of all financial firms that are deemed to be big enough to threaten overall economic stability ("systemic risk") will be consolidated under, and be regulated by, the Federal Reserve. We're not just talking about banks here – the new regulations will allow the Fed to oversee any private or public companies that are deemed to pose systemic risks (ie- "too-big-to-fail").

These entities will be required to hold more capital and liquidity than other firms, and will face other regulatory requirements as deemed appropriate by the Fed and/or the Treasury Department. Firms that cannot meet the Fed's requirements can be taken over, partly or wholly, by the government – as was the case with insurance giant AIG, or simply shut down – as was the case with Lehman Brothers. This is scary!

Obama's regulatory net is also being cast over the credit markets whose growth contributed to the financial crisis. Those who package loans together for sale in securitizations (including mortgages) will have to disclose more and will be required to keep 5% of any deal to encourage sounder underwriting. Likewise, the new plan calls for payment of their fees to be spread over time and reduced if the loans go bad. Frankly, these specific regulations may actually make sense, while others are simply unnecessary government intrusions in the private sector.

The president's new reforms also include the creation of a Consumer Financial Protection Agency (CFPA). In theory, this new government agency will safeguard against mortgage, credit card and other abuses that may have contributed to the current crisis. In reality, this new agency may ultimately be the arbiter of who can – and cannot – get a home mortgage, what interest rates lenders and credit card companies can charge, etc., etc. Concern is already mounting that the new agency will take an overly restrictive view of permissible financial products, limiting access to credit and curbing good as well as bad innovation.

What follows are excerpts from an Investors Business Daily editorial published last Friday that fairly, I think, points out the assessment of those who will oppose Obama's sweeping regulatory reforms:

"Many on Wall Street have been stunned by a plan that subjects America's free-market capitalism to the controlling whims of bureaucrats, newly appointed czars and congressional committees headed by anti-business liberals such as Rep. Barney Frank.

‘We intend to take our case to Congress to explain why we believe adding new layers to a broken regulatory system is not the answer,' David Hirschmann, who heads the U.S. Chamber of Commerce's Center for Capital Markets, told the Los Angeles Times. Indeed, there are lots of objectionable things in the plan.

…We hope Wall Street — banks, investment houses, hedge funds, private investors — continues to speak up. The Democrats' plan slips the government's fingers around the economy's neck, choking off the risk-taking that is the very essence of America's capitalist success. Bold risk-takers will be replaced with risk-averse bureaucrats, and the dynamic growth engine that feeds our ever-expanding standard of living will be shut down.

This in turn will create a permanent bailout culture — one that will deem certain companies ‘too big to fail' and subsidize their failure with taxpayer money, while burdening small, entrepreneurial companies with unnecessary and costly regulatory oversight."

The IBD editors hit on only a few of the potential problems with President Obama's sweeping new regulatory reforms included in his 85-page report released last week. Analysts are still sorting out the details and considering the long-term implications. Certainly, some of the reforms will be welcomed by many Americans, especially those who believe that the government should control the private markets. But with any such government intervention, freedoms are sacrificed and free markets are restricted. A June 18 Wall Street Journal editorial makes the best argument I have seen regarding Obama's sweeping regulatory reform proposals.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

QUOTE: TOO BIG TO FAIL, OR SUCCEED
Everyone will want to become big enough to enjoy 'systemic risk' protection.
by Peter Wallison (senior fellow at the American Enterprise Institute)

In a speech at the White House yesterday, President Barack Obama outlined what he envisions for future regulation of the financial system. He called his plan "a new foundation for sustained economic growth . . . a transformation on a scale not seen since the reforms that followed the Great Depression." Indeed it is.

His plan, if adopted, will fundamentally change the nature of our financial system and economy. The underlying concerns and assumptions are clear, and they are made clearer by considering other ways that his administration has dealt with the consequences of competition -- particularly the faux bankruptcies of General Motors and Chrysler and the impending change in antitrust policy. Although the president said in his speech that he supports free markets, these initiatives confirm that the administration fears the "creative destruction" that free markets produce, preferring stability over innovation, competition and change.

According to the administration white paper circulated prior to the president's speech, the Federal Reserve would be authorized to create a special regulatory regime -- including requirements for capital, leverage and liquidity -- for any firm "whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed." In addition, if a large financial firm is failing, the Treasury is to be given the power -- in lieu of bankruptcy -- to appoint a conservator or receiver to "stabilize" it.

Designating particular financial firms for this kind of special regulatory treatment clearly signals to the markets that these institutions are too big to fail. It will reduce the perceived risk of lending to them, enabling them to raise funds at lower cost than their smaller competitors.

In other words, the administration's plan would create what are essentially government-sponsored enterprises like Fannie Mae and Freddie Mac in every sector of the financial economy -- insurers, securities firms, finance companies, bank holding companies, and hedge funds -- where these specially regulated firms are to be designated. The result will be devastating for competition. Larger firms will squeeze out smaller ones and aggressive small companies will have less opportunity to overcome the government-backed winners.

Moreover, the administration's proposal to provide a special bailout mechanism for large firms confirms the likelihood that these firms will never be closed down or liquidated. Citing the market turmoil that followed Lehman's collapse, the administration will argue that failures like this are "disorderly." But failure comes from risk-taking -- the very source of our economy's strength -- and it is ultimately risk-taking and its consequences that the administration's plan is intended to prevent.

The turmoil following Lehman's failure occurred because market participants expected, after the rescue of Bear Stearns, that any larger firm would also be rescued. When Lehman wasn't, all market participants were required to recalibrate the risks of dealing with all others, causing a freeze-up in lending and hoarding of cash. Lehman's failure itself did not cause any substantial losses, and within two weeks of its bankruptcy filing, Lehman's trustee sold its brokerage, investment banking, and investment management businesses to four different buyers.

Contrast this with AIG, the administration's paradigm, which was saved by the government because it was allegedly too big to fail. That firm is gradually wasting away under government control, with the taxpayers footing the bill.

The administration's fear of competitive outcomes is not reflected solely in financial-sector policies. Consider General Motors and Chrysler. They were defeated in the marketplace. Simply put, they failed to build automobiles [that] enough Americans wanted to buy.

Their disappearance would not have threatened the stability of the financial system, although it would undoubtedly have been disruptive for suppliers, dealers and employees. Yet the administration wouldn't allow them to fail, either. Despite all the talk about credit priorities, the fundamental point is that the administration used taxpayer money to overturn the market's verdict. If we want a preview of what the administration will do with the resolution authority it wants for large financial companies, we need look no further.

The same pattern with regard to competitive markets can be seen in the Justice Department's new antitrust policy. Christine Varney, the new assistant attorney general in charge of antitrust policy, has said that U.S. policy should be more like Europe's. Until now, U.S. antitrust policy has tried to protect competition. Europe attempts to protect competitors. Protecting competitors means blunting the skills of superior players, allowing inferior managers and business models to remain in business and thus preventing better managements and business models from emerging. Again, stability wins out over change and progress.

The president has said on several occasions, including in yesterday's speech, that "I've always been a strong believer in the power of the free market." But his administration's prescriptions tell a different story. In AIG, GM, Chrysler, Fannie Mae and Freddie Mac we can see the future that the administration envisions for our economy -- a sclerotic and unchanging structure of big companies working with, protected by, and relying on big government.
END QUOTE

I could not agree more with Mr. Wallison's analysis above. Yet most Americans have no idea what President Obama's sweeping regulatory changes really mean, much less how they may negatively affect competition and the free markets. Most Americans only hear the media sound-bites which leave the impression that the Obama administration reforms will "fix" the financial markets once and for all.

Were some changes in regulation of the financial markets in order? Certainly. Subprime loans, "no-doc" loans and "liar" loans allowed millions of Americans to purchase homes they could never afford. Likewise, credit rating agencies allowed investment bankers to create AAA-rated bonds secured by these questionable mortgages, which greatly broadened the impact of the subprime debacle.

These and other abuses ultimately led to the housing crisis, the credit crisis and the most severe recession since the Depression. So, changes to the financial regulatory system were needed.

As I noted above, some of Obama's new regulations on mortgage lenders make a lot of sense and will help to curb abuses. But many others are nothing less than purposeful government intrusion in the private markets in ways that will stifle competition. In many ways, these new rules look more like nationalization than regulation.

Americans More Concerned About Deficits

While President Obama continues to enjoy high (but falling) approval ratings overall, the public is growing much more concerned about Obama's record-large budget deficits and government intrusion in our lives, as noted in this week's SPECIAL ARTICLES below. In particular, a new Wall Street Journal/NBC News poll published last Thursday had some surprising findings.

For example, a solid majority – 58% – were more concerned about the budget deficit than they are about the economy. Specifically, they said that the president and Congress "should focus on keeping the budget down, even if it takes longer for the economy to recover."

When asked about the expanding role of government (e.g. ownership stake in GM, executive compensation, health care, etc.) a whopping 69% said they were very concerned (49% answered "a great deal" and 20% answered "quite a bit").

On the issue of Obama's health care plans, the WSJ poll results suggest that the president still has a lot of convincing to do. 33% think it's a good idea, 32% think it's a bad idea, and 35% have no opinion. Put differently, 67% either think government run health care is a bad idea, or they're not sure.

The New York Times also released its latest poll last Thursday. It also revealed that the public is growing more wary of the expanding role of government. When asked if the government is doing too much or too little, the result was: 56% too much versus 34% too little.

These surprising poll results suggest that more and more Americans are realizing just how dangerous it will be for America to double the national debt in a decade or less, as I discussed in detail last week.

Economy May Have Seen the Worst of It

Barring a major negative surprise, I think we have likely seen the worst of this recession. The Commerce Department will release its final estimate of 1Q GDP on Thursday, and most forecasters expect it to be in the -5.5% to -5.7% range (annual rate), which is at least mildly less negative than the -6.3% plunge in the 4Q of last year. Together, these two quarters should prove to be the worst of the most severe US recession since the Great Depression.

There is a broad consensus that the US economy has continued to contract during the 2Q, with most suggesting a decline of 2-3% in GDP over the last three months. From there, though, forecasts vary widely as to what will happen in the economy during the second half of the year. While I continue to believe that GDP will remain in negative territory all year, a growing number of analysts believe that GDP could actually go positive in the 4Q.

We have had more good economic news in the last couple of weeks. Most importantly, the Index of Leading Economic Indicators (LEI) rose a better than expected 1.2% in May, following a 1.1% gain in April. These were the first back-to-back monthly increases in almost three years.

The Commerce Department reported on June 11 that retail sales rose 0.5% in May, the first increase in three months. However, the report indicated that much of the rise in sales was due to the significant increase in gasoline prices.

On the manufacturing front, the latest reports were mixed. The ISM Index rose modestly to 42.8 in May versus 42.3 in April. Remember that any reading in the ISM below 50 indicates an economy that is still contracting. Industrial production fell another 1.1% in May, while the factory operating rate slipped to 68.3% in May, down from 69% in April.

On the housing front, there was a bit of encouraging news. Housing starts rose sharply in May, thanks in large part to the federal home tax credit that expires in November. Building permits were also up modestly in May. However, the inventory of unsold homes remains at a record level with over 11 months' supply on the market. Home prices nationally plunged 19.1% in the 1Q and are down 32% from the peak in 2006. So the housing slump is far from over.

The US unemployment rate continues to spike higher, rising to 9.4% in May, up from 8.9% in April. A recent Wall Street Journal survey of economists found a consensus opinion that the unemployment rate will hit at least 9.9% by the end of this year. The continued rise in the unemployment rate is almost certain to keep consumers on the defensive.

While we are seeing signs that the worst of this recession is behind us, that does not mean the economy will move into positive territory by the end of this year. Consumer spending is still lagging and is likely to stay below trend for some time to come. The personal savings rate jumped to 5.7% in April (latest data available), the highest level in more than 14 years, and this trend is likely to continue.

The combination of declining housing and stock-market values with the heavy debt loads Americans took on during the housing boom has inflicted significant damage on household finances. The Federal Reserve's latest "flow of funds report" earlier this month showed that household net worth fell $1.1 trillion in the 1Q from the 4Q of last year to $50.4 trillion, putting it $13.9 trillion below its 2007 peak. Collectively, homeowners held 41.4% of the equity in their homes, the lowest level since records have been kept and down from 53.9% two years earlier.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

As noted above, we have seen some encouraging signs in the economy. If you watch any of the financial channels, you will find that there is a great deal of optimism that the recession will be over before the end of this year. Sorry, but I just don't buy it. I continue to believe that the economy will still be in negative territory at the end of the year, as measured by GDP. I hope I am wrong.

As for President Obama's sweeping financial regulatory reforms he announced last week, we would hope to be implementing new regulations that should prevent anything similar to the sub-prime meltdown and the credit crisis from ever happening again. However, I believe that most of Obama's proposed regulatory changes are over-reaching and onerous. But Congress is likely to pass most or all of them, despite the long-term market implications.

On a positive note, I am very encouraged that more Americans are becoming increasingly concerned about the mammoth level of spending and deficits planned by the Obama administration over the next decade. Doubling the national debt in the next decade (or less) will have extremely negative consequences for the economy and stocks and bonds.

I feel that more of the public is coming to realize just how much exploding federal deficits will affect the future of their children and grandchildren. Perhaps we have come to realize just how large a sum one trillion dollars is, how long it could take to pay it back and who will be required to make those payments. More people want the government to do what every family must do - make tough decisions on which expenditures are most important and which can be deferred.

Finally, I believe that the public is picking up on the fact that capitalism's very structure is changing. Specifically, the government has switched from a role of economic supporter and regulator to owner and controller. This is a fundamental shift in the very nature of capitalism and could have ramifications far into the future. To me, this is the most disturbing of all of the recent events that have come to pass.

Let's hope that our representatives in Washington get the message that the recent polls are sending – that Obama's incredible spending and bigger government plans will wreck our economy over time. If not, it could be a very bleak future that we leave to our heirs. Sorry to end on a negative note, but it is what it is.

Wishing you a great summer,

Gary D. Halbert

SPECIAL ARTICLES

Independent voters worried about Obama's spending
http://online.wsj.com/article/SB124570175501838333.html

More polls show growing concern over Obama's deficits
http://www.nydailynews.com/opinions/columnists/goodwin/index.html

Public confidence in Obama stimulus plan is falling
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/22/AR2009062202000.html?hpid=moreheadlines

Why This Recession Could Last Another Year

Gary D. Halbert — Tue, 26 May 2009 21:37:42 GMT

IN THIS ISSUE:

Is the US Economy Turning Around?
The Housing Blues Getting Bluer
Adjustable Rate Mortgage "Resets" To Soar
Commercial Real Estate - The Next Shoe To Drop?
Conclusions - This Can't Be Good For Stocks

Introduction

It's time that we had a talk about the "conventional wisdom" making the rounds in the financial media. We are constantly reminded that the US economy always comes back and that the frozen credit markets will return to normal. We are also assured that the stock markets always recover and go on to new highs. Yet there is little disagreement that we are in the worst economic downturn since the Great Depression and the worst global credit crisis in our lifetimes.

Despite that, dozens of well-known economists and forecasters now tell us that the US economy will be out of the recession and back into positive growth in GDP by the end of this year. They must assume that the serious housing slump is somehow going to go away this year. It won't. In fact, the housing slump looks to get worse before it gets better and is likely to drag on for several more years.

Most troubling is the fact that the home mortgage foreclosure rate spiked 46% in March from a year ago, hitting a record high. A record 5.4 million Americans are delinquent on their mortgage loans, or are already in foreclosure. A record 20 million Americans now owe more on their mortgage loans than their homes are worth. Home prices plunged a record 19% in the 1Q.

