Forecasts & Trends : Recovery

Obama’s Decision: Millions More on the Dole

Gary D. Halbert — Tue, 24 Jul 2012 22:02:00 GMT

1. Welfare Work Requirement Gutted by Obama

2. Disability Rolls Outpace New Jobs Big-Time

3. Still Five Million Fewer Jobs Today

4. Record Number of Americans Now on Food Stamps

5. US Poverty Rate Nearing Highest Level in 50 Years

6. Conclusions: This is a Sad Commentary

Overview

We all know that the economic recovery is slowing. While it’s clear that growth is slowing, the reasons why are not so clear. Some blame it on the “fiscal cliff” of higher taxes and government spending cuts come January 1, unless Congress does something to stop it before the end of the year. Others blame it on the slowdown in global growth, especially in Europe. Still others say that the Fed should have done more. Some even say it’s election-year uncertainty.

One thing is for sure: Public confidence in the economy has fallen significantly since late May, as I reported in my blog last Friday (see chart). With consumer spending accounting for apprx. 70% of GDP, it should not be a surprise that the economy slows down when consumer confidence weakens, as has been the case in recent months.

On Friday, we will get the “advance” estimate of 2Q GDP. The pre-report consensus is that 2Q GDP will slow to only +1.2% (annual rate), down from 1.9% in the 1Q. If the number comes in as expected, that will be even more discouraging for consumers. I will comment on the GDP report in my blog this Friday and will likely have more to say in the E-Letter next Tuesday.

Today, I want to focus on recent developments in the “Welfare State” in America. The Obama administration recently gutted the “work requirements” in the 1996 welfare reform law enacted by President Clinton and the Republican-controlled Congress. Most feel this move was blatantly illegal and will be challenged in the courts in the months and years ahead.

Also on the subject of welfare, the number of Americans on Social Security Disability Insurance is exploding, even faster than the rate of new jobs created in this country. Likewise, the number of Americans receiving food stamps is at a record high above 46 million and rising. Ditto for the number of Americans now living in poverty.

Most Americans are unaware of these developments, so this should make for an interesting E-Letter. Let’s get started.

Welfare Work Requirement Gutted by Obama

In 1996, President Clinton and the Republicans in Congress worked together to pass a sweeping bill to reform welfare in this country. Many consider this legislation the signature accomplishment in President Clinton’s legacy. Within that law was a clear requirement that most recipients must work or at least be actively looking for or training for work at least 30 hours per week in order to receive welfare payments.

The 1996 welfare reform bill, otherwise known as the Temporary Assistance for Needy Families (TANF), ended welfare as an entitlement and empowered states with the authority to create unique and robust welfare-to-work programs, including a specific set of activities that qualified as “work.” As the name of the bill suggests (“Temporary”), these benefits were intended to be short-term in nature.

The bill included a requirement that a certain percentage of each state’s welfare caseload (currently 40%) had to be working or preparing for work. A great deal of effort was put into defining what qualified as work, and making sure that “work” actually meant work and not activities such as bed rest, massage, exercise, personal care, etc.

Shortly after President Clinton signed the Republican-authored bill into law, welfare caseloads fell drastically, while at the same time employment among single mothers rose and child poverty fell. Welfare rolls in some states fell by roughly half, whereas they had never fallen for four decades. In other words, it worked and has been lauded as a bipartisan success ever since.

On July 12, however, President Obama’s Health and Human Services Department (HHS) issued an administrative order to the states that effectively reverses the work requirements contained in the welfare law. This move is troubling because lawmakers went to great lengths to craft the 1996 reform law such that the work requirement could not be easily reversed, certainly not without congressional approval.

For whatever reasons, President Obama decided to do it anyway. Many Republicans and even some Democrats are stunned and dismayed by this action. It is not entirely clear why the Obama administration chose to make such a controversial, and many say illegal, decision that once again involves executive power. I have some thoughts that I will share at the end today.

Republicans are moving to block the Obama administration from “unilaterally weakening” welfare rules after the HHS notified states they may seek a waiver from the program’s work requirements. House and Senate Republicans introduced a bill on Wednesday of last week to prohibit the administration from implementing its latest policy or approving any change that “waives compliance” with the program's work rules.

They claimed the administration had “overstepped its bounds” in eviscerating planks from the 1996 bipartisan agreement on welfare reform. Senator Orrin Hatch (R-UT) said in a statement:

“Gutting welfare work requirements with the stroke of a pen and without congressional input is simply unacceptable and cannot be allowed to stand. Neither the Obama administration nor any administration should have the power to unilaterally change the law as it sees fit.”

It will be most interesting to see if President Clinton will have anything to say about this! Welfare reform, as noted above, was arguably his greatest accomplishment.

Note: I have included a link to an article from the Heritage Foundation on this subject below, which includes a link to the actual directive sent by HHS to the individual states.

Disability Rolls Outpace New Jobs Big-Time

More workers joined the federal government’s disability insurance program in the 2Q than got new jobs, according to two new government reports, a clear indicator of how bleak the nation’s jobs picture is after three full years of economic recovery.

The economy created just 225,000 jobs in the 2Q, the Bureau of Labor Statistics reported earlier this month. But in that same period, 246,000 workers left the workforce entirely to enroll in the Social Security Disability Insurance program, according to the Social Security Administration (SSA).

The disability ranks have outpaced job growth throughout President Obama’s time in office. While the economy has created 2.6 million jobs since June 2009, fully 3.1 million workers signed up for disability benefits. Put differently, the number of new disability enrollees has climbed 19% faster than the number of jobs created during the sluggish recovery.

This doesn’t take into account workers’ dependents that may also qualify to receive disability checks. If we count those dependents, a record 5.4 million people have signed up to collect federal disability checks since Mr. Obama took office.

In just the first four months of this year, 539,000 joined the disability rolls and more than 725,000 put in applications. By April of this year, there were a total of 10.8 million people on disability according to the SSA.

The question is, why have applications for disability insurance skyrocketed over the last three years? The main reason cited is the sluggish economic recovery, and that is certainly a major factor. Another reason is that more and more Americans are seeing their 99 weeks of unemployment benefits come to an end, and they try to qualify for disability. I’m told that almost anyone can get on disability if they hire a lawyer – whether they are totally disabled or not.

In fiscal year 2011, the disability insurance program paid out $119 billion to 8.3 million people, accounting for approximately 18% of all Social Security spending. The Congressional Budget Office (CBO) expects that number to jump by 71% to $204 billion by 2022, as the number of disabled workers and their dependents receiving money increases to 12.3 million. At the rate of growth projected by the CBO, the disability trust fund is on a fast-track to insolvency in just four years.

The saddest part of this story is that very few people who get on disability ever get out of the program. According to SSA data, only 1% of disability recipients ever return to the workforce. I doubt that many Americans are aware of that fact.

Still Five Million Fewer Jobs Today

While hiring has been very weak during the recovery, the number of people who have dropped out of the labor force entirely has exploded by 7.3 million since June 2009, according to the Labor Department. Some of those aged into retirement, but most either signed up for disability, stayed in school, moved back in with parents, or just quit looking for a job altogether.

As a result, the "labor force participation rate" – the number of people who have jobs or are actively looking for one, compared with the entire working-age population – is now 63.8%, down from 65.7% in June 2009. This participation rate is at the lowest level in 30 years. In previous recoveries, the participation rate has almost always risen, not fallen.

Here’s another stark statistic: If we look back at the 60 years prior to June 2009, the jobless rate topped 8% in a total of only 39 individual months. In the current weak recovery, the unemployment rate has been above 8% for 41 consecutive months.

There is another grim statistic many people are not aware of: The total number of people working is still nearly five million below its pre-recession peak. Think about that. There are almost five million fewer jobs today than before the recession started. The media almost never mention this staggering number because it is so damning for the Obama administration!

The number of “long-term unemployed” – those out of work 27 weeks or more – is still 5.4 million, almost 1 million higher than when the recovery began, and almost twice the level it ever reached prior to the current recovery.

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.