These foreclosure numbers are almost certain to get even higher over the next year or two at least as millions of adjustable rate mortgages ("ARMs") are scheduled to "reset" to higher monthly payments, as I will discuss in detail below. Then there is the question of whether the commercial real estate market will follow suit as developers try to refinance their loans over the next year or two. Defaults and foreclosures are already rising rapidly in commercial real estate.

It is for these reasons that I believe the housing slump will get worse before it gets better. If correct, that is not good news for the credit markets or the stock markets. Therefore, it is quite possible that this recession could drag on for at least another year. Let's talk about it.

Is the US Economy Turning Around?

As the stock markets have continued to move higher, more and more economists and analysts have been revising their forecasts upward. Some polls show that a majority of forecasters now believe that we will be out of this recession by the end of the year. Fortunately, there has been some encouraging news over the last couple of months. The major stock market indexes have rebounded by 35-40% since early March, and many analysts conclude that this is a sure sign the recession will end later this year.

This rosy outlook is helped along by what Fed Chairman Bernanke called "green shoots" (good news on the economy) suggesting that the worst of the recession is behind us, and that the economy should be back in mildly positive territory by the end of the 4Q.

Barring any further major shocks in the credit markets, I would agree that we have probably seen the worst of the recession. GDP plunged 6.3% annual rate in the 4Q and -6.1% in the 1Q based on the latest Commerce Department estimate. A growing number of analysts seem to believe that the economy (GDP) will only dip by 2-3% in the 2Q, improve more in the 3Q and then be flat to slightly higher in the 4Q. Obviously, I think such forecasts are too optimistic as I will discuss as we go along.

But we have seen a few encouraging signs of late. The Index of Leading Economic Indicators rose 1.0% in April, the first monthly increase in seven months. The Consumer Confidence Index rose from 29.7 in March to 39.2 in April. The government announced today that the confidence index jumped to 54.9 in May, the highest level in eight months, and stocks are up sharply as this is written. We have also seen a rise in business confidence over the last month or so.

Unfortunately, the rise in consumer confidence has not led to an increase in consumer spending. Retail sales fell .4% in April after falling 1.3% in March. This is another reason I do not believe the economy will be out of the recession this year. Consumer spending accounts for 65-70% of GDP. Yet consumers are still reducing debt and increasing savings in the wake of the credit crisis, and this trend is likely to continue for at least the rest of this year.

The ISM services index (non-manufacturing sectors) edged slightly higher in April from 40.8 to 43.7, but keep in mind that any reading below 50 is an indicator that the economy is still contracting. That's about it for the good news of late.

On the manufacturing front, the news continues to disappoint. The ISM manufacturing index stood at 40.1 in April, thus marking the 15th consecutive month of manufacturing contraction. Factory orders declined .9% in March (latest data available), and durable goods orders fell almost as bad at -.8% during the same period.

As everyone knows, the rate of unemployment continues to spiral upward, rising from 8.5% in March to 8.9% in April. Initial claims for unemployment insurance have been well over 600,000 in each of the last two reporting weeks. I continue to believe the official unemployment rate will hit 10% sometime this year.

Despite this, some forecasters still seem to believe we will be out of this recession by the end of the year. Some point to the recent improvement in several foreign economies and conclude that the US can't be far behind. But as I will discuss in the next section, the US could be well behind these foreign economies in recovering.

Therefore, while there have been a few positive economic reports over the last several weeks, the news is still quite negative on balance. As a result, I am still doubtful, and you should be as well. As I will discuss below, the housing slump - which sparked this recession and credit crisis - is not over, and in fact is getting worse. Home foreclosures skyrocketed 46% from a year ago in March. And most of the other economic indicators and reports continue to point downward.

I continue to believe that this recession will be with us all year. If I am correct, it suggests that the rally in the stock markets will roll over to the downside soon. I continue to recommend that you move some money to the sidelines, put on hedges or at least use stop-loss orders.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Housing Blues Getting Bluer

Even though some of the economic reports coming out show signs of hope for a recovery, I think it is important to revisit what got us to where we are in the first place - housing. After all, it was escalating foreclosure rates on subprime loans that started this recession and credit crisis, and a number of forecasters (myself included) are still convinced that we will not see the end of this recession until housing begins to recover.

Unfortunately, I do not see the housing sector improving anytime soon. In fact, I think it will get even worse before it gets better, despite the trillions of dollars Obama is spending to jump-start the economy and stimulate jobs via liberal programs. This is news you're not likely to hear from government officials or the mainstream press.

The US housing market has two fundamental problems that look to get worse before they get better. As noted in the Introduction, the home mortgage foreclosure rate spiked 46% in March from a year ago, hitting a record high, as reported by RealtyTrac on April 16.

The sign for a foreclosed house for sale sits at the property in Denver, Colorado March 4, 2009. (REUTERS/Rick Wilking)

A temporary freeze on foreclosures by major banks and government-controlled home finance companies Fannie Mae and Freddie Mac ended in February. Filings, which include notices of default, auction sale or bank repossession, jumped 17% in March from February. Foreclosure filings for the 1Q also marked a record high, jumping 24% from the same period a year ago.

RealtyTrac also reported that one in every 159 US households with mortgages got a foreclosure filing in the first three months of this year. Filings were reported on more than 803,000 properties in the quarter. California, Florida, Arizona, Nevada and Illinois accounted for nearly 60% of US foreclosure activity in the first quarter, with a combined 479,516 properties receiving filings.

In the transition from industry freeze to new government rescues, the foreclosure filing floodgates reopened. RealtyTrac vice president Rick Sharga noted that after the foreclosure moratoriums ceased, "We saw an onslaught of notices of default, which is the first stage of foreclosure… The rise in filings suggests a backlog had built up due to the moratoriums."

RealtyTrac predicts that home foreclosure rates will continue to rise and possibly not peak until near the end of the year. Mr. Sharga continued, "We still anticipate that we'll see upward of 3 million households receive a foreclosure notice this year, up from 2.4 million last year."

One does not have to be a real estate expert to know that this is very bad news for home prices in general. Mr. Sharga added, "But unfortunately, these well-intentioned delays in [foreclosure] processing might have the unintended consequence of extending the housing downturn, and further dragging down home prices."

Meanwhile, US home prices are still falling, down over 27% on average from their peak in 2006. In many areas, it is much worse. Even worse still, the Wall Street Journal reported earlier this month that a record 5.4 million Americans are delinquent on their mortgage loans, or are already in foreclosure. Making matters even worse, Bloomberg reported the following day that 20million Americans now owe more on their mortgage loans than their homes are worth.

The National Association of Realtors reported last month that the median existing home price across the nation fell to $169,000 in the 1Q, down from $196,000 a year earlier. Sales of new and existing homes were both down again in March, well below expectations. Housing starts and building permits were both worse than expected in March, with both coming in well below 500,000 units for the first time since such records have been kept going back to 1959.

While these declines will ultimately help to bring an end to the housing glut, it is clear that things will get worse before they get better. This is one of the main reasons I don't see us coming out of this recession later this year.

Adjustable Rate Mortgage "Resets" To Soar

The other big negative facing the housing slump - and the credit crisis - is the flood of Adjustable Rate Mortgages ("ARMs") that are due to have their interest rates and monthly payments "reset" to higher levels over the next several years. The riskiest of these loans include subprime mortgages, Alt-A loans, interest-only loans and so called "no documentation" loans. These are collectively called "Option Arms." It is reported that 90% of all Option ARMs in 2006 were "no-doc" mortgages.

Option ARMs usually reset after five years, at which point the monthly payment typically increases 50% or more. About 38% of option ARMs originated in 2005 are still outstanding, 63% of the 2006 vintage are outstanding, and 82% of the 2007 loans remain outstanding, according to Barclays Capital. And about a third of the outstanding loans in these years are deeply delinquent.

All of these loans are scheduled to reset over the next few years if they are still outstanding (ie - have not defaulted). Unfortunately, most of these homeowners cannot qualify for traditional 15 or 30 year mortgages. That's too bad since today's mortgage rates are below 5% in some parts of the country. The bottom line is that many of these option ARMs are going to default, especially given that home prices continue to slump - down a record 19% in the 1Q alone.

The chart below is reprinted from a major study published recently by Credit Suisse which projects the dollar amounts and timing of upcoming option ARM resets. Note that the vertical axis is in billions of dollars. As you can see, the amount of option ARM resets will explode over the next several years, thereby dumping millions more foreclosed homes on the market.

Source: Credit Suisse

I should note that in February President Obama carved up to $75 billion out of his $787 billion stimulus package for what he called a new Federal Loan Modification Plan. This plan would make money available to banks and mortgage lenders so that they can modify loans to distressed homeowners. However, since most option ARM loans are paying no principal (and many not even 100% of the interest), this latest bailout is not likely to make a significant dent in the rising foreclosure rate. Ditto for the $2.2 billion rescue plan passed by Congress last week.

I should also mention President Obama's $8,000 tax credit for first-time home buyers in 2009. Earlier this month, it was reported that first-time home buyers accounted for over 50% of home sales in March. Yet as reported above, new and existing home sales have declined each month so far this year. There are simply way too many homes on the market, and many more are coming in the next few years as implied by the chart above.

ENDORSED ADVERTISEMENT

Commercial Real Estate - The Next Shoe To Drop?

The drumbeat of bad news in the commercial real estate sector continues to worsen, and many are worried that this could be the next big shoe to drop in the credit crisis. The US commercial property market is huge and is widely estimated at apprx. $5.3 trillion, of which apprx. $3.5 trillion is financed.

Foresight Analytics, a California-based consulting firm that serves institutional investors and lenders, estimates that close to $1trillion of the outstanding $3.5 trillion in commercial real estate loans is due to mature between now and the end of 2011. Not only is the default rate on commercial loans rising, the credit crunch has made such loans very hard to obtain when it comes time to renew them.

* Note: the orange bars in the chart represent the years 2009-2011.

Widespread defaults in the commercial lending market would be devastating, as they were for Lehman Brothers, whose bankruptcy was precipitated by nearly $30 billion troubled commercial loans. In a May 19 report, the Wall Street Journal estimated that commercial loan losses for the 19 major banks that recently underwent the government's stress tests could easily total $200 billion between now and the end of next year. In addition, the Journal estimated that smaller and mid-sized banks could suffer losses of another $100 billion over the same period.

Using the same scenario as in the government's stress tests, the Journal examined 940 small and mid-sized banks around the country, and the results are troubling. Using the stress test criterion (which are not all that bad), the Journal found that more than 600 small and mid-sized banks would see their capital shrink to levels that would be "worrisome" for federal regulators.

The Journal concluded: "The findings are a stark reminder that the U.S. banking industry's problems stretch far beyond the 19 giants scrutinized in the government stress tests. Regulators and investors have focused on too-big-to-fail banks such as Bank of America and Citigroup Inc. But more than 8,000 other lenders throughout the country are being squeezed by the recession and the real-estate crash."

Making matters worse, for several years commercial mortgage loans have increasingly been packaged together and securitized into "Commercial Mortgage Backed Securities" (CMBS), much like with residential mortgages. Banks, investment banks, insurance companies and others could trade these loans on the CMBX (Commercial Mortgage Backed Index) market to offset some of the risk. We've heard this song before (read: subprime).

Not surprisingly, the issuance of CMBSs imploded in 2008. Earlier this year, JP Morgan Chase reported that issuance of CMBSs plunged 95% in 2008. The CMBX market is all but dead today, which virtually assures that commercial mortgage defaults will continue to increase. The Mortgage Bankers Association estimates that at least $171 billion in commercial mortgages will come due in 2009 alone.

It's a vicious circle. The recession means lower consumer spending, which in turn causes problems for commercial businesses that rent space. In turn, rental income for commercial developers goes down. Then there is the fact that the value of commercial real estate is declining in general, and you have the perfect conditions for a spike in the default rate.

Then you throw in the credit crisis. Even developers that can prove their commercial properties are still profitable, despite the recession, are finding it next to impossible to find sources to renew their loans and maturing mortgages. We have just such an example right down the street from my office where a huge new "Galleria" mall recently filed Chapter 11 bankruptcy because it cannot find any lenders to renew its maturing construction debt. Yet the mall is teeming with customers, and most of the retailers, restaurants, etc. report that business is booming.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions - This Can't Be Good For Stocks

While a growing number of economists are upgrading their forecasts, and more are predicting we will be out of this recession by the end of the year, I do not agree. While it is possible that we have seen the worst of the recession in the 4Q of last year and the 1Q of this year, I will be shocked if this economy is in positive GDP territory by the end of the year. There is simply too much bad news out there.

I do not believe that this economy will get back to positive growth until the housing crisis at least stops getting worse. Based on the discussion above, the housing crisis is set to get worse before it gets better. Maybe it starts to get better (ie - not getting worse) sometime in 2010. In any event, the housing slump will be with us for several more years as we work off a record large inventory of unsold homes, which will likely get even larger as option ARM resets lead to a continued spike in foreclosure rates.

Then there is the issue of commercial real estate defaults. As discussed above, most experts agree that the default rates on commercial real estate loans and mortgages will rise for at least the balance of this year, if not longer. We don't hear much about this in the news, but I think it is safe to say we will in the months ahead. And it won't be pretty.

I don't believe most investors and the markets fully understand the ominous implications of what will almost certainly be a $2+ trillion federal budget deficit for fiscal 2009 and $1+ trillion deficits for years to come (especially if President Obama is re-elected). This mind-boggling explosion in our national debt is quite bearish for America's economic and financial future.

For all these reasons, I believe the recession will last considerably longer than most forecasters have recently predicted. Likewise, for all these reasons and more, I do not believe that the recent strong rebound in the stock markets will last.

The S&P 500 Index has heavy overhead resistance at the point where is began to struggle two weeks ago. We may be witnessing the rollover to the downside again. For several weeks, I have recommended that you use this rally to move some money to the sidelines, put on hedges or at least use trailing stop-loss orders.

This may also be an ideal time to consider one or more of the professionally managed programs I recommend that have the flexibility to move out of the market and/or hedge long positions should the trend turn down once again. More aggressive investors may want to consider one or more of the professionally managed programs I recommend that will "short" the market.

Over the past year as the stock markets imploded, we have seen the fastest pace of new account openings in several years. More and more investors are finally coming to realize that "buy-and-hold" simply does not work in these unprecedented times, and are putting some of their investment money with the managers I recommend (and who manage my money).

If you would like to discover how active money management strategies might affect your portfolio, please feel free to call one of our Investment Consultants at 800-348-3601, send us an e-mail at info@halbertwealth.com or complete our online information request form (your personal information is strictly confidential). As always, our consultations are available to you at no cost and there is never any obligation to invest.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

Home prices fell a record 19% in the 1Q
http://www.realclearmarkets.com/news/ap/finance_business/2009/May/26/
s_p__home_prices_fall_by_record_19_1_percent_in_1q.html

Roubini - Don't Believe the Optimists
http://www.forbes.com/2009/05/20/depression-recession-green-shoots-housing-
jobs-opinions-columnists-nouriel-roubini.html

Cheney bests Obama in speech duel
http://www.nydailynews.com/opinions/2009/05/24/2009-05-24_obama_gets_schooled_
on_terror_cheney_bests_him_in_speech_duel__by_sticking_to_th.html

Our president is not quite as advertised
http://online.wsj.com/article/SB124286200693341141.html

On The Economy, Bonds & Bear Market Rallies

Gary D. Halbert — Tue, 05 May 2009 21:15:55 GMT

IN THIS ISSUE:

First Quarter GDP Falls More Than Expected
Stocks Always Outperform Bonds, Right? Wrong!
Should You Put All Your Money in Bonds? No!
Is the Current Market Rally Too Big to Fail?
Conclusions – Not Out of the Woods Yet

Introduction

Last Wednesday the government reported that 1Q GDP declined at an annual rate of 6.1%, thus confirming that we are still in a deep recession. While the GDP report was worse than the pre-report consensus, it was very much in line with what I predicted in my April 21 E-Letter. I continue to believe that we will be in this recession all year.

Several recently released studies highlight the fact that long maturity Treasury bonds have outperformed stocks over the last 40+ years, and by a substantial margin over the last 28 years. I will examine these reports as we go along. Does this mean you should put all of your money in bonds now? I'll tell you why I believe that would be the wrong move to make at this time.

Finally, we get calls every day asking if the recent rally in the stock markets means that the bear market is over, or if this is just a bear market rally. While no one knows for sure, we will take a look at some past bear market rallies to keep things in perspective. I think you'll find this week's letter interesting.

GDP Falls More Than Expected (But Not to My Readers)

The Commerce Department reported last Wednesday that 1Q GDP fell at an annual rate of 6.1%. The pre-report consensus called for a drop of 4.7%, so the actual report came as a negative surprise to the markets (but not to those of you who read my April 21 E-Letter). The decrease in real GDP in the 1Q primarily reflected negative contributions from exports, inventory investment, equipment and software, and decreases in commercial and residential construction.

There were, however, a few bright spots in the latest GDP report, particularly in regard to consumer spending. The GDP report last Wednesday noted that personal consumption expenditures (consumer spending) increased at an annual rate of 2.2% in the 1Q in contrast to a decrease of 4.3% in the 4Q. That number seemed unusually high to me in light of the continued plunge in consumer confidence in the 1Q (more on this below).

Durable goods orders increased 9.4% in contrast to a decrease of 22.1% in the 4Q. Nondurable goods orders increased 1.3% in contrast to a decrease of 9.4% in the 4Q. These are encouraging signs but were overwhelmed by the bad news in the 1Q.

Commercial construction plunged 37.9% year-over-year in the 1Q, even worse than the 21.7% decline in the 4Q. Residential construction decreased 38.0% in the 1Q compared with a decrease of 22.8% in the 4Q. Equipment and software purchases decreased 33.8% compared with a decrease of 28.1% in the 4Q. Exports of goods and services decreased 30.0% in the 1Q compared with a decrease of 23.6% in the 4Q. Imports of goods and services decreased 34.1% compared with a decrease of 17.5% in the 4Q.

The bottom line is that if we had not seen the pickup in consumer spending and durable goods orders, the 1Q GDP number could well have been down 8-10%. The recession is still quite severe, and I continue to predict that it will be with us all year.

It remains to be seen if the next 1Q GDP update on May 29 will include a downward revision from the -6.1% number reported last week. If so, that may not be good news for the markets.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Stocks Always Outperform Bonds, Right? Wrong!

The conventional wisdom going back over a century is that stocks outperform government bonds over time, right? Surely most everyone reading this has been taught that axiom over the years. It's your basic Investing 101 gospel. It's also the financial planning gospel. It goes like this: stocks are more volatile than bonds, but they deliver a fairly significant return premium over bonds in the long-term. Since government-backed bonds are considered safer, if held to maturity, then it only stands to reason that they would deliver somewhat lower returns than stocks over time.

So as a general rule, you should invest more heavily in stocks over bonds when you are younger and have lots of years to ride out the occasional bear market. Then, as you get closer to retirement age, you begin to scale back your equity allocation and invest more in government bonds. Many traditional asset allocation and financial planning models suggest something in the range of a 60/40 stocks/bonds split when you are younger and over time moving to a 40/60 stocks/bonds split – and then even more in bonds as you hit retirement.

Yet this conventional wisdom has come under increased scrutiny recently. Why? Since we've had two serious equity bear markets in the last decade, Treasury bonds have now outperformed equities over the last 30-40 years. Many financial academics and Investment Advisors are now seriously rethinking their long-held beliefs about bonds. (You might note that yours truly never believed you should have all of your money in stocks and bonds only, but that's another story for another time.)

Given the severity of the recent stock market debacle, with the benchmark S&P 500 Index plunging almost 45% since the peak in late 2007, the long-term performance numbers for stocks-versus-bonds have changed. Government bonds now have somewhat higher returns than stocks, especially over the last 30-40 years. Let's look at the numbers.

If we look back from 1801 (for some reason this is a popular historical date) to today, stocks did beat government bonds by apprx. 2.5% per year on average, which is huge considering the compounding effect over more than two centuries. This is the basis for claims that stocks beat bonds over the long-term. But these days, the “long-term” is hardly measured by multiple centuries. Today, a long-term investment horizon is more typically three to five years, or 10 at tops.

But even if we are to look back 200+ years, we see several long periods in which Treasury bonds beat stocks, including the last 30-40 years. Bonds outperformed stocks in the following time windows: 1803 to 1871 (68 years); 1929 to 1949 (20 years);and yes, 1968 to 2009 (41 years).

The implications of this are quite interesting. While Treasury bonds can be quite volatile at times, they always pay off in full if held to maturity. Stock investors have no such guarantee. As a result, stocks are supposed to provide a “risk premium” of a couple percentage points or more, at least historically, to pay for that chance their price could drop (potentially to zero).

Yet as noted above, stocks have not lived up to that historical expectation over the last 30-40 years, not to mention the current bear market. Based on the actual returns in stocks and bonds over that period, you could have chosen one of the safest investments in the world and performed better than those following Wall Street's buy-and-hold forever mantra (which I have never believed should be one's only strategy).

Bonds Really Outperformed Over the Last 28 Years

Economist and author A. Gary Shilling recently published an interesting study on the performance of stocks versus bonds over the period from 1981 to early 2009. For purposes of illustration, Shilling assumed that one bought a 25-year zero-coupon T-bond at the all-time low in October 1981 when long-bond yields were well above 14%. Each year thereafter, he rolled it into another 25-year bond to maintain the 25-year maturity and reinvested the income.

By comparison, Shilling assumed that one bought the S&P 500 Index at its low in July 1982 and reinvested the dividends each year. Then he tracked the performance of both investments through the end of March 2009. The results are quite surprising! Of course, keep in mind that we have seen one of the largest declines in interest rates and inflation in history over the last 28 years, along with two major bear markets in stocks in the last decade.

Shilling found that the 25-year zero-coupon bond delivered an average annual return of 20.4% over the 28 years, while the S&P 500 gained an average of only 10.7% annually over the period from 1981 through March 2009.

If you would like to review Shilling's study (that was printed in Forbes recently) in more detail, I have provided a link to it below in SPECIAL ARTICLES.

Actually, you can go all the way back to 1969 and long-bonds (Treasuries with 20-year or longer maturities) still beat the S&P 500, but only by a marginal amount.

So, Should You Put All Your Money in Bonds? No!

Given that bonds almost doubled the returns of the S&P 500 over the last 28 years, and given that the S&P 500 fell 37% last year and is still down in 2009, you might think it's time to put all or most of your money in Treasury bonds. I do not recommend doing so. First of all, interest rates today are the lowest in many years.

The 20-year and 30-year Treasury bond yields are currently well below 4%, which is extremely low. The 10-year T-bond is well below 3%. Sooner or later the inflation threat will sink in, and bond rates will rise, possibly significantly.

With trillion dollar budget deficits as far as the eye can see, and with other trillions being spent on bailouts, toxic asset purchases, etc., there is little doubt that the US will experience a significant increase in inflation in the years ahead. Some fear we will see hyperinflation given the unprecedented spending by President Obama. Therefore, now could be one of the worst times to load up on Treasury bonds.

Stocks, on the other hand, remain quite depressed. The S&P 500 Index is down apprx. 45% from the highs back in late 2007. While no one knows if the early March lows are “the bottom,” stocks are much cheaper in terms of value today than are bonds, which are in my opinion over-valued.

The question before us is not what happened over the last four decades, but what might happen in the future. One Internet blog entry that I read noted that a call to invest in bonds right now may be similar to John Bogle's (of Vanguard fame) advice in the late 1990s to buy a S&P 500 Index fund and hold it for the foreseeable future. Given that we have experienced two major bear markets since then, that advice was obviously wrong!

There are several bond studies coming out that basically reach the same findings as Gary Shilling's numbers quoted above. So bonds are getting a LOT of attention of late. While all this attention is almost sure to drive more investors to bonds, I would not follow the crowd by selling stocks and equity mutual funds to buy Treasury bonds, which will go down in value if interest rates rise.

ENDORSED ADVERTISEMENT

Is the Current Market Rally Too Big to Fail?

We have heard a lot since last year about institutions that were deemed “too big to fail” and were thus eligible for billions in government bailouts. While it's admittedly a bit different in the stock market, there are market analysts and investors who are claiming that the sheer size of the recent market rally means that the bear market is over and happy days are here again; in other words, this 25% rally is “too big to fail.” While all of us would like to believe that the bear market has run its course, I'm afraid that we can't make that judgment based on the size of the recent rally.

To illustrate this point, I'll reference an excellent example that I came across the other day. The illustration begins with a question: What would an investment of $100,000 be worth if it was invested over a three year period that benefited from the following stock market rallies.

+48.0%
+23.4%
+27.6%
+35.0%
+24.6%

The natural inclination is to assume that the $100,000 would be worth far more at the end of the three-year period. Compounding the original $100,000 investment by the returns above results in an ending value of almost $400,000. However, we know that markets don't go straight up, and there were also some down periods during this timeframe. So we have to reign in our guess to something less. So, what about $200,000 to $250,000? That sounds like a reasonable range, doesn't it?

Well, the correct answer is only $10,800! Yes, over this particular three-year period, $100,000 invested in the Dow Jones stocks would have lost almost 90% of its value.

Surprised? Shocked? I have to admit that this illustration is somewhat of a trick question because it conveniently leaves out the fact that these market rallies occurred over the three years between September 1929 and July of 1932, the darkest period ever for the US stock markets. During this time, the down periods were far worse than the market rallies, so a $100,000 investment in the stock market lost over 89% of its value.

While the above illustration is designed to generate a surprise reaction, it also makes a very important point in regard to bear market rallies. Very rarely do bear markets go straight down, just as no bull market goes straight up. There are almost always “corrections” in the short-term trends, and these reversals are frequently large enough to convince investors that the major trend has changed as well. This can be very costly, especially if they make a change, only to find that the correction was just that, and then the major trend continues.

After the Crash of '29, there were several powerful market rallies that followed. Just as now, I'm sure there were stock market pundits back then claiming that a new bull market had surely begun during some of these rallies, especially the one in late 1929 to early 1930 that gained 48% over the course of 22 weeks.

While the 1929–1932 period was the most prominent example, other notable bear markets have had strong rallies that proved to be false alarms. One Internet source I consulted noted that the 1973–1974 bear market had two bear market rallies of apprx. 10%, and the 2000–2002 bear market had three substantial rallies with the smallest being 19%.

Even the current bear market that began in October of 2007 has had four double-digit rallies, including the one we're in right now. Each of the preceding rallies has provided hope to market participants and drawn many of them back into the market, only to see their investments dwindle further.

As I have mentioned in these pages several times, I am not sure that we have seen the end of this bear market, especially if we learn in the coming weeks that some or many of the largest insurance companies are in trouble. While I am willing to consider the possibility that the March 9 low was the bottom of the market, I also believe that we are very likely to at least retest this low again in the future.

A good example of the market retesting its prior lows is the period of time from July of 2002 to March of 2003. The statistics on the 2000–2002 bear market indicate that the S&P 500 Index hit an intra-day low of 768.67 in October of 2002. However, when you look at a chart of the S&P 500 Index during that period of time, you see that we came very close to the October 2002 intra-day low in July of 2002 (775.96) and again in March of 2003 (788.94). Chartists call this a “triple bottom.” I would not be surprised to see a similar situation occur in 2009.

What Should You Be Doing?

There's an old saying that you should “hope for the best but plan for the worst.” I think that's where we are today in the stock markets. With the unprecedented government intervention in the credit markets and even corporate ownership, we are sailing in uncharted waters. Politicians, who are always happy to see a healthy stock market, now have an even greater incentive to make sure the economy pulls itself out of the ditch. No one wants to run for re-election with the stock market in a slump, especially when the government controls some of the nation's largest banks and corporations.

Therefore, while we all hope that the March 9 low set the bottom of the current bear market, we have to plan as though there's more pain to come. There are a number of ways you can do so, including:

If you are fully invested in the market, you have experienced a nice bump in the value of your portfolio recently. Not knowing what lies ahead, you may want to consider taking advantage of the rally and moving some of your investments to cash. This way, if the market continues to rally, you'll still participate in the gains but with less exposure. However, if we retest the March 9 lows, you'll have some money on the sidelines out of harm's way.
If you are totally on the sidelines in cash, then you have probably been spared some of the bear market's losses, depending upon when you cashed out of the market. However, you have also missed out on the recent market rally. Don't let this regret grow into an emotional need to jump into the market. You could be setting yourself up for losses if we retest the March lows.

If you feel you must get back into the market in some way now, I would suggest that you “dollar cost average” into the market. This is a strategy that calls for making partial investments over time rather than committing your whole portfolio at once. That way, if we retest the March lows, not all of your portfolio will be affected.
Finally, I suggest that you consider the actively managed strategies I recommend that have the flexibility to move to cash or hedge long positions during market downturns. This professionally managed approach takes away the worry and hassle of deciding whether to be in or out of the market. Since I have written about some of these managers in the past, I'll not go into detail here. Suffice it to say that professional active money managers seek to position your portfolio to participate in up markets but become defensive during market downturns.

In light of the current stock market situation, I am reminded of a conversation I had many years ago with a very successful active money manager. We were discussing the higher management fees charged by active managers, typically in the 2-2½% range annually. I made the comment that I believed such fees were justified in return for getting investors out of the market during serious downturns. The manager responded as follows (more or less verbatim):

You know, most people think they pay us our fees to get them out of the market to avoid the big declines and bear markets. But getting out of the market is the easy part. What people really pay us for is to get them back in the market – that's the hard part.

That conversation comes to mind because we hear from so many people who got out of the stock market late last year or early this year, and they have no idea when to get back in. That's when having a time-tested mechanical timing system directing a portion of your portfolio can be very valuable.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions – Not Out of the Woods Yet

Following the release of the 1Q GDP report last Wednesday, the Dow Jones promptly rallied 200 points, and the S&P 500 gained 22 points – even though the overall GDP report (-6.1%) was worse than expected. People reacted to the increase in consumer spending in the 1Q as a sign that the recession may be ending.

Yet if we dissect the numbers within the GDP report, as I did above, we find that most sectors of the economy declined at an even faster pace in the 1Q. These facts suggest that this recession has not hit bottom and will be with us for some time to come.

It may be that the 1Q proves to be the worst part of the recession. Most economists expect the decline in GDP to be smaller in the 2Q and even smaller in the 3Q. While those estimates may prove to be correct, we saw no convincing evidence that the recession was starting to bottom in the 1Q. Given that, I think we can dismiss forecasts calling for a return to positive GDP in the second half of this year.

Also keep in mind that there may be more bad news for the credit crisis just ahead. As I discussed at length in my April 7 E-Letter, there is plenty of evidence that some of the largest insurers in the US are in financial trouble. Some are pleading for bailouts, and it is probably reasonable to expect they will get them. But this news is getting hardly any media attention thus far. So this could be the next shoe to drop in the credit crisis.

Obviously, it is very difficult to know what to do with your investments in times like these. Investors who are on the sidelines wonder if they should jump back in. People who rode the market all the way down are wondering if they should now get out. Based on the calls we get, most investors are still very nervous, even though the stock markets have recovered somewhat.

In my Investment Advisory business, we have found that investors mostly want to talk to someone they can trust and explore all of the options. They don't want to talk to someone who is automatically going to tell them to sell all of their investments and transfer their money to a new Advisor or program, nor do they want to be hounded on the phone or via constant e-mails. Fortunately, we don't do any of those things at my company.