Record Number of Americans Now on Food Stamps

More people are on food stamps this year than ever before. The Supplemental Nutrition Assistance Program (SNAP) provides financial assistance for purchasing food to low (and no) income people and families. It is a federal aid program, administered by the Food and Nutrition Service of the US Department of Agriculture; however, benefits are distributed by the individual US states. It was enacted in 1964 and is commonly known as the Food Stamp Program.

In the 2011 fiscal year, $76.7 billion in food stamps were distributed. As of March 2012, 46.4 million Americans were receiving on average $133.14 per month in food stamps. Recipients must have near-poverty incomes to qualify for benefits, and in Washington, D.C. and Mississippi, more than one-fifth of residents receive food stamps.

As you can see in the chart below, the number of Americans receiving food stamps soared to almost 19% of the population in 2011, and it’s even higher today. As of April, more than 46 million people were in the program, which is expected to cost $80 billion this year. The food stamp rolls have ballooned by almost 40% just since 2009.

Many people believe that the explosion in the number of Americans on food stamps in recent years is largely a result of the Great Recession and the loss of millions of jobs across the country. No doubt that is a big part of the increase. But others, including me, believe that the Obama administration has made a concerted attempt to get more people on the food stamp rolls in order to get more Americans dependent on the government. Now there is proof.

The Department of Agriculture has recently come under fire for its “aggressive” ad campaign, including a 10-part series of Spanish-language “novelas,” (TV ads) to convince people to go on food stamps – at a time when millions are already enrolled.

The novelas are a 10-part miniseries (soap operas) in which the characters try to convince a woman named Diana to go on food stamps, even though her husband works and she doesn’t think her family needs government assistance.

In Episode 4, Diana says (in Spanish), “I don't need help from anyone. My husband makes enough to take care of us." But her friends are persistent, and by Episode 10 Diana is enrolled and singing the food stamp program’s praises.

The novelas have drawn sharp criticism in recent weeks. Among those in Congress calling for an end to the program is Senator Jeff Sessions (R-AL), who said:

“It has become increasingly clear that, in recent years, the mission of the food stamp program has been converted from targeted assistance for those in need into an aggressive drive to expand enrollment regardless of need. Food stamp spending has quadrupled since 2001, yet USDA complains that too many eligible people continue to resist enrollment. ... Read as a whole, USDA's activities suggest that the program administrators take personal offense when people who technically qualify for their largesse decline to accept -- and see it as an obstacle to overcome.”

To be fair, the novelas were produced in 2008 by the USDA and have been used continuously since then. On July 13, the USDA reportedly bowed to mounting pressure and ceased airing the novelas. The agency continues to run ads for food stamps in English.

US Poverty Rate Nearing Highest Level in 50 Years

The Census Bureau figures for poverty in 2011 will be released this fall in the critical weeks ahead of the November elections. The Associated Press recently surveyed dozens of economists, think tanks and academics, including conservatives and liberals, and found a broad consensus on poverty in the US.

The consensus is that the official US poverty rate rose from 13.2% in 2008 to 15.7% in 2011. If so, that would put the US poverty rate at the highest level in 50 years. Poverty is spreading at record levels across numerous demographic groups in the US, from underemployed workers and suburban families to the poorest of the poor.

The government’s definition of poverty is based on annual income received. For example, the poverty level for 2012 was set at $23,050 (total yearly income) for a family of four. The most common measure of poverty in the United States is the so-called “poverty threshold” set by the US government. This measure recognizes poverty as a lack of those goods and services commonly taken for granted by members of mainstream society.

More discouraged workers are giving up on the job market, leaving them vulnerable as unemployment aid begins to run out. Suburbs are seeing some of the largest increases in poverty, including in such political battlegrounds as Colorado, Florida and Nevada, where voters are coping with a new norm of living hand to mouth.

Sadly, no end is in sight. The question is, WHY?

Conclusions: This is a Sad Commentary

Several of my in-house proofers made the comment that today’s E-Letter was more than a little depressing. I can’t disagree. Every sub-topic discussed above is a sad commentary on the state of affairs in our country today: 1) welfare work requirements revoked by Obama; 2) Americans on disability at record highs; 3) people on food stamps at record highs; and 4) poverty nearing a 50-year high. All of these are depressing headlines, no doubt about it.

But in the big picture, what may be even more depressing is the question of whether or not these trends are the result of some grand design. Take for example the Obama administration’s latest executive directive to eliminate the work requirements to receive welfare payments just four months before the elections.

Republicans and Democrats largely agree that the Clinton welfare reforms were working – IF you consider the goal to be more people working instead of on welfare. Yet Obama chose to “fix” something that wasn’t broken. No one can definitively rule out that this was done to increase the number of people who are dependent on the government, and thus more likely to vote for the president in November.

Ditto for those on disability insurance and food stamps, which are both at record highs. Are these facts largely the result of the worst recession since the Great Depression? Or are they partly the result of a larger plan to get more Americans dependent on the government for their daily subsistence?

I can’t say for sure, but I suspect it is a combination of both. I know that is a very controversial statement to make, and I know that my liberal readers will take me to the woodshed in their e-mails just ahead. But if you stop and think about these troubling trends in our country, somebody has to at least raise the possibility.

I’m reminded of the famous quote from historian Alexis de Tocqueville:

“A democracy … can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.”

Obama is not only increasing the number of voters on the government dole, but is also issuing Executive Orders that ignore the intent of the Constitution. Do I think he’s lining himself up to be a dictator? No, but it’s obvious that he’s trying to build a class of loyal Democratic voters increasingly made up of federal government beneficiaries.

I’m also reminded of another famous quote from White House Chief of Staff, Rahm Emanuel, shortly after President Obama took office in 2009, in the depths of the Great Recession:

“You never want a serious crisis to go to waste, and what I mean by that is an opportunity to do things that you didn’t think you could do before.”

I am not afraid to be one of those making these observations and asking these questions!

If you agree with me, I encourage you to let me know. Most of the time, I only hear from those who disagree.

Hoping you’re not too depressed after reading this,

Gary D. Halbert

Buy Low, Sell High - Any Questions?

Gary D. Halbert — Tue, 15 May 2012 21:19:31 GMT

IN THIS ISSUE:

1. Value Investing Seizes on Market Inefficiencies

2. Introducing Yacktman Capital Group

3. Yacktman’s Seven Key Insights

4. Yacktman’s Risk Management Techniques

5. Performance Evaluation

Overview

Today we will delve into the world of “value” investing in stocks. Many investors don’t really understand how value investing works, other than they’ve heard that legendary investor Warren Buffett is a value-style investor. Put simply, value investing implies seeking to buy healthy companies that are trading below their “intrinsic value” with the likelihood that their share prices will return to their intrinsic values, if not rise above them, over time.

Intrinsic value is a term you see batted around in the financial media, but the exact definition can be elusive. Contrary to some thinking, intrinsic value isn’t just another name for “book value.” Warren Buffett, for example, has defined intrinsic value as “…the discounted value of the cash that can be taken out of a business during its remaining life.” Thus, intrinsic value relates to the true value of the business underlying the stock without regard to short-term market fluctuations.

The value-style strategy can be very successful if implemented properly. Warren Buffett and many others are examples of that. The problem is that most investors do not possess the knowledge and ability to analyze complicated business financials and detect industry trends that are necessary to determine what the true intrinsic value of any given company really is.

Few investors have an army of analysts to produce all this information as Mr. Buffett does. So if they want a value-style exposure in their portfolios, their only option in most cases is to buy a mutual fund that specializes in value investing. Even then, there are hundreds of so-called value funds to choose from.

Today I will introduce you to a professional money manager that thrives on value investing, one who literally grew up under the roof of one of the most successful value investors of our time.

Value Investing Seizes on Market Inefficiencies

There are some who maintain that the US stock markets are too “efficient” for value-style investing to work. These folks believe that everything there is to know about a company is “already priced into the market.” Successful value investors like Warren Buffett know that’s not true – there always seem to be market inefficiencies one can exploit, IF you know where to find them.

Buffett once said: “I'd be a bum on the street with a tin cup if the markets were efficient.”

These inefficiencies in individual stock prices can be taken advantage of if you have the knowledge to find them. Value-style investing originated with Benjamin Graham, the “Father of Value Investing.” Warren Buffett learned this strategy from Graham while he was a college student and has used it ever since.