I would like to offer you the ability to talk to any of our Investment Consultants about your investment needs with no cost or obligation to invest of any kind. My company is very different in that all my Investment Consultants are paid a salary, and do not receive commissions or incentive compensation of any kind. Thus, their marching orders are to make sure that our clients' investment needs are met, even if it means not participating in any of the investment programs we recommend.

If you would like to discuss your current investments and/or retirement planning with someone who is not going to pressure you to invest with them, then you are welcome to call one of my experienced Investment Consultants, at no charge to you. You can call us at 800-348-3601, or if you prefer, you can send an e-mail to info@halbertwealth.com and your questions will be immediately routed to one of our staff members.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

Gary Shilling Study: Stocks vs. Bonds
http://www.forbes.com/2009/04/22/treasury-deflation-stocks-personal-finance-guru-insight-gary-shilling.html

More on the Financial Stability Board
http://spectator.org/archives/2009/05/04/the-fed-fails-upward

Signs of the End of the Recession - Maybe

Gary D. Halbert — Tue, 21 Apr 2009 19:29:18 GMT

IN THIS ISSUE:

The Latest Economic Reports -- Mostly Negative
Latest Wall Street Journal Survey of Economists
Fed's Latest "Beige Book" Outlook is Bleak
Conclusions -- What To Believe?

Introduction

We have clients calling us every day to ask if we believe the economy and the stock markets have seen the bottom. We don't know for sure, of course, but it may be reasonable to assume that the 4Q of last year and the 1Q of this year will mark the worst two quarters of this severe recession. We won't see the government's first estimate of 1Q GDP until next Wednesday, April 29, and it is expected to be about as bad as the 4Q decline of 6.3% (annual rate).

Economic reports over the last few weeks have been mixed to negative. I will highlight those reports as we go along. To get a better idea where we stand in the recession, we will also review the latest Federal Reserve "Beige Book" released on April 15, which analyzes the national economy in greater detail. Overall, it was quite negative and reinforced my view that we will be in negative economic growth territory for all of this year.

The stock markets bottomed in early March, and we have seen an impressive rally since then. The Dow Jones rebounded almost 25% from the lows in early March. There is historical evidence that the stock markets are often an early indicator of a change in the economic indicators, and tend to lead the economy by an average of six months. More and more analysts are calling the March lows the bottom, but this assumes there will be no more major negative surprises.

The stock market recovery and signs that the credit markets are unfreezing just a bit prompted some rather optimistic predictions (overall) in a recent Wall Street Journal survey of 53 economists and market analysts. On average, the 53 forecasters predicted an end to the recession by September of this year. I am not so optimistic, and the combined WSJ survey results are not nearly as positive as the September end-of-recession conclusion suggests. More on this later.

As I wrote in my April 7 E-Letter, many of the largest insurance companies are in financial trouble, so I believe it is still too early to assume that there will not be more major negative surprises. Although, as I noted in last week's letter, it appears that the Treasury Department will allow most major insurers access to TARP bailout monies, assuming the companies are willing to submit themselves to government controls.

As we go along, I will direct you to a weekly economic publication I follow that is produced by the Wachovia Economics Group (Wachovia bank was purchased by Wells Fargo bank in December of 2008). While the analysts at Wachovia are considerably more optimistic than I am about the recession ending later this year, they do a decent job of forecasting and analyzing the various economic reports that are released each week, and it's free of charge. I'll tell you how to access it later on in this letter. Let's get started.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Latest Economic Reports -- Mostly Negative

At the end of March, the Commerce Department released its final estimate of 4Q GDP, showing that the economy fell at an annual rate of 6.3%, the worst quarterly drop in 25 years. Personal consumption spending plunged 4.3% year-over-year in the 4Q. As noted above, the first estimate of 1Q GDP will not be released until next Wednesday, April 29. Pre-report estimates vary from down 4-5% to down 7-8%. My guess is that 1Q GDP will be down slightly more than the -6.3% in the 4Q of last year.

We have recently seen a few encouraging signs that the worst of the recession and the credit crisis may be behind us, such as improving profit numbers from several of the big banks that took TARP money. At the same time, there are persistent rumors that several of the major banks have failed their so-called "stress tests" being conducted by the Treasury Department. For a host of reasons, I believe that the recession will drag on for the rest of the year.

Most importantly, every week we continue to hear of mounting job losses. The unemployment rate jumped to 8.5% in March, up from 8.1% a month earlier. The Labor Department announced last Thursday that the number of Americans receiving unemployment benefits topped six million for the first time in US history. Initial unemployment claims have been above 600,000 for the last four weeks running. Most of my trusted sources believe that the unemployment rate will hit at least 10% by the end of the year, another suggestion that the recession will drag on for at least another 2-3 quarters.

Consumer confidence remains in the tank. The latest report for March had the Consumer Confidence Index at 26.0, down from 60 just last September. Lynn Franco, Director of The Conference Board Consumer Research Center noted:

"Consumer Confidence was relatively unchanged in March, after reaching an all-time low in February (Index began in 1967). The Present Situation Index suggests that the overall state of the economy remains weak and that more job losses are on the horizon. Apprehension about the outlook for the economy, the labor market and earnings continues to weigh heavily on consumers' attitudes. Looking ahead, consumers remain extremely pessimistic about the short-term future and do not foresee a turnaround in economic conditions over the coming six months."

With consumer confidence so depressed, it should not have surprised anyone that retail sales for March were worse than expected, falling 1.1%. It was the biggest decline in three months and a much weaker showing than the 0.3% decline that analysts expected. A big drop in auto sales led the overall slump in demand. Sales also plunged at clothing stores, appliance outlets and furniture stores, just to mention a few.

Along with the slowdown in consumer spending, we are seeing credit card delinquencies continue to soar. It was recently reported that banks and credit card companies wrote off a record $21 billion in unpaid credit card debt in 2008. Such credit card write-offs are estimated to balloon to a whopping $41 billion this year. This will mean more bad news for the major banks.

The Conference Board reported yesterday that the Index of Leading Economic Indicators (LEI) fell 0.3% in March, following a decline of 0.4% in February. The chart below illustrates the severity of the economic downturn and does not suggest that the recession has bottomed out yet.

The ISM manufacturing index was essentially unchanged in March at 36.3, up fractionally from February's 35.8. Any reading in the ISM index below 50 indicates that the economy is contracting. The March decline was the 14th consecutive month that the index was below 50. A spokesperson for the ISM noted, however, that the March reading of 36.3 marked the third consecutive month that the index was in the mid-30s, suggesting that the decline may be stabilizing. We will see.

Industrial production contracted by 1.5% in March after a similar decline in February. Analysts estimate that industrial production fell at an annualized rate of 20% in the 1Q. If correct, that would mean the 1Q would be the largest drop since the 1Q of 1975. With the exception of utilities, all major industrial sectors registered declines. Capacity utilization (the factory operating rate) fell to 69.3% in March, which is the lowest on record, down from near 80% a year ago.

On the housing front, March brought more bad news following the brief respite the month before. Housing starts plunged 10.8% in March to a seasonally adjusted annual rate of 510,000 units. That was the second lowest home construction pace in records that go back 50 years. The decline was worse than economists had expected, and February activity also was revised lower. Applications for building permits fell 9% in March to a record low of 513,000 units. Some would argue that the declines noted above are a good thing since there are still far too many unsold homes on the market.

Unfortunately, the home foreclosure rate jumped by 24% in the first three months of this year and is poised to rise further as major lenders restart foreclosures after a temporary break, according to data released last Thursday. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same time period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm.

The big unknown for the coming months, however, is President Obama's supposed plan to help up to nine million borrowers avoid foreclosure through refinanced mortgages or modified loans. The Obama administration expects its plans to make a big dent in the foreclosure crisis. But it hasn't happened yet, and it remains to be seen whether the lending industry will fully embrace it, despite $75 billion in potential incentive payments.

Predictions of a Recovery in the Economy

As noted in the Introduction, the analysts at Wachovia Economics Group are considerably more optimistic than I am about the second half of this year. As you can see in the chart below, the Wachovia Group expects 1Q GDP to come in around -6%, and they could be correct. In any event, the 1Q GDP number will almost certainly be one of the worst in decades.

The Wachovia Group believes that economic growth will recover in the 2Q and 3Q with GDP registering only a negative 1-2%. And they currently forecast that GDP will improve into mildly positive territory in the 4Q. I believe Wachovia's prediction of an end to the recession by the 4Q is too optimistic, as do several of my most trusted sources for economic forecasts.

If you would like to read Wachovia's latest weekly economic analysis released on Friday, click on the following link:
http://www.realclearmarkets.com/articles/WeeklyEconomicFinancialCommentaryApril172009.pdf

If you would like to subscribe to Wachovia's weekly economic commentaries, click on the following link -- the service is free of charge:
http://www.wachovia.com/economicsemail

Latest Wall Street Journal Survey of Economists

As noted in the Introduction, the latest Wall Street Journal (WSJ) survey of 53 economists and market analysts yielded some (emphasize some) surprisingly positive suggestions, despite the continued drumbeat of negative economic news. The WSJ survey was taken in early April. On average, the 53 economists and analysts surveyed predicted that the recession would end by September of this year.

While the average forecast among the 53 economists suggests that the recession will end late in the 3Q, there were a number of the economists surveyed that were not so optimistic. I agree. Here are some highlights from the latest WSJ economic survey. Pay special attention to the unemployment forecasts. Those, to me, tell us more than anything about when the recession will end.

"Economists in the latest Wall Street Journal forecasting survey expect the recession to end in September, though most say it won't be until the second half of 2010 that the economy recovers enough to bring down unemployment.

Gross domestic product was predicted to contract in the first and second quarters of this year by 5.0% and 1.8%, respectively, on a seasonally adjusted annualized rate. A return to growth -- a modest 0.4% -- isn't expected until the third quarter.

Indeed, economists' prospects for the labor market remain bleak. Just 12% of the economists expect the unemployment rate to fall some time this year. More than a third of respondents expect the jobless rate to peak in the first half of 2010, while about half don't see unemployment declining until the second half of 2010. By December of this year, the economists on average expect the unemployment rate to reach 9.5%, up from the 8.5% reported for March...

Meanwhile, asked to name the biggest risk to their forecasts, economists singled out problems in the credit markets. ‘Once the virtuous cycle starts, the chief headwind will be credit availability,' said Kurt Karl of Swiss Re. The possibilities of a failure of a major financial institution and persistent reluctance of consumers to spend, both related to the credit markets, were tied for second place in the list of concerns."

Many market analysts around the world follow the WSJ economist surveys, and they are always insightful. But this one published earlier this month raises more questions than answers. How likely is it that the recession will end in September when the consensus among the economists is that the unemployment rate will continue to ratchet up until at least mid-2010? I don't get it.

My conclusion is that the recession may well hit bottom by September of this year, but we won't be back to positive economic growth until sometime in 2010. And that assumes we are not looking at major insurance company bankruptcies (and/or major bailouts) if we see a bad hurricane season this summer or fall (as discussed in my April 7 E-Letter).

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Fed's Latest "Beige Book" Outlook is Bleak

The Federal Reserve issues a very insightful economic publication entitled the "Beige Book" eight times per year, essentially every month and a half. Each of the 12 Federal Reserve Banks gathers information on current economic and financial conditions in their district, and this information goes into the Beige Book report every 45 days or so. The latest Beige Book economic summary released this month is perhaps the most negative I have ever read. Here is the summary and highlighted remarks:

"Reports from the Federal Reserve Banks indicate that overall economic activity contracted further or remained weak. However, five of the twelve Districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilizing at a low level.

Manufacturing activity weakened across a broad range of industries in most Districts, with only a few exceptions. Nonfinancial service activity continued to contract across Districts. Retail spending remained sluggish, although some Districts noted a slight improvement in sales compared with the previous reporting period. Residential real estate markets continued to be weak.

Home prices and construction were still falling in most areas, but better-than-expected buyer traffic led to a scattered pickup in sales in a number of Districts. Nonresidential real estate conditions continued to deteriorate. Difficulty obtaining commercial real estate financing was constraining construction and investment activity. Spending on business travel declined as corporations cut back. Reports on tourism were mixed. Bankers reported tight credit conditions, rising delinquencies, and some deterioration of loan quality.

Agricultural conditions were generally favorable across Districts, although drought conditions persisted in the Dallas and San Francisco Districts. The Districts reporting on energy said reduced demand, high inventories, and lower prices led to steep cutbacks in oil and natural gas drilling and production activity. The Minneapolis, Kansas City, and Dallas Districts noted declines in employment in the oil and gas extraction industry.

Downward pressure on prices was reported across Districts. Wage and salary pressures eased as labor markets weakened in all Districts, and many contacts continued to report job cuts and wage and hiring freezes. Employment continued to decline across a range of industries, with only scattered reports of hiring."

This summary of the latest Beige Book report sounds rather benign. But keep in mind that the Fed hates to come across sounding too negative. The report continues as follows:

"Manufacturing activity continued to decline in most Districts and across a wide range of industries… Orders and shipments of capital goods, autos, paper, and construction-related equipment and products such as metals, wood products, lumber and electrical machinery remained mostly sluggish and below year-ago levels…

Districts that report on nonfinancial business services said demand continued to fall across most industries. Providers of health-care services noted further declines in activity, and contacts in several Districts noted demand for professional services, such as architecture, business consulting and legal services, remained weak. Auto dealers continued to struggle, and overall vehicle sales were sluggish in all reporting Districts as weak demand and tight credit continued to limit sales…

Travel and tourism activity contracted further in several reporting Districts, as households and businesses continued to scale back on discretionary and travel spending. Tourist spending in the New York, Minneapolis, and San Francisco Districts saw double-digit declines compared with the prior year. Airlines in the Dallas District and hotel contacts in the Kansas City District reported weakening demand for business travel, while the Atlanta District noted convention cancellations. Restaurants continued to see sluggish activity in the Kansas City and San Francisco Districts, which prompted further layoffs and closures in the latter region.

Housing markets remained depressed overall, but there were some signs that conditions may be stabilizing… New home construction activity fell further, however, as inventories remained elevated. Home prices continued to decline in most Districts, although a few reports noted that prices were unchanged or that the pace of decline had eased… Nonresidential real estate conditions continued to deteriorate over the past six weeks. Demand for office, industrial and retail space continued to fall, and there were reports of increases in sublease space.

[Commercial] property values moved lower as reality ‘set in…' Commercial real estate investment activity weakened further. Contacts said a decline in credit availability and markdowns on commercial property were keeping buyers and sellers on the sidelines.

… Demand for commercial and industrial loans was weak, and there were several reports that business borrowers were postponing capital expenditures. Commercial real estate lending continued to decline. Credit availability generally remained very tight across regions. A number of Districts reported deteriorating loan quality and rising delinquencies for all types of loan categories. In particular, several reports noted more stringent requirements for commercial real estate loans due to worries of worsening loan quality in the sector.

Labor market conditions were weak and reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across Districts. Staffing firms in the New York, Cleveland, Richmond, Chicago, and Dallas Districts reported that demand for workers remained sluggish.

… Continuing layoffs, furloughs and hiring freezes kept wage pressures minimal. Contacts from a broad range of industries reported pay freezes, with some noting salary reductions. The Minneapolis District reported that unionized faculty at Minnesota's technical and community colleges had tentatively accepted a two-year pay freeze. Contacts in the Boston, Philadelphia, Richmond, Chicago, and San Francisco Districts reported cuts in certain non-wage employment benefits, including cuts in bonuses, elimination or suspension of employer contributions to employee retirement programs, and increases in copayments on employer sponsored healthcare plans.

… Consumer spending remained generally weak. Travel and tourism activity contracted further in several reporting Districts, as households and businesses continued to scale back on discretionary and travel spending… Retailers kept inventories lean, in line with the slow pace of sales, and most expect demand to stay at current low levels over the next few months… Auto dealers continued to struggle, and overall vehicle sales were sluggish in all reporting Districts as weak demand and tight credit continued to limit sales."