Graham argued that because of speculation in the markets, the prices of individual stocks are often driven above or below their intrinsic values. If an investor has the knowledge to correctly determine the true intrinsic value of a company, then buying healthy companies that are trading below that value should be very profitable. Successful value investors have proven that to be true in spades.

Best of all, there are stocks that trade below their intrinsic value in all types of markets – bull markets, bear markets and even sideways markets – thanks to speculators. The trick is how to know what the true intrinsic value is, and that’s why you need a professional on your team.

Introducing Yacktman Capital Group, LLC

So far, we have discussed how Benjamin Graham taught that it’s important to differentiate between speculators and investors and that quality businesses can be purchased at a discount. Warren Buffett improved upon this concept by focusing on businesses that have good prospects for the future, essentially using the same analysis to buy a stock as you would if you were acquiring the entire business operation.

Brian Yacktman, founder and portfolio manager of Yacktman Capital Group (Yacktman) offers a further improvement upon Graham’s and Buffett’s principles by devising a way to set up a portfolio of individual stocks so that it has the potential to protect capital during times of severe market declines while still attempting to produce above-market returns over a full business cycle.

That’s an important point, so let’s say it another way: Yacktman seeks to maximize your risk-adjusted return on capital by employing a strategy that grows your purchasing power over time no matter what economic scenario the unknown future holds.

If the Yacktman name sounds familiar to you, it’s because Brian’s father, Don, founded the Yacktman family of mutual funds in 1992 and built it into a value-style investment powerhouse. While there are lots of eager emerging money managers out there, few have the stock selection pedigree that Brian Yacktman does. Because Yacktman Capital Group was formed in 2007, its official track record is relatively short; however, Brian has over a decade of time spent honing his money management skills in personal and family accounts.

For the millions of investors on the sidelines taking a “wait and see” approach, Yacktman’s value strategy offers a way to re-enter the market with the knowledge that their portfolio will consist of only businesses with stock prices that Yacktman has purchased at a discount to their intrinsic values.

By focusing on capital preservation and superior stock selection, as opposed to matching some market index, Yacktman seeks to produce “absolute returns.” While the details of Yacktman’s methodology are proprietary, we can make some general observations about its management style based on information gathered in our due diligence process.

Yacktman’s Seven Key Insights

We noted above how Yacktman seeks out stocks that are trading at a discount to their intrinsic values, which is far easier said than done. Yacktman knows that the evaluation of a company’s intrinsic value is only as good as the analysis performed on its internal condition. As a result, it has developed an evaluation process that is based on the following seven key insights Brian has gained over his decade-plus experience in managing money:

Insight #1 – High-Quality vs. Low-Quality Businesses: Yacktman has determined that high quality businesses outperform low-quality businesses over the long haul. For Yacktman’s purposes, a high-quality business is one with high profitability, low profit volatility and minimal use of leverage (borrowing). Not only that, but high-quality stocks also tend to outperform lower quality stocks during down markets. The following graph shows the multiple needed to regain stocks’ original values based on the quality of the underlying business during the Great Depression:

Brian notes that the combination of higher returns and better downside protection can potentially preserve principal, even in a bear market scenario. This is why high-quality businesses will always be the vast majority of client holdings in the Concentrated Composite Strategy.

Insight #2 – Treat Stocks Like Bonds: If you study most value strategy approaches, you will find that they seek to determine a stock’s value by predicting all of its future cash flows and then applying an arbitrary discount rate. Instead of using this methodology, Yacktman treats stocks like bonds, in that they calculate the implied return expected from buying the stock at the current price and then determine the predictability of that return.

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.

While going into the calculations used is a bit involved for this article, the gist is that Yacktman seeks to calculate the stock’s forward rate of return, which then allows it to evaluate the yield spread as compared to stocks of varying quality levels. Brian says that this approach is beneficial in that it forces him and his staff to be long-term thinkers rather than being a hostage to short-term market actions.

Insight #3 – Most Investors Intend to Act Rationally, but Rarely Do: Yacktman has observed that even many professional investors approach the market with the intent to act rationally, but often find that they cannot do so. Why? Yacktman ventures that even professionals sometimes become victims of the old saying that “genius is a bull market.” In up markets, they seek out stocks that may be of lesser quality but appear to have a greater potential return. Benjamin Graham observed that this is when they stop being investors and start becoming speculators.

Yacktman, on the other hand, has structured its clients’ portfolios such that they not only have the potential to withstand market shocks, but actually benefit from these scary periods. In addition, Yacktman may actually buy more quality stocks when this irrational fear drives down the stock price of good businesses.

Insight #4 – Maintain the Proper Level of Concentration: Yacktman’s Concentrated Composite Strategy carries that name for a reason. Yacktman generally limits the number of stocks held under this strategy to anywhere from 15 to 30 holdings. By doing this, Yacktman seeks to maximize returns while minimizing volatility as measured by standard deviation.

Having too few holdings can subject a portfolio to too much risk from a single stock, but too many holdings can dilute the value added by Yacktman’s fundamental analysis. Brian calls the process of holding too many stock positions “de-worsification.”

Insight #5 – Taxes Matter: Unlike many other money managers, Yacktman is committed to earning the bestafter-tax returns possible. Historically, turnover has been low and holding periods usually extend beyond one year, so capital gains tend to be long-term in nature. Many of the holdings in Yacktman portfolios also pay dividends, which are also currently subject to special tax treatment.

Insight #6 – Fees Matter: Absolute return strategies such as Yacktman’s are often found in so-called hedge funds, which typically charge a base fee of 2% plus an incentive fee of 20% of any profits. Yacktman’s management fee starts at 2% and can be even less for larger accounts, and there is no incentive fee on profits. [Also note that Halbert Wealth Management shares a part of the 2% fee, so our involvement does not result in any additional cost.]

Insight #7 – Incentives Matter: Last but not least, Yacktman has observed that many investment managers are more interested in selling products and receiving a commission than in providing solutions. The asset-based fee structure discussed above provides an incentive for Yacktman to grow accounts over time. Plus, Brian notes that he and his staff have virtually all of their own money invested alongside his clients in the various programs he manages.

Brian notes that he has an additional special incentive in that his family (including his father, Don) and friends are also investors in his strategies. Plus, I have my own money invested with Yacktman, just as I do with every money manager that we recommend to our clients.

Yacktman’s Risk Management Techniques

Yacktman defines risk as a permanent loss of capital and seeks to minimize risk of loss in a variety of ways. As noted above, buying stocks at a sufficient discount provides a margin of safety during market declines. The quality of the companies purchased is also an important risk management feature. As a general rule, the better the quality of the company, the quicker it can recover from market declines.

The use of individual stocks rather than mutual funds is another way Yacktman controls risks. The level of fundamental analysis performed by Yacktman does not work if applied to a stock mutual fund, since such funds consist of a constantly changing collection of stocks. Plus, using Brian’s term, a “de-worsified” mutual fund is more likely to follow the major indexes during market downturns, while a portfolio of carefully selected individual stocks may actually rise during down markets, depending upon the types of businesses held and market conditions.

A final risk management feature is that Yacktman invests in stocks without regard to their market capitalization. Yacktman is not “pigeon holed” into any particular size of business, freeing the firm to select only the best opportunities across a wide spectrum of market caps.

It is important to note that Yacktman does not move to cash in bear markets or downward corrections. In fact, they may buy more stocks if the downtrend makes them more attractive from a pricing perspective.

Performance Evaluation

From its inception in November of 2008 through April of 2012, the Yacktman Concentrated Strategy has produced an average annualized gain of 18.4% compared to 13.5% for the S&P 500 Index, with dividends. Yacktman’s worst drawdown was -15.83%, significantly lower than the S&P 500 Index’s drop of 23.24% over the same period of time.

Brian cautions that future drawdowns could potentially be considerably larger than the -15.83% losing period noted above, especially should we have another blowout like the 2007 – 2009 bear market when the S&P 500 Index lost over 50% of its value. However, since Yacktman’s strategy seeks to purchase stocks below their intrinsic value and does not go to cash in down markets, Brian expects that any short-term drops in value would be made up in subsequent rallies, much as was the case in 2009. There are no guarantees, of course.

See the performance information below for more comparisons and detailed monthly returns. All performance information is provided net of all fees and expenses:

Be sure to read Important Notes following my signature.

The minimum account size for the Concentrated Composite Strategy is $100,000. Additional information, including administrative details, fee schedule and Advisor background can be found in the Yacktman Advisor Profile by clicking on the following link:

Click here to view the Yacktman Advisor Profile.

Conclusions

Value investing has been and will continue to be an important strategy for those of us who believe that the market can sometimes be irrational, setting up a potential gain for the knowledgeable investor. With investing legends such as Benjamin Graham and Warren Buffett going before, Yacktman has some big shoes to fill, but we believe this firm is more than up to the challenge.

We feel that one of the most important features of Yacktman’s Concentrated Composite Strategy is that it seeks to preserve capital and make money in any kind of market or economic environment. That being the case, it may be the perfect vehicle for those investors who are still on the sidelines and nervous about getting back into the market.

In the words of Benjamin Graham, “It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities.” (The Intelligent Investor)

More importantly, if you have money in stocks that you manage yourself, or if you own equity index mutual funds, I would seriously considering moving all or part of that money to Yacktman. While I can’t make any guarantees, I believe Yacktman will do a better job for you than doing it on your own or in equity mutual funds.

All of us have observed that there always seem to be some stocks that do well even in down markets. The problem was that we didn’t know how to find them. With Brian Yacktman and his staff, we now have a guide to lead us to the opportunities that lie undiscovered by most investors.

It is rare to be able to take advantage of an emerging money manager early in his career. It is even more rare to have an “emerging” manager with over a decade of hands-on money management experience. Rarer still is an emerging manager who learned his craft at the feet of an industry legend, his dad. We have all of these things in Brian Yacktman.

To learn more about this promising emerging manager and its value-style approach, contact us in any of the following ways:

Call one of our Investment Consultants at 1-800-348-3601 ;
Send us an e-mail at info@halbertwealth.com;
Check out our website at www.halbertwealth.com; or
Complete our Yacktman online request form.

I also invite you to sit in on a webinar featuring Brian Yacktman and Yacktman’s CEO, Will Kruger, to be held on May 24, 2012 at 1:00 PM Eastern Time (10:00 AM Pacific). The webinar will last approximately 30 minutes and will allow you to hear about this innovative value-style all-cap approach directly from the money manager. Seating is limited, so click on the following link to register today:

Click here to register for the Yacktman online webinar.

Very best regards,

Gary D. Halbert

Is The Economic Recovery Stalling?

Gary D. Halbert — Tue, 24 Apr 2012 21:19:00 GMT

IN THIS ISSUE:

1. Bond Auctions in Spain and France Just OK

2. Fears Rise That the US Economy is Faltering

3. Fed: Is QE3 Really Off The Table?

4. 5.4 Million Join Disability Rolls Under Obama

Overview

Economic reports in recent weeks have been disappointing overall, and there are growing concerns that the economic recovery may be slowing following 3% GDP growth in the 4Q of last year. As I have written in previous weeks, the 3% GDP number for the 4Q was largely buoyed by inventory rebuilding, which is believed to have slacked off considerably in the 1Q of this year.

Thus, all eyes will be focused on this Friday’s first report on 1Q GDP. Only a month or so ago, some worried that the 1Q GDP number could come in below 2% due to the slowdown in inventosry rebuilding. But as you’ll read below, most pre-report estimates for 1Q GDP are north of 2%.

Assuming Friday’s GDP number comes in above 2%, I don’t expect too much of a reaction in the markets. A number below 2% would likely be quite negative, while a number of 3% or more would be a positive surprise. In any event, I will analyze the GDP report in my blog on Friday.

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

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

Finally, a record 5.4 million workers and their dependents have signed up to collect federal disability checks since President Obama took office. Many unemployed apply for disability benefits as soon as their unemployment benefits run out. There are now a record 10.8 million Americans on disability – double the number since Obama took office.

Before we get into those discussions, I will give you a brief update on the outcome of the debt auctions in Europe last week. In a nutshell, the auctions went a little better than expected.

Bond Auctions in Spain and France Just OK

The good news is that Spain and France were able to sell all the government bonds they wanted to sell at last Thursday’s debt auctions. The bad news is that the rate on Spain’s 10-year bonds rose to near 5.8%, up from 5.4% in January. At least the rate didn’t climb over 6% as it did in the secondary market early last week, as many feared. However the rate did rise to 5.9% in the secondary market just after the auction.

There was one other worrying note to the auction. Spanish banks, fresh with cheap money from the ECB, were the biggest buyers of the bonds, along with other institutions, while foreign investors continued to reduce their holdings of government securities. While the auction was mildly better than expected, Spain is far from being out of the woods. Italy’s next big bond auction is this Friday. There are concerns about that auction as well.

Expect the European debt crisis to continue to make news. Country after country in southern Europe is struggling with debt and austerity measures which are driving their economies into recession. France’s president Nicholas Sarkozy appears to be on his way out, to be replaced by a socialist candidate who promises to reverse some of the austerity measures. The Dutch government appears to be breaking up for similar reasons.

The bottom line is that the European debt crisis is ongoing and may serve as a lid on global equity prices for some time to come.

Fears Rise That the US Economy is Faltering

As noted above, the US economic recovery is facing some stiff headwinds. Those include high gasoline prices, the recession and higher interest rates in Europe and the recent disappointing unemployment numbers in the US, just to name a few.

The apparent slowdown in the recovery recently is in part due to the unusually warm winter, which served to pull economic activity forward in January and February, thus making March and April so far look softer. With this analysis, some in the mainstream media concluded that we don’t have a problem with the economy. Maybe so, but the recovery has had an uneasy feeling about it recently.

The International Monetary Fund (IMF) held its spring meeting in Washington at the end of last week, and it was clear from comments made by the central bankers that they have concerns about the US recovery slowing down. Christine Lagarde, managing director of the IMF said: “There is a light recovery blowing in a spring wind with dark clouds on the horizon.”

The IMF’s chief economist, Olivier Blanchard added: “An uneasy calm remains. One has the feeling that any moment, things could well get very bad again.” He is particularly concerned that the ongoing recession in Europe will have negative effects on the US recovery.

Treasury Secretary Geithner was trotted onto the Sunday talk shows on April 15 and even he acknowledged that the recovery has been slow of late and cautioned that headwinds remain. There’s a real feeling of concern out there when even the White House admits it.

Given that, let’s take a look at some of the latest economic reports.

Housing reports released last week were weaker than expected, leading many forecasters to predict a further drop in home prices later this year. Industrial production was flat in March for the second month in a row, and below pre-report expectations. Construction spending fell 1.1% in the latest report.

Weekly initial claims for new unemployment benefits were significantly higher than expectations over the last two weeks at 380,000 and 386,000 respectively versus 357,000 in the last week of March. The initial claims report for the third week in April will be out on Thursday, and the pre-report consensus is for a number of 373,000. I think that number would still be considered high.

The March unemployment report earlier this month showed that only 120,000 new jobs were created last month, down sharply from 285,000 and 233,000 respectively during the two previous months. All this led numerous forecasters to predict that the national unemployment rate for April will rise above the 8.2% mark for March.

All the news was not negative, however. Retail sales rose a better than expected 0.8% in March. The index of leading economic indicators was up 0.3% last month. The ISM manufacturing index climbed a point to 53.4 in March. And building permits were up a better than expected 4.5% in March.

Of course, this Friday’s 1Q GDP report is critically important. Of the 50 economists surveyed by Blue Chip Economic Indicators, the predictions ranged from a high of 2.9% to a low of 1.8% with an average of 2.2% (annual rate). As this is written, the pre-report consensus is for a rise of 2.5%. The 1Q GDP report will be released on Friday at 8:30 EDT.

As usual, I will analyze the GDP report in my blog on Friday – click here to sign up if you haven’t already – it’s free).

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.

Fed: Is QE3 Really Off The Table?