I could go on and on with quotes from the April Federal Reserve Beige Book, but you get the picture. This is the most negative Beige Book assessment of the economy that I can ever remember reading over many years.

Notice how many references the Fed makes to the weakness in the commercial real estate markets. Some analysts believe that commercial real estate markets may be the next shoe to drop in the recession (along with insurance companies, as I warned two weeks ago). This does not suggest an economy that is about to rebound from a recession anytime soon.

Have the Stock Markets Bottomed?

The major market indexes rebounded 20-25% since the recent lows in early March, and investors around the world are wondering if we've finally seen the bottom. The latest recovery has indeed been impressive, but we need to keep it in perspective. As you can see in the S&P 500 monthly chart below, the market was extremely oversold by the end of February.

Given that the S&P 500 had plunged almost 45% from the peak in late 2007, the market was overdue for a significant rebound. Over the last couple of weeks, there have been plenty of analysts and financial writers who have proclaimed that we've seen the bottom. But many of these same analysts are always bullish. Others, of course, maintain that this is just a bear market rally.

No one knows which camp will ultimately be proven correct. Here are a few observations as to how things may play out. First, if Wachovia and the majority of economists surveyed by the WSJ are correct that the recession will end and the economy will improve significantly in the second half of this year, then I would bet that the bottom is in.

It is also very helpful that several of the major banks have been reporting good news for the 1Q, and the credit markets are starting to unfreeze a bit. Several of the big banks that had TARP money shoved down their throats are now begging to give it back, which is also good, and is encouraging to the equity markets and investors in general. But keep in mind that we have yet to see the results of the stress tests, and some fear this news will not be good. We'll see.

Also, keep in mind my ongoing concerns about the insurance industry where the 1Q financial reports are expected to be very ugly. Also, as discussed above, the commercial real estate markets are turning down as we speak. So, I will not be surprised if we see at least a retest of the March lows in the major indexes. Whether we've seen the bottom or not may depend on how much concern develops for the insurance industry and commercial real estate just ahead.

Several of the professional money managers I recommend have moved back on the long side of the market, but most are not fully invested (i.e., they still have some money on the sidelines). And if their systems indicate that this rally is fizzling, they won't hesitate to move back to cash and/or hedge their long positions.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions -- What To Believe?

At the end of the day, the question is whether or not this recession will end before this year is over, or will it drag on into 2010? This, of course, depends on one's definition of recession. If we are to believe that the recession is over when negative economic growth bottoms out, but has not yet improved to positive territory, then I would tend to agree that the recession will end later this year.

But if we agree that the recession has ended only when the economy returns to positive growth, then I believe the recession will not end until sometime in 2010. I hope I am wrong. The economists at Wachovia Group believe the recession will end in the second half of this year, as does a consensus of Wall Street Journal economists based on an April survey.

I sincerely hope they are correct, but I fear they are not, especially if it is confirmed over the coming weeks that the big insurance companies are in financial trouble. It's a lot to think about, especially as it pertains to your investment accounts, your retirement portfolios and meeting your financial goals.

Time will tell which camp is correct. In the meantime, I continue to recommend that you use this market rally to move to more defensive (alternative) portfolio strategies that have the potential to protect you from major market downturns.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

A Backdoor Nationalization of the Banks (read this)
http://online.wsj.com/article/SB124027165661037073.html

Big-Spending Conservative
http://www.nytimes.com/2009/04/21/opinion/21brooks.html?_r=2&ref=opinion

Tea Party Economics
http://www.forbes.com/2009/04/20/tea-party-taxes-opinions-columnists-ear-marks.html

Have We Turned The Corner On The Recession?

Gary D. Halbert — Tue, 31 Mar 2009 20:31:08 GMT

IN THIS ISSUE:

Finally a Little Good News for the Economy
Geithner's Latest Toxic Asset Bank Bailout
Does the PPIP Have Any Chance of Working?
Fed to Buy $300 Billion in Treasuries & a Lot More
CBO Assessment of Obama's Record 2010 Budget
Conclusions, Market Implications & What to Do Now

Introduction

Some weeks, it's tough to find a good topic to write about. Then other weeks, I'm overwhelmed with all there is to write about, as is the case this week. So, we'll touch several bases in this week's E-Letter. We'll begin with the latest economic news, some of which was surprisingly positive (especially housing). Unfortunately, the latest good news does not necessarily mean we've seen the bottom of the recession or the bear market.

On Monday of last week, Treasury Secretary Geithner announced the much-awaited new plan to take toxic assets off the books of troubled banks. The plan is called the Public-Private Investment Program. Under this new program, the government along with private investors would buy up toxic assets by way of auctions to get these loans off the banks' books. But will the plan work? I'm not optimistic. We'll discuss this in some detail as we go along.

As if the Obama administration is not spending enough already, the Fed recently announced that it will print and spend over $1 trillion in the months ahead to buy at least $300 billion in direct purchases of Treasury securities and at least another $750 billion for purchasing more toxic assets from banks and other sources. Where will it end? No one knows.

In my March 10 E-Letter, I predicted that President Obama's $3.55 trillion federal budget for fiscal 2010 would result in a deficit of more than $2 trillion, as opposed to the administration's estimate of $1.75 trillion. Turns out I was wrong – the Congressional Budget Office predicted last week that Obama's 2010 budget deficit will hit $2.3 trillion. Wow, this will be bad! The CBO agrees with me that Obama's economic assumptions are too optimistic.

Following those discussions, I will give you my latest thoughts on where we stand in the big picture. With the latest smattering of good news on the economy and the nice rebound in the stock markets, some analysts are concluding that we've turned the corner on the recession and the financial crisis. I think it's premature to make that call, and I will not be surprised if we see another downward leg before long. In fact, it may have already begun. Let's get started.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Finally a Little Good News for the Economy

As everyone reading this is all too aware, the economic news so far this year has been horrible. Rarely has any good news been seen in recent months. But there was some good news last week, and it came in a very good spot – housing. Existing home sales in February unexpectedly rose by 5.3% above January levels to an annual rate of 4.72 million units. It was the largest monthly jump since 2003; still, sales were down almost 5% below yearago levels.

The increase in sales of existing homes was strongest in the West and in Florida, one of the worst hit markets. February sales of existing homes in Florida rose 20%. Florida Realtors also reported a 15% gain in statewide sales of existing condominiums in February, continuing a trend in recent months for higher statewide sales of both the existing home and existing condo markets compared to yearago levels.

The median sales price for existing homes nationwide rose to $165,400 in February, the first monthly increase in over a year, but it remains 15.5% below yearago levels. Unfortunately, the inventory of unsold existing homes rose again in February, despite the improved sales figures, thus putting the backlog at an estimated 9.7 months supply at the current sales pace.

New homes sales also increased by 4.7% in February to an annual rate of 337,000 units. Economists had expected new home sales to decline to a rate of 300,000 annualized units, so this was welcome news. While the unexpected rise in new home sales might be seen as a positive movement for the beleaguered housing market, the February rate for new home construction is still the second-lowest reading since the last recession in 2002. The median price of a purchased new home fell to $200,900 in February, down over 18% from a year ago.

Housing starts jumped well above expectations in February, rising 22% over January levels. Rising housing starts might not sound like a good thing, as that could mean even more homes on the market, but reportedly over 80% of the February construction starts were for apartment complexes, not new single family homes. Also, building permits climbed in February for the first time in over a year.

On another front, durable goods orders rose a surprising 3.4% in February following six consecutive monthly declines. This news was bittersweet because the Commerce Department revised January durable goods orders further downward from -5.2% to -7.3%.

Elsewhere, the economic news continued to disappoint. Last Thursday, the government reported that 4Q GDP fell at an annual rate of -6.3%, down from -6.2% as reported last month. Consumer confidence continued to plunge in February to only 25.0, a new record low, down from 37.4 in January. However, the latest Rasmussen tracking poll shows that consumer confidence has rebounded a bit in March.

The Index of Leading Economic Indicators fell 0.4% in February. The LEI has fallen very sharply since the last peak in July 2007. The unemployment rate jumped to 8.1% in February from 7.6% in January. The consensus is for a rise to 8.5% in March and at least 9% by yearend. These are just a few of the negative reports we've seen over the last month.

In summary, while we've seen a few positive reports on the economy and the housing sector in particular over the last month, we are far from out of the woods on the recession and the financial crisis. Now, let's move on to the latest bank bailout proposed by Treasury Secretary Timothy Geithner.

Geithner's Latest Toxic Asset Bank Bailout

After Treasury Secretary Geithner announced his new Public-Private Investment Program (“PPIP”) on Monday of last week, the Dow Jones promptly rallied over 500 points. That followed a rally of almost 1,000 points since the low in early March. The Dow and the S&P 500 bounced just over 20% from their recent lows – that is until the latest near 5% downward reversal over the last two trading sessions (Friday and Monday). While the equity markets clearly liked the government's latest bank bailout plan, serious questions remain – such as, will it work, and will private investor groups want to get in bed with the government, which threatened to impose a 90% tax on AIG executive bonuses?

We'll get to those questions and others as we go along, but first let's examine how the Public-Private Investment Program is supposedly designed to work. In an online article in FORTUNE, CNNMoney.com's Jon Birger provided the following summary on how the PPIP is expected to work as follows:

“The [PPIP] plan tries to fix the banking crisis by encouraging the very behavior that got us into this mess in the first place -- using buckets full of leverage to buy mortgages, asset-backed securities and other so-called toxic assets. Moreover, it requires the participation of the very folks -- Wall Street bankers and investors -- whom officials in Washington have spent the last two months threatening and vilifying.

At its core, the Public-Private Investment Program (PPIP) harkens back to what the original bank bailout bill was supposed to do when it was first passed by Congress last fall: remove toxic assets from bank balance sheets, thereby freeing up more money for lending. The mechanics of the program would operate somewhat differently for stand-alone loans than for debt securities (basically bundles of loans packaged as asset-backed or mortgage-backed securities), but the general approach is the same. The government will match, dollar for dollar, any private-sector funds put towards buying these toxic assets.

And if that weren't incentive enough, the government will also facilitate cheap loans -- think of them as FDIC-guaranteed margin loans -- to private investors who will be able to leverage their distressed-debt purchases six to one.

Here's how it might work: Say a bank has a pool of residential mortgages with a $100,000 face value that are deemed good risks by the FDIC. The pool is then auctioned off, and in this example, the winning bid is $84,000. Of that, the government puts up $6,000, the private investor another $6,000, and the remaining $72,000 is financed via a FDIC-guaranteed margin loan.

The goal is to jump start the market for toxic debt and put the prices of these loans more in line with the underlying interest payments (which in some cases have declined far less than the market valuation of the loans or debt securities). Theoretically, once the PPIPs start buying and selling this stuff, the valuations will become clearer, opening the door to other private investors who may see opportunity but have shied away up until now due to the lack of price transparency.

That's the upside. The potential downside is what happens if prices continue to fall. And if you think taxpayers are mad now, just wait till they find out that, on account of government-sponsored leverage, a further 15% decline in the debt markets caused them to lose 100% of their investment in PPIPs. Says Tom Atteberry, co-manager of the FPA New Income bond fund: ‘I do see some irony in the fact that the proposed government solution to the problem looks a lot like a hedge fund and a primary broker -- with the primary broker being the federal government.'

There's also a question of whether Wall Street money managers will play ball with a government that has been bad-mouthing them and threatening them with confiscatory taxes. ‘If they go ahead with the 90% tax, nobody is going to want to work with the government,' says a top mortgage-fund manager, referring to the bill passed by the U.S. House of Representatives that would slap a 90% tax on bonuses paid to employees of bailed-out financial companies. ‘It's a deal killer,' says Rick Hughes, co-president of Portfolio Management Consultants, which directs $70 billion in institutional and retail accounts.

Even if the bonus tax isn't implemented, the mortgage-fund manager worries what might happen if PPIP works too well. He envisions a scenario in which money managers are hauled before Congress and accused of making millions on the backs of taxpayers. ‘I'd rather be attacked by a pack of wild dogs,' he says. There are other, more conventional ways that government involvement could discourage money managers from participating.

FPA's Atteberry notes that under the Treasury Department proposal, the FDIC would provide oversight to the PPIP funds. Atteberry says that if he were putting his firm's capital at risk, he'd want to know more about what ‘oversight' entails. For instance, will political considerations prevent investors from foreclosing on certain homeowners or force them to offer generous loan modifications? Says Atteberry, ‘Those are details you need to flesh out if you want to get private investors to come on board.'

Of course, it could be that some on Wall Street -- hedge fund managers in particular -- are so desperate for any source of income, they'll gladly accept these risks.

Prime brokers are extending less credit to hedge funds and investors are pulling out their money. So if the government now wants to become hedge funds' new BFF -- their new prime broker as well as their biggest investor -- why quibble about the details? ‘The reality is that a lot of hedge funds really don't have a business model any more,' says veteran Wall Street strategist Ed Yardeni. ‘The government is basically putting Wall Street back in business with a whole new business model, which is to take all the toxic assets, repackage them and re-sell them at a discount.'

‘Wall Street is getting paid to re-arrange the deck chairs on the Titanic -- but hopefully with a better outcome.'”

Many thanks to Jon Birger of CNNMoney.com for that summary. Obviously, there are still many unanswered questions about the Public-Private Investment Program. Geithner's roll out of the program last week was very short on details, and many private investors are going to be very wary of getting in bed with the government to buy up these toxic assets, even if the discounts are very attractive.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Does the PPIP Have Any Chance of Working?

If President Obama wants this plan to have any chance of working, he needs to make sure the Senate does not go along with the House in passing the 90% retroactive income tax on the AIG executives that received big bonuses. Hedge funds, private equity funds and the like will not want to pony up money to buy toxic assets if they fear that the government will change the rules on profit sharing in these PPIP transactions.

I have read several articles recently that indicated the Treasury was already planning to recoup the AIG bonuses by subtracting that amount from the next round of bailout money AIG will need. That would have been an easy way to get the money back and put the onus on top AIG management to claw back the bonuses. But the Democrats in the House couldn't resist the opportunity to grandstand in front of the American people with an illegal, retroactive 90% income tax on the AIG bonus money.

Political commentator Dick Morris has an interesting take on the PPIP. Morris believes strongly that President Obama wants the PPIP to fail. Morris is convinced that, while Obama says publicly that he does not want to nationalize the big banks, privately Obama and Rahm Emanuel would very much like to see the government take over these large money center banks that have taken bailout money.

Morris argues that this is precisely why the president has been lambasting Wall Street and the big banks for weeks now, in the hope that private investors will not jump into the PPIP with both feet. Morris also believes that this is why Obama packaged the PPIP as Geithner's plan, not his own, so that if it fails he won't get the blame. If it does fail, Morris predicts that Obama will then nationalize the troubled banks. I sincerely hope this assessment is wrong!

As noted earlier, the stock markets reacted extremely strongly following Geithner's announcement of the Public-Private Investment Program. If it is to have any chance of working, he needs to get the details out fast, including assurances that the government won't change the rules in the middle of the game. We'll see.

Fed To Buy $300 Billion in Treasuries & a Lot More

The Fed Open Market Committee met on March 17-18, and the policymakers approved some bold new (yet troublesome) actions. Citing that the economy continues to worsen and the credit markets are still dysfunctional, the FOMC voted unanimously to authorize the Fed to make direct Treasury security purchases of $300 billion over the next six months, with a suggestion that much more could be authorized later on if needed.

This move is controversial because the Fed will have to print the $300 billion to pay for the purchases of Treasury securities. Many fear that this action (and likely more to come) will further sew the seeds of significantly higher inflation when we emerge from this recession. But as I have written often in recent letters, the Fed is scared to death of deflation and will do whatever they feel is required to avert a debt deflation in the economy.