The Fed Open Market Committee (FOMC) that sets monetary policy is meeting today and tomorrow in Washington. The markets always pay a lot of attention to the policy “statement” which is released just after the meeting ends in the early afternoon. That will happen tomorrow, and I don’t expect any significant changes to the statement this time.

To get the details on what the FOMC members actually discuss in these closed-door meetings, you have to wait until the “minutes” of the meeting are released. For example, the minutes from the March 13 meeting were released on April 3. Warning: these minutes are very boring, but I have to look at them – at least the policy sections (good thing I’m a speed-reader).

When the latest minutes came out on April 3, there was a fairly broad consensus that the FOMC had ruled out any further quantitative easing, or QE3. In fact it was largely this consensus on QE3 that sent the stock markets lower earlier this month.

I didn’t read the March 13 minutes that way. In my view, the FOMC once again left all options on the table. The specific policy options were unchanged from the previous meeting: 1) Keep the Fed Funds rate near zero at least until late 2014; and 2) continue to extend the maturities of existing securities (“Operation Twist”). But then there is the following paragraph that was unchanged from the previous meeting:

“The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.” [Emphasis added.]

This language clearly suggests, to me at least, that QE3 is still an option. As I discussed at length in my March 13 E-Letter, the Fed is still very concerned about the economic recovery which, as discussed above, appears to be weakening. It will be very interesting to see what the Fed has to say about the recent pace of the economy in its policy statement tomorrow.

Following the last several FOMC meetings, the policy statement noted that the US economy has been expanding moderately. For example, here are excerpts from the March 13 policy statement:

“Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance.” [Emphasis added.]

Here are the key points to watch for in tomorrow’s Fed policy statement. It will be very important to see if the Fed alters this language to note that the economic recovery appears to be slowing down in the policy statement tomorrow. It will also be important to see if the Fed alters any of its prior language regarding keeping the Fed Funds rate near zero into late 2014, or if it changes the language regarding Operation Twist.

If the Fed fails to acknowledge that the economic recovery is slowing down in the statement tomorrow, then I think it’s safe to assume that QE3 is not going to happen just ahead. On the other hand, if the Fed does acknowledge that the economy is slowing down, then I would not rule out a decision to enact QE3 (or extend Operation Twist) at the June 19-20 FOMC meeting.

Unfortunately, we won’t see the minutes from this week’s FOMC meeting until the middle of next month. Only then will we know what the FOMC members really talked about today and tomorrow. As usual, I will write about this when the minutes are made public (most likely in my blog on May 18 – click here to sign up if you haven’t already – it’s free).

And one final note on the Fed: Don’t automatically believe the media’s take on the Fed’s policy statement tomorrow. The financial talking heads often misinterpret the Fed’s policy statements. Keep that in mind as you hear the spin tomorrow following Chairman Bernanke’s post-meeting press conference. It will be very interesting to see if he even hints at more QE – I doubt it.

5.4 Million Join Disability Rolls Under Obama

A record 5.4 million workers and their dependents have signed up to collect federal disability checks since President Obama took office, according to the latest official government data. The problem is that discouraged workers who are unemployed are increasingly giving up looking for jobs and taking advantage of the federal disability program.

Since the recession ended in June 2009, the number of new enrollees to Social Security's disability insurance program is twice the job growth figure as you can see in the chart at left. In just the first four months of this year, more than 725,000 put in disability applications, and more than 539,000 (74%) were accepted.

As a result, by April there were a total of 10.8 million people on disability, according to Social Security Administration data released last week.

Even worse, data released by the White House stated that “…workers on SSDI rarely return to the labor force.” [Emphasis added.] To me this is the saddest part of this story: once you go on disability, you’ll probably never get off of it.

This is straining already-stretched government finances while posing a long-term economic threat by creating an ever-growing pool of permanently dependent working-age Americans. Even after accounting for all those who've left the disability rolls – some 700,000 drop out each year mainly because they hit retirement age or died – that’s up 53% from a decade ago.

The biggest factor in the recent surge is the slow pace of the economic recovery after the severe recession. That has kept the unemployment rate above 8% and created an enormous pool of long-term unemployed and discouraged workers. More than 5 million people have been jobless for 27 weeks or more, nearly twice the previous high set in 1983, according to the Bureau of Labor Statistics.

Boston College's Center for Retirement Research says that a lot of unemployed people apply for disability as soon as their unemployment insurance expires. The number of disability applications last year was up 24% compared with 2008, according to Social Security Administration data.

The explosive growth in disability enrollment also helps explain some of the drop in the labor force “participation rate” – the share of working-age people who have or are looking for a job. The participation rate has fallen to 63.8% compared with 65.7% at the start of Obama’s term.

Ironically, this drives down the unemployment rate, which simply measures how many people are looking for work but haven't been able to find it. When people quit looking or sign up for disability benefits, they no longer count as unemployed.

As noted above, the problem is that few people who get on disability will ever participate in the labor force again. As a result, the rapid increase in the number of disabled is a huge drag on the economy and will be for a very long time.

How Do So Many (74%) Qualify?

At this point, you are probably asking, how did so many of the unemployed qualify? As noted above 74% of all disability applicants were accepted so far this year. Has some mysterious force caused more people to become disabled than ever before? Hardly.

No, given the fact that unemployment has remained so high for so long, more and more Americans are seeing their unemployment benefits expire. Many view disability insurance as an extension of their unemployment benefits.

In reality, many applicants are turned down during the initial medical screening process, especially those who apply on their own without legal assistance. Increasingly, however, applicants who are turned down initially decide (or are advised) to appeal the decision, which they have a right to do.

Also more and more applicants are appealing with the help of lawyers. Apparently, if you get a lawyer, you get accepted pretty much automatically. I’m sure you’ve seen TV ads for such attorneys, usually on late-night TV (what else is new?).

Reasons for applying can be as vague as simple “pain and discomfort” or “multiple non-severe ailments” or “mental illness.” These and many other claims are difficult to disprove. According to a study by the National Bureau of Economic Research, many applicants who were denied initially returned with lawyers and claimed different ailments than they cited on the first application. Again, if you get a lawyer, you get accepted virtually automatically.

Reform ideas that would cut the ranks of those on disability have been bandied about for years. They include tightening eligibility rules, giving workers more options other than full-time disability and offering tax incentives for disabled workers to stay in the workforce. So far, the reform ideas have spurred little action.

So along with a new record number of Americans living in poverty (a topic for another time), we have an all-time high number of Americans on disability. This is a travesty on so many levels!

Very best regards,

Gary D. Halbert

The Worst Economic Recovery in a Lifetime

Gary D. Halbert — Tue, 05 Jul 2011 21:35:00 GMT

Introduction

I hope everyone reading this had a memorable Independence Day holiday. We certainly did with lots of family and friends at our home on Lake Travis, and with lots of cooking on my part (but unfortunately, no fireworks this year due to the severe drought in Central Texas). July 4th is one of my favorite national holidays.

Due to the short week, I have elected to reprint a surprising new study that has just been released by the Congressional Joint Economic Committee (JEC). The JEC is a bipartisan committee including 10 Senators and 10 House Representatives, evenly divided between Republicans and Democrats. The JEC’s main purpose is to make a continuing study of matters relating to the US economy. The Committee holds hearings, performs research and advises Members of Congress.

Two Republican members of the JEC – Senator Jim DeMint (SC) and Rep. Kevin Brady (TX) – recently commissioned the study which appears below. The study compares today’s economic data—including employment, gross domestic product (GDP) growth, consumer spending and credit, housing and personal income—with that from previous recessions and recoveries. The conclusion: economic conditions are worse today than in any recovery since at least World War II.

Because the study was commissioned by the two Republicans noted above, the analysis includes some partisan statements, unfortunately. However, the data and charts below are accurate, and this is the worst post-war economic recovery – regardless where one wishes to affix the blame. In my view, both President Bush and President Obama share the blame.

I have written often this year about this disappointing economic recovery, and this relatively brief analysis sums it up very well. It is reprinted in its entirety below, including over a dozen charts and graphs, so it will print longer than usual.

Uncharted Depths: Welcome to Barack Obama’s “Recovery Bummer”

6/23/2011

Two years after the official end of the Great Recession, and one year after the Obama Administration declared “Mission: Accomplished” on the economy by celebrating the dawn of “Recovery Summer,” the United States economy remains in dire straits. And on closer inspection, the situation is even worse than the headlines suggest.

This report compares today’s economic data—including employment, gross domestic product (GDP) growth, consumer spending and credit, housing, and personal income—with that from previous recessions and recoveries, and finds that economic conditions are worse today than in any recovery since at least World War II.

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.

EMPLOYMENT

It has been 23 months since the recession ended in June 2009, and 28 months since President Obama signed an $814 billion stimulus bill—which White House economists said would keep unemployment from climbing even to 8 percent.

The unemployment rate in the United States today is 9.1 percent, and it has been at or above 9 percent for a record 23 of the past 25 months (since records began in 1948). The unemployment rate is 4.1 percentage points higher than when the recession began. This compares to an average increase of only 1.2 percentage points over that same time period in previous post-WWII recessions.¹

Even worse, total employment is now 5.0 percent below what it was at the start of the recession, 38 months ago. This compares to an average rise in employment of 3.7 percent over the same period in prior post-WWII recessions.

The chart at the top of the following page highlights the magnitude of the decline in employment as well as the absence of symmetrical, "bounce-back" job-creation that has occurred in virtually all previous recessions. Had employment followed a typical symmetrical pattern, there would be 5.3 million more payroll jobs in the economy than there are today.

LONG TERM UNEMPLOYMENT

A particularly troubling component of the current labor market is the record-high level of long-term unemployment (the percentage of those unemployed who have been out of work for six months or more).

The proportion of the unemployed who have been without work for more than six months is 45.1 percent—a 26.7 percentage points increase since the beginning of the recession. This compares to a historical average increase of only 7.0 percentage points over that same period in previous, post-WWII recessions.

As Federal Reserve Chairman Ben Bernanke has emphasized, long-term unemployment is particularly concerning because "people without work for long periods can find it increasingly difficult to obtain a job comparable to their previous one, as their skills tend to deteriorate over time and as employers are often reluctant to hire the long-term unemployed."²

LABOR FORCE

Another particularly troubling component of the current recession has been the rapid decline in labor force participation. From the start of the most recent recession to May of 2011, the labor force participation rate has declined by a record 2.0 percentage points, from 66.2 to 64.2 percent. In previous post-WWII recessions, the labor force participation rate rose an average of 0.1 percentage point over that same time period.

If the labor force had continued to grow at the same pace that it did from 2004 through 2007, there would be 6.7 million more people in the labor force than there are now.³

The fact that the labor force has declined so sharply means that the unemployment rate is unlikely to improve significantly anytime soon. As previously discouraged workers who left the labor force begin to re-enter it, there will be more people looking and competing for jobs. If the approximately 6.7 million workers who are not in the labor force now, but who would be in the labor force in a healthy economy were to all simultaneously re-enter it, the unemployment rate would rise from 9.1 percent to roughly 12.8 percent.

ALTERNATIVE MEASURES OF UNEMPLOYMENT

While the headline unemployment measure stood at 9.1 percent in May 2011, this statistic does not capture the unemployment and underemployment of workers "marginally attached" to the labor force and those who are working part-time but want full-time work. Including these workers reveals a much higher unemployment rate of 15.8 percent in May 2011.

GDP GROWTH

GDP grew at an annual rate of only 1.8 percent in the first quarter of 2011, and has grown at a disappointingly slow pace thus far during the recovery. In the first year after the recession, GDP grew 3.0 percent, compared to an average growth rate of 6.6 percent following prior post-WWII recessions.

To date (through the 1st quarter of 2011), real GDP has risen 0.8 percent over the 13 quarters since the recession began, compared to an average increase of 9.9 percent in past recessions.

CONSUMER SPENDING

Consumer spending makes up roughly 70 percent of GDP. But in the 38 months between the start of the recession and March 2011 (the most recent data), real consumer spending increased only 1.6 percent, compared to growth nearly seven times as high—11.1 percent—over the same period in previous post-WWII recessions.

In order for the economy to recover, consumers need to start spending again. But in order to start spending, consumers need income and access to credit, both of which have been lagging behind in the current recession.

PERSONAL INCOME

Income growth has been particularly weak coming out of this recession. From the start of the recession to April 2011 (the most recent data), real personal income has grown just 0.9 percent. This compares to average income growth of 9.4 percent over the same time period for previous post-1960 recessions.⁴

CONSUMER CREDIT

From the start of the recession to April of 2011, the amount of consumer credit outstanding has declined by 4.3 percent. This compares to a rise of 22.5 percent over that same period in previous post-WWII recessions.

The decline in credit availability has not only affected home owners, whose access to credit has been decimated by the housing collapse, but particularly many small business owners. Without access to credit, many businesses have been unable to maintain regular operations and have had to lay off employees, postpone planned investment and expansion, or close up shop altogether.

HOUSING

Arguably the primary driver of the current recession, the housing market has been extremely hard hit. Despite large amounts of federal spending programs and tax credits aimed at propping up the housing market, home prices remain depressed, foreclosures remain extremely high, and a record-high 28 percent of homeowners remain in negative equity, owing more on their homes than their homes are worth.⁵

Since the start of the recession, the median single-family home price is down 17.2 percent. This compares to an average increase of 22.9 percent over the same period in previous post-1968 recessions.⁶

CONCLUSION

On July 14, 2009, one month after the recession officially ended, President Obama gave a speech on the economy, saying:

Now, my administration has a job to do, as well, and that job is to get this economy back on its feet. That's my job. And it’s a job I gladly accept. I love these folks who helped get us in this mess and then suddenly say, ‘Well, this is Obama’s economy.’ That’s fine. Give it to me.

And on June 15, 2011—just this past week—Democratic National Committee Chair Debbie Wasserman Schultz said much the same on behalf of her party: "I think we clearly are responsible… I’m going to take ownership right now… We own the economy."

What the president himself calls "Obama’s economy" and Rep. Wasserman Schultz says her party "owns" is, in fact, the worst economic recovery the American people have suffered through in a lifetime.

________________________________
¹ Data comparing current levels to averages of previous post-WWII recessions include the ten recessions occurring between 1948 and 2001. The data in the graphs for the 1980 recession are limited to the first 18 months following the start of the recession because 18 months after the start of the 1980 recession commenced the beginning of the 198101982 recession. While the data in the charts are limited to the first 18 months following the start of the 1980 recession, the data levels comparing previous recessions to the most recent one include the full span of data for all recessions. All data comparisons are based on the most recent data available: for data on employment statistics, comparisons are made through the 40 months following the start of each recession; for data on income and home prices, comparisons extend 39 months beyond recession starts; and for consumer credit and consumer spending, comparisons extend 38 months beyond the start of each recession.

² Federal Reserve Chairman Ben Bernanke, "The U.S. Economic Outlook," Remarks at the International Monetary Conference, Atlanta, Georgia, June 7, 2011.

³ The estimated figure of 6.7 million assumes the same 0.10 percent monthly growth rate in the labor force that occurred from 2004 to 2007 also occurred from January of 2008 onwards. This is a conservative estimate as the long-term historical average growth rate from 1948 to 2007 is 0.13 percent per month.

⁴ Data on personal income was first recorded in 1960, so comparisons for this statistic are limited to those recessions occurring after 1960.

⁵ Confirm record-high since data for this only goes back to 2009.

⁶ Data on single-family home prices first began in 1968, so comparisons for this statistic are limited to those recessions occurring after 1968.

The study above from the Congressional Joint Economic Committee merely confirms what I have been writing about for months. This is the weakest economic recovery since the Great Depression. The question is, where do we go from here? Are we on our way to a double-dip recession? That is certainly a possibility, but is it the most likely scenario just ahead?

While most forecasters are dialing back their economic predictions for the second half of 2011, there is an argument for a better than expected last half of this year. I can’t say that I am buying it yet, but it should provide a thoughtful discussion for next week’s E-Letter. Stay tuned until then.