At the same FOMC meeting, Bernanke & Company also voted to double the Fed's purchases of mortgage-backed securities and take on more agency debt. That means the Fed will purchase another $750 billion in toxic mortgage-related securities this year. Between the Treasury purchases and the additional mortgage-related securities – all of which they will have to print money for - the Fed's balance sheet liabilities will skyrocket to well above $3 trillion this year.

Here are excerpts from the March 17-18 FOMC official statement:

“In these [bad economic] circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities… and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.”

Following this announcement, yields on 10-year Treasury notes plummeted in the largest one-day decline on record to near 2.5%, down from above 3% just two days before. Stocks also rallied on March 18 and since then (at least until the last two days), a clear indication that many investors approve of the Fed's unprecedented actions in buying Treasury debt directly and doubling its purchases of toxic assets.

But it should also be noted that the US dollar plunged on the news that the Fed would be buying $300 billion in Treasuries and another $750 billion in toxic assets, and the implication that those numbers may well go even higher later this year. Keep in mind that these numbers are in addition to the $2+ trillion budget deficit we will have in fiscal 2010 (more on that below) and well over $1 trillion in each of the next several years.

Given the staggering size of these numbers, I don't see the US dollar going anywhere but down over the next several years. Maybe that's why China is threatening to stop buying US Treasuries and calling for a serious discussion of a new world currency at the upcoming G-20 Summit on April 2. I will discuss this issue more in coming weeks.

CBO Assessment of Obama's Record 2010 Budget

In my March 10 E-Letter, I discussed President Obama's record $3.55 trillion budget for fiscal 2010, with its projected budget deficit of a record $1.75 trillion. I also discussed why I believe the deficit next year will be well north of $2 trillion. Last week, the supposedly non-partisan (but Democrat controlled) Congressional Budget Office (CBO) released its own analysis of President Obama's proposed budget for 2010 and the next 10 years.

The CBO estimates the 2010 budget deficit at $2.3 trillion; the budget deficits for 2009-2011 at almost $5 trillion; with deficits of $1 trillion or more each year thereafter to 2019, and concludes that Obama's budgets would add $9 trillion to the national debt over that 10-year period, if enacted.

If you recall, I noted in my March 10 letter that I believe the Obama administration used economic assumptions that were too optimistic. I pointed out that Obama's projections for GDP growth were too rosy. Likewise, I noted that his assumptions for unemployment were considerably too low. I concluded that discussion by saying: But it will not surprise me if the deficit is $2 trillion or more in 2010. Now the Democrat controlled CBO agrees with me!

Interestingly, Obama has routinely criticized George W. Bush for out-of-control spending, which is a well-deserved criticism. In Bush's eight years, he – with the help of Congress – added almost $5 trillion to the national debt. Obama's budgets would add almost twice that amount - $9 trillion - according to the CBO.

I think most people reading this would agree that a 2010 budget deficit of $2.3 trillion is simply way too much, even in this economic and financial crisis. While Obama says his budget is necessary to get the economy out of the ditch, it could make things worse by ruining America's credit standing in the world. Unfortunately, it looks like he has the votes to get most of his budget passed.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions, Market Implications & What To Do Now

The 20% bounce in the stock markets and the latest smattering of good news on the economy have led some analysts to conclude that the worst of the recession and the credit crisis are behind us. That could be, but the forecasters I respect believe we will see at least another 1-2 quarters when GDP will fall 6-7% or possibly more. So, I am not convinced we've seen the worst of the recession or the credit crisis. I hope I am wrong.

The good news (if we can call it that) is that the US was the first major economy to go into recession; it has suffered a more severe contraction than most other sizable economies, with the notable exception of Japan; and it would therefore be reasonable to assume the US will be one of the first major economies to turn the corner.

Yet in many ways, calling the bottom in the recession misses the point. Unlike past recessions that were followed by a strong recovery, I believe (and my best sources agree) that we face at least a couple of years of very slow growth when this recession ends. Yes, the government and the Fed are spending trillions like drunken sailors, but this economic and financial crisis is likely to put a damper on growth for at least several more years.

With that backdrop, investors have to consider the likelihood (or unlikelihood) that the US equity markets bottomed in early March. With the major market indexes having plunged over 50% from their peak in late 2007 to early March, it is easy to assume that we've seen the bottom. I, on the other hand, am not so convinced.

But that, too, misses the point in my opinion. Whether the bottom is in or not, I fully expect the equity markets to at least retest the lows seen early this month when the Dow fell to 6,500 and the S&P 500 fell to 675. And there is no guarantee that those lows will hold. Therefore, if you are looking to exit failed buy-and-hold positions in stocks, and move to more defensive strategies, I would suggest doing so now.

My greatest concern at this point is that the new Public-Private Investment Program may not work. As I have written in several recent letters, it is clear that relatively little of Obama's $787 billion stimulus plan will be spent this year when it is needed most. Thus, that means that it is even more critical that the PPIP get started quickly and that it succeeds. As noted earlier, there is no assurance that it will get up and running quickly, or that it will succeed (or if President Obama is fully behind it).

If the PPIP does not succeed, I would expect the US equity markets to plunge once again, and if so, buy-and-hold strategies will get hammered again.

If you have been considering alternatives to the buy-and-hold strategy for a portion of your equity portfolio, such as the active management programs I recommend – which can move to cash and/or hedge long positions - now may the time to get such strategies in place.

Remember, it does not matter where you live; we have hundreds of clients all across America.

Finally, we hosted our second Webinar with Scotia Partners on March 25. I'm very pleased to report that almost 300 of you registered for this opportunity to learn more about Scotia's very successful investment program. If you missed it, you can watch and listen to the full Webinar discussion (including all charts) at www.halbertwealth.com.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

Obama Budget - $9.3 Trillion in Deficits says CBO
http://news.yahoo.com/s/ap/20090320/ap_on_go_pr_wh/obama_budget

Obama Sticker Shock (more CBO budget analysis)
http://online.wsj.com/article/SB123776518094909023.html

Uncle Sam's Hedge Fund (the Geithner bank bailout plan)
http://www.realclearpolitics.com/articles/2009/03/uncle_sams_hedge_fund.html

Why The Stock Markets Are Collapsing

Gary D. Halbert — Tue, 10 Mar 2009 20:46:56 GMT

IN THIS ISSUE:

The Economy Continues To Slump Badly

US Stock Markets Continue To Plunge

Obama's Multi-Trillion Dollar Spending Spree

Obama's Budget – The First $2 TRILLION Deficit?

Obama's Plan To Nationalize Health Care This Year

Obama's “Cap-and-Trade” Environmental Proposal

Conclusions – Why The Stock Markets Are Collapsing

Introduction

Economic news continues to worsen week after week. As I will discuss below, Gross Domestic Product contracted at almost twice the previously reported pace in the 4Q of last year, and most analysts now expect a similar or worse slowdown in the 1Q. Many forecasters now believe the recession will last all year, with a modest rebound beginning in 2010. We will look at the latest economic data as we go along.

The stock markets continue to plunge, even as trillions of dollars in bailouts and government spending have been announced. The Dow and the S&P 500 fell 33.8% and 38.5% respectively in 2008. So far this year, the Dow and the S&P 500 are down another 25+%. Both indexes are down more than 50% from their peaks in October 2007. While the equity markets are grossly oversold, there is still no evidence of a bottom, although I fully expect that we are close.

Investors around the world are stunned, not only as a result of the collapse in the US and global equity markets, but also due to the continuing severe credit crisis. More and more analysts and politicos are calling for the US to nationalize the major money center banks that are teetering on the brink of insolvency. Clearly, people around the world are preoccupied with the economic and financial crises.

In the following pages, we will recap the unprecedented spending that President Obama has proposed over the last six weeks, including his first federal budget proposal totaling a record $3.55 trillion for fiscal 2010. Obama's 2010 budget projects a record deficit of $1.75 trillion, and I believe it will be even higher as I will discuss below. No wonder the markets are not happy!

It is also clear now that President Obama has decided to use these crises as an opportunity to cram down all of his big liberal plans for the country this year. In addition to spending trillions of dollars, he is also moving forward with other major plans including “Cap & Trade” (carbon emissions), “Card Check” (expanding unions) and nationalized health care – just to name a few, all of which will eventually mean higher costs for American consumers.

When Mr. Obama was elected, most political analysts believed that he would attempt to enact these major liberal plans over the course of his four-year presidency. Yet it is obvious now that he wants them all this year, while Americans are preoccupied with the economic and financial crises. If he gets his way, it will dramatically change the face of America. More on this as we go along

The Economy Continues To Slump Badly

It will come as no surprise to readers of this E-Letter that the US economic numbers continue to falter. But by far the most shocking number released over the last several weeks was the latest 4Q GDP report released in late February. In late January, the Commerce Department's advance estimate for 4Q GDP was -3.8% (annual rate), which was the worst in well over a decade.

Then on February 27, the government revised this number to -6.2%, the deepest quarterly decline since early 1982. I have been watching US economic data for over 30 years, and I have never seen the Commerce Department miss the GDP number this badly over just a one-month period of time. Clearly, this economy is contracting severely.

The US unemployment rate continues to ratchet up rapidly. On Friday, the Labor Department reported that unemployment rose to 8.1% in February, up from 7.6% in January. Many forecasters predict this number to rise to near 9% by year-end, and some even project the jobless rate to reach 10% by the end of this year.

The Consumer Confidence Index plunged again to a new record low in February of 25.0, down from the previous record low of 37.4 in January. Consumers' appraisal of overall current economic conditions, which was already bleak, worsened much further in February. Those claiming business conditions are “bad” rose to 51.1% in February from 47.9% the prior month.

On the manufacturing front, reports are equally grim according to the reports for January (latest data available). Durable goods orders plunged 5.2% in January following a drop of 4.6% in December. Factory orders fell 1.9% in January following a plunge of 4.9% in December. Industrial production fell 1.8% in January following a drop of 2.4% in December.

The nation's factory operating rate fell to 72.0% in January, down from 73.3% in December. Elsewhere, the construction spending rate fell another 3.3% in January, down from 2.4% in December. This is the worst manufacturing downturn in decades.

On the housing front, the numbers continue to worsen. Existing home sales fell to 4.49 million in January from 4.74 million in December (again, latest data available). New home sales fell to 309,000 in January, down from 344,000 in December. Housing starts in January fell to 466,000, down from 560,000 in December. Meanwhile the median home sale price continues to fall, sliding to $170,300 in January, down 15% from a year earlier.

In summary, we find ourselves in the worst economic slump since 1981-82, and many would argue something worse. A growing number of forecasters are coming to the conclusion that we may be headed into a depression. But as I will discuss as we go along, Obama has authorized over $3 trillion in new spending, the Fed will spend up to $2 trillion and Congress has just passed more new spending projects. So, that much money should start to show up in the economy before long.

US Stock Markets Continue To Plunge

As noted in the Introduction, The Dow and the S&P 500 fell 33.8% and 38.5% respectively in 2008. So far this year, the Dow and the S&P 500 are both down over 25%. Both indexes are down more than 50% from their peaks in October 2007. The Nasdaq Composite Index fell 40.5% in 2008 and is down another 17.6% so far in 2009, down over 55% since the peak in late 2007.

Stocks have been battered with a steady stream of bad news so far this year, as noted in the latest economic reports above. In addition, there has been report after report of faltering banks. The government now owns 36-40% of Citigroup, which saw its share price fall below $1.00 last week. The 30 companies that make up the Dow Jones Industrial Average are commonly referred to as “Blue Chips” or the strongest of the strong. Over the last year, however, the number of Dow stocks trading under $10 per share has increased dramatically.

In addition to Citigroup, other beleaguered Dow stocks include General Motors at $1.50 per share, Bank of America at $3.00, General Electric at $6.00 (down 60% this year alone), and Alcoa at $5.00.

The government has also increased its equity stake in AIG, now reportedly owning over 80% of the insurance giant. Speaking of insurance, I am hearing from sources inside the industry that we could be hearing announcements soon that some major insurers are in serious financial trouble.

Investors around the world want to know what is driving the equity markets down so dramatically. Certainly, the credit crisis and the economic recession are weighing heavily on stock prices. But I believe there is much more to it than that. As I will discuss later on, I believe that the markets are voting NO on the massive spending Obama has authorized in his first 40 days in office.

Obama's Multi-Trillion Dollar Spending Spree

In sheer size, the economic measures announced by President Barack Obama to address “a crisis unlike we've ever known” are remarkable, rivaling and in many cases dwarfing the New Deal programs that Franklin D. Roosevelt famously created to battle the Great Depression. Here is a list of the massive spending that Obama has gotten passed or is proposing:

1. In February, Congress passed and Obama signed into law a record $787 billion stimulus bill, which is mostly new federal spending along with aid to struggling states and tax incentives.

2. Treasury Secretary Geithner announced last month that the government would make available up to $2 trillion on top of what has already been spent or promised in a rescue effort for banks and other financial institutions, including credit card companies and those who make student loans. We have yet to see the details on this massive rescue plan. Clearly, the lack of a detailed financial rescue plan for the banks is spooking the stock markets.

3. The president pledged up to $275 billion in federal aid to help stem the tidal wave of home foreclosures. Here, too, the details are unclear as to how it will work.

Add it all up and the total for these three spending proposals alone is over $3 trillion in new government debt over the next 2-3 years. In all, the plans noted above would raise the federal portion of the US economy to some 31%, more than twice the level after eight years of FDR's historic New Deal spending.

This does not include the remaining $350 billion in TARP money that Obama will get to spend this year. Plus, there is also talk of a second stimulus package later this year, one supposedly aimed at consumers directly.

And let's not forget that the Federal Reserve has purchased over $1 trillion in troubled assets and related securities over the last year alone. Fed chairman Bernanke told Congress recently that the Fed is prepared to double that amount this year.

President Obama and Bernanke tell us that all this massive spending is necessary to avoid a “catastrophe.” Yet no one knows if these huge spending programs will work. No wonder the stock markets are tanking.

Obama's Budget – The First $2 TRILLION Deficit?

President Obama unveiled the largest federal budget in history in late February – a whopping $3.55 trillion. With the economy in recession, the Obama administration projected that the budget deficit for fiscal 2010 would be a record $1.75 trillion. However, there are reasons to believe it will be even higher.

For example, Obama's budget plan assumes that Gross Domestic Product, the sum of all goods and services produced by the nation, will shrink by only -1.2% this year and rebound to about 3.2% by next year. Given that GDP plunged by 6.2% (annual rate) in the 4Q, and the likelihood that the 1Q will be just as bad or worse, we would have to see a huge rebound in the second half of this year for GDP to average only -1.2% for the year overall.

Furthermore, none of my trusted sources expect GDP to rebound to 3.2% in 2010. The point is, federal tax revenues in 2010 will almost certainly be lower than the assumptions in Obama's $3.55 trillion budget, so the deficit is almost certain to be larger than projected.

Obama's budget plan also assumes that the US unemployment rate will average 8.1% this year and get slightly better in 2010. The US unemployment rate stood at 7.2% for December 2008. It has since risen to 7.6% in January and to 8.1% in February. Most economists now expect the unemployment rate to reach 9% by year-end. That does not average out to 8.1% for the year.

Here again, the unemployment realities will mean that federal tax revenues in 2010 will almost certainly be lower than the assumptions in Obama's $3.55 trillion budget. As noted above, the Obama administration projects a budget deficit of $1.75 trillion for fiscal 2010. But it will not surprise me if the deficit is $2 trillion or more in 2010. No wonder the markets are tanking!

$410 Billion Omnibus Spending/Pork Bill

The Senate is expected to pass the huge $410 billion omnibus spending bill that will finance the government through the end of September any day now. This is possibly the most pork-laden spending bill in history. It is widely reported that the bill contains over 8,500 “earmarks” (pet spending projects for lawmakers' states and districts).