Hoping you had a memorable 4th of July,

Gary D. Halbert

On the Economy and Investment Dos and Don’ts

Gary D. Halbert — Tue, 15 Feb 2011 22:08:00 GMT

IN THIS ISSUE:

1. The Economic Recovery Continues Slowly

2. Unemployment Rate – Good News & Bad

3. Not-So-SmartMoney Advice

4. Results of the Financial Literacy Test

Introduction

Today we will delve into several topics, including a look at the latest economic reports, which continue to be encouraging on balance. We will also focus on the most recent unemployment numbers that are confusing to many people.

Following that, I will tackle some recent advice on what to do, or not do, with your hard-earned money. Some so-called “experts” are advising people to make some financial moves today that should normally be avoided. I’ll give you my take on these issues.

There’s a lot to cover, so let’s get started.

The Economic Recovery Continues Slowly

Most (but not all) of the economic reports of late have been positive. As noted previously, the Commerce Department reported that 4Q GDP rose 3.2% (annual rate) as compared to 2.6% in the 3Q. While 3.2% was a definite improvement from the 3Q, the pre-report consensus called for a rise of 3.7%, so the report was initially considered a disappointment.

Even though 4Q growth was not as robust as expected, a number of economists continue to increase their forecasts for 2011. The Blue Chip Economic Indicators (BCEI) survey of 50 leading economists earlier this month saw a slight increase in growth forecasts for all of 2011. The consensus calls for GDP growth of 3.2% this year, up from the 3.1% estimate in January.

The same survey found that the consensus expects inflation to rise only 1.9% in 2011 and 2.0% in 2012, as compared to 1.6% in 2010. I continue to feel that these estimates may prove to be somewhat low, but that remains to be seen.

Several specific economic reports of late were quite surprising. As one example, the Conference Board reported in the last week of January that its Consumer Confidence Index jumped from 53.3 in December to 60.6% in January. That was well above the pre-report consensus of only 53.5. By comparison, the University of Michigan Consumer Sentiment Index rose only modestly in January from 72.7 to 74.2.

It remains to be seen if the Consumer Confidence Index number will be revised downward later this month when the report for February is announced, but it wouldn’t surprise me. In any case, it does appear that Americans are becoming somewhat more confident in the economic recovery.

Another surprise came with last week’s report on consumer credit from the Federal Reserve. The Fed reported that U.S. consumer borrowing rose in December (latest data available) for a third consecutive month, led by the first increase in credit-card charges in more than two years as holiday sales improved. Credit rose by $6.1 billion in December to $2.41 trillion after increasing a revised $2.02 billion in November.

The pre-report consensus called for a rise in consumer credit of only $2.4 billion in December, so the $6.1 billion number was quite surprising. However, consumer credit still remains below the peak of $2.58 trillion in July 2008. For all of 2010, consumer credit contracted by 1.6% as compared to 2009 when credit fell a record 4.4%.

A thawing of credit makes it more likely that consumer spending, which accounts for apprx. 70% of the economy, will keep increasing after climbing at the fastest pace in four years in the 4Q of last year. We can argue, of course, as to whether consumers taking on more debt is a good thing or not, but increased spending is helping the economy in the short-term.

Elsewhere, the government reported that worker productivity rose a better than expected 2.6% in the 4Q, up from 2.4% in the 3Q. The ISM manufacturing index rose to a better than expected 60.8 in January, the highest level since May 2004. New home sales came in well above expectations in December at 329,000 units versus 280,000 in November.

Of course, not all the latest reports were positive. Orders for durable goods fell 2.5% in December versus the consensus forecast for a rise of 1.5%. Construction spending also fell 2.5% in December, which was worse than expected.

Overall, the economic recovery is gaining momentum, but growth should remain in the 3.0-3.5% range for the rest of this year.

The Unemployment Rate – Good News & Bad

The government announced on February 4 that the official unemployment rate fell from 9.4% in December to 9.0% in January, while the pre-report consensus number was for a slight rise to 9.5%. The official unemployment rate has fallen from 9.8% just two months ago.

Last Thursday, the Labor Department announced that weekly “initial claims” for state unemployment benefits fell to 383,000 for the week ended February 5. It was the second monthly drop in a row and was the first time initial claims fell below 400,000 since July 2008.

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.

That’s the good news.

The bad news is that much of the improvement in the unemployment rate came as a result of an increase in the number of Americans who gave up looking for work in the previous four weeks and are therefore no longer counted as unemployed. DOL reports that there were 2.8 million people in this “marginally attached” category in January who were not counted as being unemployed.

Using this logic, if everyone stopped looking for work, the unemployment rate would fall to zero. This is one reason why the official unemployment rate is not very reliable on a month-to-month basis. Overall, there are still 13.9 million Americans who are out of work.

Furthermore, the latest unemployment report noted that only 36,000 new jobs were created In January versus the consensus forecast for 150,000 new jobs. Keep in mind that 150,000 jobs per month are not even enough to absorb new people trying to enter the workforce for the first time, much less create jobs for the unemployed.

Next, the Labor Department report also announced that it had over-counted by 452,000 the number of jobs it previously thought had been created in 2010. President Obama loves to say in speeches that 1.3 million jobs were created last year. He can't anymore because the new figure is just 909,000 jobs in 2010, and many of those were temporary Census 2010 positions.

I have included a link to a good article that explains more fully the flaws in the Labor Department’s model that they use to calculate the official unemployment rate in SPECIAL ARTICLES below.

Finally, the consensus among the 50 economists surveyed by BCEI is that the US unemployment rate will average 9.3% for all of 2011. In fact, the lowest estimate among the 50 is for the rate to average 9.0% this year, while others see it rising back to 9.5% in the months ahead.

Not-So-SmartMoney Advice

A recent article appeared on the SmartMoney website that I think merits comment. Long-time readers may recall that I have criticized publications like SmartMoney (among others) that offer lists of “hot” mutual funds every year. The problem with these articles is that hot performing funds are very unlikely to repeat their performance the next year, yet many investors rush like lemmings into these funds based only on the merits of the magazine article.

The most recent article was entitled, “4 Traditional Money Rules to Break Now.” The first thing that struck me about this article is that there are very few hard-and-fast “rules” in the financial/investment business. However, financial publications often like to create such rules since it makes it easier to develop listing articles such as “5 reasons to buy this or that security now,” and so on.

Another problem is that there is no way to know whether or not to follow any generalized rule or suggestion without knowing the underlying financial situation of the individual or household involved. Considering some of the Internet responses to this article, I’m not alone in my criticism. What follows is a brief summary of the four rules mentioned in the article as well as my own observations and comments:

Traditional Rule #1 – Avoid taking 401(k) loans at all costs.
SmartMoney’s Take – 401(k) loans are now the most affordable loans available.

The SmartMoney article argues that the general rule of not using 401(k) loans is no longer as valid because interest rates are much lower now than in the past. Thus, 401(k) money can be accessed at a much lower interest rate than is available from other sources.

While the article’s observation is true, the conclusion is faulty. Many 401(k) plans now offer loans in the 4% to 5% range, making them attractive alternatives to credit cards and banks. However, you have to remember that in a 401(k) loan, you pay the interest toyourself as part of your retirement plan earnings. Thus, if you borrow at a bargain rate of interest, your account may be earning far less than what remaining invested would produce. In other words, bargain interest rates result in lower borrowing costs at the expense of your 401(k) account.

The article’s author also forgets that times are tough and employees are still being laid off and losing jobs every day, despite hints of a recovery. Should you lose your job with an outstanding 401(k) loan, it will most likely be deemed a taxable distribution complete with a 10% penalty tax if you are under age 59 ½, unless you can immediately pay the loan off in full. Somehow, the prospect of losing your job and having to pay off a 401(k) loan with savings is not a good situation to find yourself in.

Another factor that I think should be considered is that 401(k) balances shouldn’t be seen as sources of money for discretionary spending. I have written before on how consumers used tech stock gains and then home equity as personal piggy banks for spending. The last thing we need right now is for consumers to start seeing their 401(k) plan balances as attractive sources of money for consumption.

While I have always felt that 401(k) loans can be a resource where circumstances merit, the decision must be based on the financial situation of the plan participant and not the fact that 401(k) loans are available at low interest. Considering the negatives, now may be a much worse time to take a 401(k) loan than ever before.