The omnibus spending package ran into trouble last week when several Democratic senators opposed not only the pork-barrel spending in the bill, but also the shear size of the bill - $410 billion. That is an 8% increase over the prior omnibus bill. Among the Democrats in opposition was Senator Evan Bayh of Indiana who told the Wall Street Journal:

“The omnibus increases discretionary spending by 8 percent of last fiscal year's levels, dwarfing the rate of inflation. Such increases might be appropriate for a nation flush with cash or unconcerned with fiscal prudence, but America is neither.”

During the presidential campaign, candidate Obama promised that he would wholly change the budget process in Washington by going line by line through spending bills, picking out the wasteful earmarks, vetoing the bills, and telling Congress to send them back stripped of the pork. President Obama has echoed that promise since he took office - but just not for this bill. Since this omnibus bill was largely negotiated last year when Bush was still in office, Obama labeled it “unfinished business,” which he says he will sign and “start fresh next year.”

So, it is politics as usual in Washington, only the numbers are much bigger! These historically huge spending programs and bailouts that Obama and the Democrats in Congress have authorized have really spooked the stock markets. And the Democratic spending machine isn't finished yet. Using the “never let a crisis go to waste” doctrine, Obama has made it clear that he plans to pursue massive spending for other pet liberal programs over the next couple of years.

Obama's Plan To Nationalize Health Care This Year

President Obama recently convened a health care summit at the White House, which was attended by “experts” across the health care and insurance industries. The Washington summit is to be followed by regional meetings across the country in the weeks and months ahead.

The summit concluded without specific details as to what an Obama health care system would look like. We do know that Obama's 2010 federal budget calls for the creation of a $634 billion health care reserve fund to cover reforms over the next 10 years. The President's remarks at the summit included the following:

“To the liberal bleeding hearts hoping for universal health coverage, I don't think we can solve this problem without talking about costs. And to those obsessed with costs…[we will] not slash the social safety net. I just want to figure out what works. We don't have a monopoly on good ideas. We've got to balance heart and head.”

For those fearing a total socialization of health care, this is at least some good news. By all accounts, President Obama is resisting the liberal calls for a “single-payer” socialized health system of the type that exists in Canada and Europe. So what can we expect? No one knows for certain just yet, but two of the ideas being floated are: 1) an expansion and retool of Medicare; and 2) some variation of the health plan that members of the federal government enjoy.

It is abundantly clear that Obama intends to enact his massive health care reforms this year, and unlike the Clinton administration, Obama appears to have the votes in Congress to get it done. So, now the question is, how to pay for it? As noted above, his 2010 budget includes $634 billion over 10 years to help fund his health care “reforms.” But where does this money come from?

The Obama administration says that $318 billion of it will come from tax increases on the “wealthy.” Another large portion will supposedly come from “internal reforms” to the Medicare system. Specifically, Medicare Advantage would be placed into a new competitive biding system that will supposedly do away with federal subsidies paid to these private medical plans, which is projected to save $175 billion over 10 years.

They say another $37 billion could be saved as home health care payments to Medicare are reduced, and a further $20 billion could come from higher rebates from drug companies for drugs sold to the Medicaid program. All of this only adds up to $550 billion. Where will the other $84 billion come from? I have no idea, and at the moment, neither does the Obama administration.

The Obama plan does not seem to be in danger of going the way of the ill-fated Hillary-Care proposal in 1993. House Representative Joe Barton (R-TX) was on hand for Obama's health care summit last week. Barton was pivotal in derailing Hillary-Care, but he told those assembled at Obama's summit that he largely supports the health care reforms that President Obama has outlined thus far.

Barring some big surprises, President Obama is going to get his massive reform of the health care system, whether we like it or not, possibly before the end of this year. While it may stop short of socialized medicine, the government will be in charge of our health care system, and we all know how well the government controls spending, costs and quality. Again, no wonder the stock markets are tanking!

Obama's “Cap-and-Trade” Environmental Proposal

The “cap-and-trade” concept is not a new idea. The type of cap-and-trade program that President Obama wants is very similar to that of the European Union. Yet, the EU's cap-and-trade program is in near-collapse, which demonstrates the weakness of this strategy.

Under a cap-and-trade system, polluters (think power generation plants, steel mills, etc.) are given a cap on greenhouse gasses they can emit into the atmosphere. If they exceed their limits, they can either make their process more environmentally friendly by upgrading technology and equipment, or they can buy credits from other entities that produce fewer emissions than their caps. The goal is that, as the overall emissions caps are reduced over time, industries will find that reducing emissions is more cost efficient than buying credits.

The cap-and-trade idea is often confused with a “carbon tax,” but the two are different. In a carbon tax, the government charges a fee for the production, distribution or use of fossil fuels, rather than creating a system of emission credits that can be traded among companies. Whatever the structure, virtually all agree that any program to curb greenhouse gasses will increase prices as higher costs are passed on to consumers. Even President Obama admits this.

President Obama's recent $3.55 trillion budget proposal calls for a cap-and-trade system to be implemented by the year 2012. The government would auction credits to power plants, industrial plants, etc., with some of the proceeds over the cost of administering the program to go back to taxpayers (I wouldn't count on it).

The Congressional Budget Office (CBO) estimates that a cap-and-trade system will cost middle-income families as much as $880 to $1,500 per year in added costs. Thus, Obama's plan to offset these increased costs through a payroll tax rebate ($400 for individuals, $800 for families) won't cover all of these costs. Plus, the liberals in Congress have not yet had their say. The final bill may concentrate the rebates on lower income families, possibly leaving many middle income and high income families out entirely. Of course, the rationale is that higher-income families will reduce their costs by lowering their energy bills through conservation. …Right.

Also, it is important to recognize that certain areas of the country will be hit much harder by cap-and-trade, especially those that rely heavily on coal for electricity. I have included a link to a very good article on which areas will be hurt the most in Special Articles below.

Here again, Obama's cap-and-trade plan serves as yet another tax on higher income folks who create most of the new jobs in this country. Critics also say that a cap-and-trade program could lead to the loss of as many as four million jobs and reduce the US GDP, but still may not effectively reduce emissions. Again, no wonder the stock markets are tanking!

Obama's “Card Check” Proposal To Strengthen Unions

It is no secret that Obama has long been an advocate for the organized labor unions. As a senator, he co-sponsored the “Employee Free Choice Act of 2007,” which was very favorable to unions but was fortunately never enacted. As a presidential candidate, he had a very pro-union agenda, including repeated promises of making “Card Check” the law of the land.

Card Check, considered one of the most sweeping revisions of labor law since the 1930s, would allow unions to do away with secret ballot voting by workers who are deciding whether or not to unionize. Instead, workers would be required to vote in public by signing a card signifying their desire for, or against, union representation.

Secret ballot elections have been the law of the land for a very long time, and even many union members do not want this to change. Critics of the Card Check system say that a secret ballot election is the only way to insure that employees are not faced with undue coercion when making their decision. Card Check changes all that, since union organizers can place a card in front of a worker and know exactly which box they check. Liberal union leaders have wanted Card Check for a long time, since it makes unionization much easier.

Union membership has been steadily declining since the 1950s when an estimated 35% of the American workforce belonged to a union. Today, the Bureau of Labor Statistics reports that only 12.4% of wage and salary workers belong to a union. By far, government employees are the most likely to be unionized, with a membership rate five times that of private employees.

Unions hope that the new Card Check rules, which are almost assured to pass and be signed into law, will help to put them back on a growth path. The economic consequences will be higher labor costs for producers, lower productivity and higher prices for goods and services to consumers over time. Just look at the big three carmakers and see how beneficial increased unionization is likely to be for the US economy.

Conclusions – Why The Stock Markets Are Collapsing

I now firmly believe that President Obama and his top advisers have made a calculated decision to try to ram through the largest parts of his liberal agenda this year, while the American people are preoccupied with the economic and financial crisis.

I recently wrote that Rahm Emanuel, Mr. Obama's new Chief of Staff, told a Wall Street Journal conference of top corporate executives late last year (comments he almost certainly probably wishes he could take back):

“You never want a serious crisis to go to waste. Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.”

So Obama's liberal policy agenda that would have been considered aggressive over the full four years of his presidency is apparently going to be crammed down the American peoples' throats this year if possible.

Obama's massive emergency spending/bailout plans announced in just the first 40 days of his presidency total over $3 trillion, something never before remotely seen. Obama's 2010 federal budget of $3.55 trillion will likely result in a budget deficit of $2 trillion next year, and over $1 trillion in each of the next 2-3 years.

Meanwhile, the Fed is in the process of printing and spending another $2 trillion in debt to fund banks and buy toxic assets. Where this Fed printing and spending will stop is anyone's guess, unfortunately. The implications for inflation down the road are ominous.

And let's not forget the Congress which is about to pass a $410 billion omnibus spending package to keep the government running through September that was 8% higher than last year at this time, and included over 8,500 pork-barrel earmarks. Obama obnoxiously broke his campaign promise to veto earmarks by saying this enormous omnibus spending bill was “unfinished business” left over from the Bush administration, and promises to sign it into law.

On top of all this, Obama's liberal policy initiatives such as nationalized health care, cap-and- trade and Card Check (just to name a few) will add hundreds of billions in cost to American consumers over the years ahead. And despite what Mr. Obama says, taxes at all levels will have to eventually be increased to pay for this massive spending. It will change the face of America as we know it, but that is a story for another time.

The long-term implications of these unprecedented multi-trillion dollar spending plans are unknown. No one knows for sure if all of these huge spending efforts will work to revive the economy and unfreeze the credit markets. If they do, then there is the prospect for spiraling inflation in the years to come.

Investors around the world are watching their stock portfolios being decimated – down over 50% in just over one year – and are asking WHY is this happening? Sure, the subprime mortgage debacle was the catalyst. But in my view, the radical changes that President Obama is pursuing – sooner rather than later – are in large part why the stock markets are in a freefall collapse instead of a normal bear market.

Fortunately, the professional money managers I have recommended to you in this E-Letter over the last several years have done their jobs admirably. Their active management strategies that have the ability to move to cash or hedge long positions have limited losses to less than half what the stock markets have lost. Some have even made money in this historic bear market. As always, I must add that past performance is no guarantee of future results.

As always, I invite you to call us at 800-348-3601 so we can help you make sense of this frustrating investment environment. That is all for this week, depressing as it may be once again.

Wishing you the best in tough times,

Gary D. Halbert

SPECIAL ARTICLES:

Deception at Core of Obama Plans
http://www.realclearpolitics.com/articles/2009/03/a_dishonest_gimmicky_budget.html

The Anti-Stimulus Plans
http://weeklystandard.com/Content/Public/Articles/000/000/016/249nhfrg.asp

Winners & Losers in Huge Congress Spending Bill (who got what in pork)
http://www.foxnews.com/politics/2009/03/09/winners-losers-proposed-massive-spending/

Who Pays for Cap and Trade?
http://online.wsj.com/article/SB123655590609066021.html

Economic & Investment Outlook For 2009

Gary D. Halbert — Tue, 06 Jan 2009 22:10:01 GMT

IN THIS ISSUE:

Editor's Notes On BCA & The Other Gary Halbert
Obama & The New Age Of Big Government
The Economy -- Have We Seen The Worst Of It?
Are The Bailouts Necessary & Will They Work?
The Latest Disappointing Economic Reports
Stock Markets -- Might We Have Seen The Bottom?

Introduction

2008 proved to be a catastrophic year in the financial and credit markets as well as for most investors as judged by the global equity markets. The credit markets and bank lending activity ground to a virtual halt, something not seen in most of our adult lifetimes. Consumer confidence and spending, which now accounts for over 70% of US GDP, fell off a cliff in the span of just 3-4 months late last year. We are now in an unprecedented "credit crisis," the outcome of which remains to be seen.

The US government and the Federal Reserve have responded to the credit crisis in ways that most of us could never have imagined, and they are not nearly done yet. Much more is to come. We can agree or disagree with these giant bailout measures, but like them or not, even more enormous government rescue programs are sure to come in the Barack Obama administration, on top of his already aggressive plans such as nationalized health care, etc.

One thing to keep in mind is that our new President is a man who embraces government ownership and control of the private sector, so we can expect more massive bailouts in the next year or longer as needed. Already, Mr. Obama is suggesting another fiscal stimulus package approaching $1 trillion this year, and that is just the beginning -- I promise. But the point of what follows is not a political piece. The question is whether or not the plans will work.

What we do know is that we are officially in a recession that reporting agencies now believe began in December 2007. Most forecasters now expect that GDP plunged 4-5% (annual rate) in the 4Q of last year, and will continue to fall for at least a couple more quarters. Meanwhile, deflation is becoming a greater threat. In the pages that follow, we will take an in-depth look at the latest economic and inflation numbers. I'll give you the latest thinking from my best sources on what may lie ahead.

But first, I have a couple of important Editor's Notes that have resulted from many reader inquiries, before we get into the meat of this week's letter. Let's get going.

Editor's Notes

The Bank Credit Analyst: I frequently get questions from long-time readers asking why I do not mention the Bank Credit Analyst (BCA) or quote from their monthly reports as I have for many years. Considering the amount of interest, an explanation is in order.

You may recall that BCA maintained throughout 2007 that the subprime mortgage dilemma would be contained to the housing market, and that a recession was not the most likely scenario for the US or the rest of the world. Then in early 2008, BCA did an abrupt about-face on the subprime crisis, complete with a forecast of a credit crisis and a potentially deep global recession.

I have to admit I was surprised that BCA was late in identifying perhaps the most significant trend change in our lifetimes and an oncoming credit crisis. However, no economic forecasting service is perfect, and I have a number of other sources of economic and financial forecasts that were also late to recognize the full effect of the subprime debacle. So that is not the reason I no longer quote BCA.

Quite the contrary. In early 2008, BCA contacted me in regard to my summarizing and quoting their materials. According to BCA, some of their subscribers had complained about having to pay a large amount of money for what I periodically offered to my clients and E-Letter readers for free. When I first began sharing BCA's outlook over 20 years ago, my comments were limited to a monthly newsletter that went only to my clients and prospective clients. Now, however, my Forecasts & Trends E-Letter goes out to over a million e-mail addresses each week.

While BCA has long been a valuable source of information for me, I fully understand their concerns. After all, they make their money through subscriptions, so anything that might diminish their subscription base would obviously need to be addressed. As a result, I agreed to no longer quote or summarize BCA's views of the economy or markets in light of their concerns.

Finally, it is important to note that BCA has never been my sole source of economic information and forecasts. My staff and I review numerous other sources for forecasts and analysis that help me in forming my own view of the economy, the markets, etc.

The "Other" Gary Halbert: As a reminder, to this day I am often confused with Gary C. Halbert, which is most interesting since Gary C. Halbert passed away in early 2007. For the record, I am Gary D. Halbert and am no relation to Gary C. Halbert; in fact, I never met the man. Apparently, Gary C. Halbert was a successful copywriter and marketer at some point in his life, and he had a newsletter called "The Gary Halbert Letter" and a website by the same name.

The confusion typically occurs when someone does an Internet search for "Gary Halbert." If you type Gary Halbert into Google, for example, the entire first page of results are for Gary C. Halbert -- even though the man has been dead for nearly two years. The first Google result for me -- Gary D. Halbert - is not until the lower part of page two.

We have often wondered how much business we have lost over the years from investors who searched the Internet looking for me but found the other Gary Halbert instead and were not favorably impressed! I have no idea why Gary C. Halbert's website is still on the Internet.

If, however, you type in "Gary D. Halbert," you'll find me at the top of the non-sponsor results. Bottom line: if you should refer someone to me, please advise them to include my middle initial "D." if they wish to find me on the Web. Better yet, advise them to go to my website at www.halbertwealth.com.

On that note, let me extend a huge THANK YOU to all of our clients who have referred friends, relatives, etc. to us over the years. Client referrals are one of our best sources of new business!

With the above noted housekeeping items out of the way, let's turn our attention to the economy, the ongoing credit crisis and the investment markets. But first, let's consider the bigger picture of what to expect from President Obama. The following is not meant to be a political slam on our soon-to-be new president; rather it is simply a perspective on the times to come.

Obama & The New Age Of Big Government

There is no arguing that Barack Obama is one of the most liberal politicians of our time, as is Joe Biden. President-elect Obama believes that more government is the solution, not the problem. He has stacked his new Cabinet with Clinton retreads who believe as he does, including Hillary Clinton as his Secretary of State designee.

President-elect Obama vows that as soon as he is in office, he will pass a gargantuan financial rescue bill (bailout) that is estimated to be as large as $800 billion to $1 trillion in an attempt to unfreeze the credit markets and create at least one million new jobs. No doubt the Democrat controlled Congress will go along. It appears that a number of Republicans will go along as well.

Mr. Obama says his huge rescue plan will be targeted at tax cuts and infrastructure projects that will create new jobs. I, however, predict that much of the bailout money will continue to go to recapitalize banks, financial institutions, automakers and other large companies that get into serious trouble. Obama may have no choice if he and the Fed are to stave off a debt deflation and a depression.

In fairness to President-elect Obama, he comes into office at one of the worst possible times in the last century. He is inheriting the worst economy in decades, the worst financial crisis since the Great Depression and a record large federal budget deficit -- just to name a few. He has an enormous job ahead of him with major problems that have no immediate solutions, and which may get worse before they get better.

But keep one thing in mind dear readers. President-elect Obama comes from a political persuasion that believes it is perfectly acceptable for the government to own equity stakes in the private sector. And he comes into power at exactly the time in which much of the public is more than willing to see this happen, and when even some conservative analysts admit that such steps are probably a "necessary evil."

Based on the many comments I receive from readers, it is obvious that many of you are totally against the government bailouts. Be warned, however, that the bailouts are far from over in my opinion. So it is in this context that I move on to more specific issues.

The Economy -- Have We Seen The Worst Of It?

As noted above, we see and read lots of economic, financial and investment forecasts at my company. Here is the general consensus on the economy of late (obviously, there are forecasts that are better and worse than the consensus I see out there). The general consensus is that the US economy (GDP) fell by an annual rate of 4-5% in the 4Q. We won't get the first official GDP estimate until the end of this month.

The general consensus is that the first half of 2009 will also see negative GDP, but perhaps not as bad as the 4Q we just endured. The unemployment rate is expected to rise to at least 8%, and some believe 10%, well before the end of this year. However, most forecasters currently believe that the US economy will bottom out and begin a slow recovery some time in the second half of this year -- assuming, of course, that there are no more big negative shocks, and that the banks slowly resume lending.

Some of my respected sources believe that, if necessary, the Obama administration and/or the Fed will institute some government mechanism that will guarantee bank loans if that's what it takes to unfreeze the credit markets. (I'm not making this up, folks.)

Assuming the economy bottoms out sometime in the second half of this year, the general consensus is that GDP will grow at a below-trend rate of only 1½-2½% for the next several years following 2009 as the world continues to deleverage (i.e. -- reduce debt).

Of course, there are some respected forecasters that believe the above noted scenario is too optimistic. Some believe that the bailouts will not be successful, the credit markets will not unfreeze this year, and that we are headed for a modern day depression. Others believe that even if the bailouts work, we will be facing runaway inflation in 2010 and beyond. Clearly, there are few, if any, rosy scenarios floating around today.

Are The Bailouts Necessary & Will They Work?

Most conservatives (and even some liberals) I talk to are opposed to the various government bailout measures to-date and the trillion dollar rescue package that President-elect Obama has planned. Many say, "Let ‘em all fail." Several media polls have shown that a majority of Americans are opposed to the bailouts. Personally, I would much prefer an economic stimulus plan that eliminated the capital gains tax and reduced other taxes, but that is not going to happen with the Democrats in control of Congress and the White House.

Given that reality, most of the sources that I respect agree that the bailouts and the various actions by the Fed were necessary in an effort to avoid a debt deflation and a possible depression. Their argument is that with consumer spending accounting for over 70% of GDP, and with consumer spending having fallen off a cliff, the government had to step in to keep us from going from a serious global recession to something worse.

In fact, some forecasters are calling on other countries to follow the lead of US policymakers and slash their interest rates and recapitalize their money center banks. Some actually criticize Europe for resisting such rescue efforts, while praising the UK for its financial rescue efforts.

Further, I would also say that there is a consensus in the forecasting world that it was a huge mistake for the government to let Lehman Brothers go bankrupt. Many analysts believe that it was the failure of Lehman that caused the major banks to put a lockdown on lending, even to each other.

I certainly don't expect to make any bailout converts with this discussion. However, I think it is pertinent to point out that there are respected analysts and forecasters that believe the government and the Fed had no choice but to do what has been done, and that the government may have to do even more if we are to avoid a depression.

Now to the question of whether the bailouts will work. At this point, the answer is we don't know. The first "economic stimulus package" of $168 billion last spring was considered pretty much a non-starter. Various sources have estimated that most Americans who received the tax rebate checks in late April and May saved most of the money or used it to pay off credit card debt or other bills, rather than spend the money as was hoped by the Bush administration.

One thing is clear, however: the Bush administration did not have a well-designed plan for how it intended to use the first $350 billion of the $700 billion Troubled Asset Relief Program (TARP). That was obvious when President Bush and Treasury Secretary Paulson changed the objective of the TARP from buying up troubled mortgage-related securities to recapitalizing the major banks and most recently the automakers.

Some (but certainly not all) of the criticism of Bush and Paulson may have been unfair. I don't believe anyone knew how difficult it would be to reinstate trust in the credit markets and to get the major banks lending once again. As discussed above, President-elect Obama will face the same challenge when he takes office, and talk of some kind of government loan guarantee program for the banks continues to gain momentum, for better or worse.

While it remains unclear if the bailouts will work, there is now little doubt that Mr. Obama's request for a massive new rescue program of up to $1 trillion will be passed by the Congress within the next month or two. Over the weekend, several leading Republicans stated that they would support such a huge stimulus program, provided it was not loaded with earmarks. So I believe it is safe to assume we will see Obama get his wish.

The Latest Disappointing Economic Reports

I have been poring over economic data for over 25 years, and I do not remember another time when the various reports have been as overwhelmingly negative as over the last month or so. Let's take a look at the latest numbers. As noted earlier, most forecasters expect that 4Q GDP fell by 4-5%; however, that report won't be out until January 30.

The final report on 3Q GDP was an annual rate of --0.5%, about as expected, following +2.8% in the 2Q. The decline in 3Q GDP was largely the result of a 3.8% drop in personal consumption expenditures.

The Index of Leading Economic Indicators (LEI) fell 0.4% in November (latest data available). The LEI has been falling for over a year. More troubling, the six-month change in the LEI was negative 2.8%, and the 12-month change was --5.6%. The Conference Board reported that the Consumer Confidence Index fell to a new all-time low of 38.0 in December.

Consumers' appraisal of current conditions grew substantially worse in December. Those claiming business conditions are "bad" increased to 46.0% from 40.6% in November, while those claiming business conditions are "good" declined to 7.7% percent from 10.1%. Consumers' assessment of the labor market was also considerably more negative than in November. Those saying jobs are "hard to get" rose to 42.0% from 37.1% in November, while those claiming jobs are "plentiful" decreased to 6.2% from 8.7% a month earlier.

The plunge in consumer confidence resulted in even worse than expected retail sales during the holiday season. Spending Pulse, an organization that collects consumer spending data from MasterCard, says consumers spent about 20% less on electronics, women's clothes and jewelry in November and December in comparison with the same period last year. Spending Pulse says total retail sales declined up to 8% during this holiday season.

The numbers are not all in yet, but it also appears that online sales declined for the first time ever. Reuters reported that online sales for the holiday period up to December 23 fell 3% from the same period last year, marking the first decline in Internet spending since comScore, Inc. started tracking online sales in 2001.

On the manufacturing front, the news is equally dismal, if not worse. The Institute for Supply Management (ISM), a purchasing management group based in Tempe, Ariz., said its manufacturing index was 32.4 for December, the lowest reading since June 1980, when it stood at 30.3.

Manufacturing activity failed to grow for the fifth consecutive month, according to the ISM, and ISM noted that the December decline was representative of all sectors of manufacturing. An ISM index reading above 50 indicates growth, while a reading below 50 indicates a slowdown. A reading below 41 is typically associated with recession in the broader economy.

Industrial production fell 0.4% in November and was 5.5% below yearago levels. Capacity utilization (the factory operating rate) fell to 75.4 in November, down from 81.1 a year ago. Durable goods orders declined 1.0% in November, following the huge drop of 8.4% in October. It was the fourth consecutive monthly decline in durable goods orders.

The unemployment rate jumped to 6.7% in November, the highest level in more than 14 years. Forecasters expect the December unemployment rate to jump to 7% when the latest report comes out on Friday. Nonfarm payroll employment fell sharply by 533,000 in November. As noted earlier, most analysts expect the unemployment rate to rise to 8% or higher in the first half of 2009. At 500,000 jobs lost per month, it could hit 10% by the end of this year if the economy doesn't begin to rebound.

News on the housing front was equally disappointing. Sales of existing homes plunged 8.6% nationally in November. New homes sales also declined again in November. The national median sales price for existing homes fell by the largest monthly amount on record in November. The median price was $181,000 as compared to $208,000 a year ago, a decline of 13.2% nationally. Of course, in many areas prices are down far more than 13% over the last year.

The National Association of Realtors reported that there were 4.2 million unsold homes on the market at the end of November. At the current sales pace, it would take 11.2 months to sell all the homes on the market. NAR also notes that many homeowners have taken their properties off of the market. Understandably, housing starts continue to plunge, with November starts at 625,000 versus 771,000 a month earlier.

Deflation -- Consumer Price Index Goes Negative

As I have discussed above and in previous E-letters, the government and the Fed desperately want to hold off deflation in the economy. This fear is the overriding reason behind the bailouts, including the potentially $1 trillion stimulus package Mr. Obama and Congress are planning. Lawmakers are particularly frightened now that the Consumer Price Index has gone negative for the last several months, and especially as it plunged lower in October and November.

In October, the CPI fell by a full 1.0% - the largest monthly dive since records began to be kept in 1947. Yet the record October decline was significantly eclipsed in November when the CPI plunged 1.7%. The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) decreased a full 2.0% in November. Of course, the significant fall in energy prices is helping this trend along, but there is much more at work here than just falling gasoline prices.

For the 12 months ended November, the CPI actually rose 1.1%. That compares starkly to July of last year when the CPI was up 5.6% on a year-over-year basis. The trend in price inflation is clearly falling rapidly. Even the "Core" CPI -- less food and energy -- is falling. The Core CPI was down 0.1% in October and was unchanged in November.

Wholesale prices are falling even faster. The Producer Price Index fell 2.8% in October and another 2.2% in November. The 2.8% dive in October was the largest monthly decline on record. The Labor Department also reported that the price of imported goods dropped 4.7% in November and more than 10% in the past quarter. Prices are coming down in a hurry! This is Bernanke's worst nightmare!

Price data such as the above, and similar numbers from around the world, are leading to increased discussion about deflation. A recent cover story in The Economist made it pretty much official: Deflation, not inflation, is now the greatest concern for the world economy.

Over the past year, producer prices have fallen throughout the developed world. Consumer prices have been falling for the last six months in France and Germany. In Japan, wages have actually fallen 4% over the past year. Prices are also falling in China and Hong Kong.

So far, none of these price declines looks anything like the massive deflation that accompanied the Great Depression. But the appearance of deflation as a widespread problem is disturbing, not only because of its immediate economic implications, but because until recently most economists regarded sustained deflation as a fundamentally implausible prospect, something that should not be a concern.

Such assumptions are now under fire as the Fed has slashed short rates to zero. I assume we'll be discussing deflation a lot more this year.

Stock Markets -- Might We Have Seen The Bottom?

The US and global equity markets will be buffeted in 2009, on the negative side, by slowing economic growth, continued deleveraging, a shortage of credit and possible deflation. On the positive side, the markets should be aided by extremely low interest rates, the government's massive efforts to reflate the economy and unfreeze the credit markets and the possibility that a lot of money now on the sidelines could come back into the market at some point.

Unlike the general consensus about where the economy is headed this year (worse in the first half, but a recovery by year-end), there is no such consensus regarding where the stock markets are going over the next year or longer. Opinions and forecasts are all over the board.

Some analysts I respect believe that the US stock market is in a secular bear market, and that we probably have not seen the worst of it. If the economy is going to get worse in the near-term, and then grow at below-trend rates of 1½-2½% over the next 2-3 years after 2009, this is a rather dire forecast for corporate earnings, which supports the case for lower stock prices over time.

Other analysts I also respect believe that the waterfall collapse in equity prices in 2008 significantly overshot on the downside, and that the November lows could represent the bottom, although they would not be surprised to see a retest of the late November lows at some point.

Forecasters in the latter camp point to the fact that there is an ocean of money around the world that is sitting in Treasuries and other no-risk/low-risk vehicles earning next to nothing. They suggest that with an even modest uptick in consumer confidence, a flood of domestic and international money could come rushing back into US equities -- especially with the rebound in the US dollar last year.

Most analysts in both camps seem to agree that the equity markets are overdue for a potentially strong corrective rally which could play out over the next several months. Specifically, most forecasters I read believe that there will be some kind of "Obama rally" after the inauguration. The problem is that the broad equity indexes have already rallied 20-25% from the five-year lows in November.

Conclusions

One thing appears clear: 2009 is likely to be another wild year in the markets. So, what is an investor to do? Remain in cash and earn little or no return, or jump back into equities and risk losing even more money if the market retests the November lows as some analysts expect? I can't tell you what the market is going to do in 2009, but I can restate what I have said since beginning this E-Letter in 2002 -- it's wise to have at least part of your portfolio in an investment program that can switch to a defensive posture (cash or hedged) in uncertain markets, in my opinion.

While I don't have space in this week's E-Letter, in upcoming issues I'm going to discuss how active management -- investment programs that have the ability to go to cash or hedge long positions - benefited investors in 2008. I'm also going to highlight the huge inflows into some of these programs during 2008, even though most mutual funds were hemorrhaging assets badly. And you may be interested to learn where these inflows were coming from. What do they know that you don't know? The answer may surprise you.

I'll also bring you up to date on the performance of the latest additions to our AdvisorLink team, the Scotia Partners Growth S&P Plus and S&P Moderate Growth programs. While past performance cannot guarantee future results, suffice it to say that Scotia's programs continue to meet our expectations.

If you'd rather not wait on these future issues and want to learn more about Scotia and the other actively managed investment programs that have the potential to become defensive when market conditions warrant, feel free to give one of our Investment Consultants a call at 800-348-3601 or send us an e-mail at info@halbertwealth.com. You can also find out more about these programs on our website at www.halbertwealth.com, or request a complete Scotia Investors Kit by completing our online Scotia request form.

Wishing you a profitable New Year,

Gary D. Halbert

SPECIAL ARTICLES

Tyranny of the Tax-Exempt (Must Read!!!)
http://www.newsmax.com/insidecover/obama_stimulus_package/2009/01/06/168219.html

Obama's Trillion Dollar Political Stimulus Package
http://www.realclearpolitics.com/articles/2009/01/fiscal_follies.html

Obama Eyes $300 Billion Tax Cut - What A Surprise!
http://online.wsj.com/article/SB123111279694652423.html

Obama Lies About Government Bailout Plan
http://www.aim.org/aim-column/obamas-lies-about-government-bailout-plan