Traditional Rule #2 – Convert traditional IRA account balances to Roth IRAs
SmartMoney’s Take – Stick with traditional IRAs

SmartMoney contends that it’s not always beneficial to convert a traditional IRA, where withdrawals are taxed upon receipt, to a Roth IRA where contributions are taxed but earnings grow tax free. They reason that the amount of time required to recoup taxes paid on the conversion may be too long, especially for those close to retirement.

Actually, I have to agree with SmartMoney on this one for some investors. However, I have to disagree with the idea that, before now, it was always a good idea to convert traditional IRAs to Roth IRAs. Once again, the individual situation of the IRA account holder drives the decision, not some general rule.

The age of the person converting the IRA has always been a factor in whether or not to convert, but there’s also the matter of paying the tax upon conversion. In many situations, traditional IRA account holders would have to pay taxes by pulling money out of the IRA, which often negates the advantages of converting. This is especially true for those who are near retirement. For our clients, we often discourage withdrawing money from their IRA to convert to a Roth.

On the flip side, however, a tax-free benefit from a Roth IRA may now be more attractive than ever, even for older traditional IRA account holders. That’s because future tax rates are likely going to be higher than they are now. There used to be an assumption that retirees would always be in a lower tax bracket upon retirement, but I don’t think that’s necessarily true anymore. With soaring budget deficits and mounting national debt, some fear that the only way tax rates can move is up, and I would sadly agree.

While I believe that anyone with a traditional IRA should explore conversion to a Roth IRA, it should be done with the assistance of a financial professional who can help you consider all of the facts and circumstances to see if it’s a wise financial move.

Traditional Rule #3 – Choose the mortgage with the smallest interest payments.
SmartMoney Take – Go for higher interest mortgage options.

SmartMoney’s recommendation is based on the assumption that it generally takes a 20% down payment and a shorter repayment period in order to get the lowest mortgage interest rates, which is correct. Instead of minimizing interest, SmartMoney recommends putting only 10% down and selecting a 30-year mortgage rather than a 15-year payback period. The other 10% of the home’s cost that would have otherwise been used as down payment could then be set aside as an emergency fund, where the article said it might be safer than invested in the home which could lose value.

Of course, putting only 10% down on the home would likely require borrowers to purchase private mortgage insurance, which would add to the monthly cost until they reach the equity threshold where such insurance is no longer necessary. However, the SmartMoney article deems this to be an acceptable tradeoff.

Once again, the selection of a mortgage is dependent upon the situation of the person seeking financing. Considering that home prices have taken a beating since the peak of the housing bubble, SmartMoney’s concern about losing more money on a home purchase may be off base. In fact, if the emergency fund is invested in the stock market (not recommended!), it could have greater potential for loss there than had it been invested in the home.

Another issue I have with this idea is that emergency funds are often spent rather than saved for a rainy day. Those who do have the discipline to maintain an emergency fund often already have one over and above money saved up for a home down payment.

A final thought is that current home prices, depending upon the region of the country, are likely far lower than they were back before the credit crisis. In some cases, what would have been a 10% down payment at the peak of housing prices could now go a long way toward a 20% down payment today, again depending upon where you live.

Traditional Rule #4 – Refrain from using credit cards.
SmartMoney Take – Use credit cards with caution.

SmartMoney’s premise in regard to credit cards is that it can be important for your credit score to maintain credit lines. That’s because credit cards that aren’t used are often closed or have their credit lines reduced, resulting in a higher ratio of outstanding balances to total credit available. In some cases, this can actually affect credit scores. Thus, SmartMoney recommends that those with significant credit card balances use credit cards periodically, but pay off the balance in full when due.

This idea seemed to get the most flak from those responding to the article, and I have quite a problem with it myself. In my opinion, a better way to maintain your credit score is to pay down balances rather than build up credit lines. While individuals may fully intend to pay off balances in full, we all know that this sometimes doesn’t happen. You could actually end up with worse credit scores than before by accumulating even more debt.

While SmartMoney’s advice may be accurate for anyone who cannot pay down their debt, it is a pathway fraught with peril. It requires considerable financial discipline to charge on a credit card and faithfully pay off the balances every month. If those whose credit scores are affected by low unused lines of credit had such discipline, it’s probably that they wouldn’t be in the situation where their credit scores are at risk.

The bottom line is that publications like SmartMoney like to promote hard and fast rules to live by, but these decisions are seldom as cut-and-dried as its editors want us to think. All financial decisions are the result of comparing an array of alternatives that tend to differ with each person. That’s why it’s important to contact a financial professional and get their advice rather than basing your decision on a magazine article.

If you’d like to read the SmartMoney article for yourself, click on the following link:

http://www.smartmoney.com/spending/budgeting/4-traditional-money-rules-to-break--for-now-1296858154544/?cid=sm_mostpop_article

As always, if you have questions, feel free to call one of our experienced, non-commissioned Investment Consultants at 800-348-3601 or via e-mail to info@halbertwealth.com.

Results of Last Week’s Financial Literacy Test

Last week’s E-Letter on financial literacy was a huge hit, just as it was back in June when I last wrote about it. Thousands of you have taken the test, and the results are pretty exciting. My readers had an average score of 92.4%! That’s awesome!!

I would like to encourage everyone to forward last week’s E-Letter and the Financial Literacy test to as many people as possible. I am appalled at the lack of financial literacy in this country, and I’m sure you are too.

On a related note, I would also encourage you to forward my weekly E-Letters to anyone that you think might enjoy and/or benefit from the topics I cover. Emphasize that they are FREE of charge and they can subscribe at www.halbertwealth.com.

Congratulations to those who took the Financial Literacy test!

Very best regards,

Gary D. Halbert

How This Economy Recovery Stacks Up

Gary D. Halbert — Tue, 26 Oct 2010 20:13:00 GMT

IN THIS ISSUE:

1. Comparing This Recovery With Previous Rebounds

2. Putting Obama’s Record Spending in Perspective

3. My Two-Cents Worth on the Upcoming Elections

Introduction

Officially, the so-called “Great Recession” of 2007-2009 was the worst economic slump since the Great Depression, thanks in large part to the credit crisis and the housing implosion. Much has been written about the Great Recession, including numerous analyses by your editor in these pages over the last couple of years.

What has not been written about nearly so frequently is how this economic rebound, since the recession officially ended in June 2009, is also the weakest recovery since the Great Depression. I ran across a series of charts that graphically depict how weak this recovery is compared to the previous worst recessions of 1973-75 and 1981-82. I’ll share those charts as we go along.

One of the top concerns among Americans is the explosion in federal debt, especially in the last couple of years as we have run back-to-back trillion-dollar-plus budget deficits, with more on the horizon. Yet there are those like Nobel Prize winner and New York Times columnist Paul Krugman who believe the government has not spent nearly enough. I’m not kidding.

As a result of this type of thinking, I will bring you some new statistics that put our runaway federal spending and debt in a clearer perspective. For example, President Obama increased spending by over $1 trillion (or 34%) in 2009 alone. And the deficit was another $1.3 trillion for fiscal 2010. How can anyone say Obama is not spending enough?

At the end, I will provide a few thoughts on the upcoming mid-term elections. Some of the races are tightening as we get closer, which is giving some Democrats hope. But the number of seats “in play” continues to increase. NBC News and others now admit that there may be 100 or more House seats up for grabs next Tuesday. It should be a very wild night!

Finally, in last week’s E-Letter I warned you not to forget about Obama’s Debt Commission that is trying to find a way to balance the federal budget by 2015. The Wall Street Journal reported yesterday that the Debt Commission is considering eliminating: 1) the home mortgage interest deduction; 2) the child tax credits; 3) the ability for employees to pay their portion of health insurance with pre-tax dollars; and 4) cutting defense spending. I have a link to this story at the end.

Comparing This Recovery With Previous Rebounds

According to the National Bureau of Economic Research – the official arbiter of when recessions begin and end – the Great Recession began in December of 2007 and ended in June of 2009. By many measurements, it was the worst recession since the Great Depression.

Actually, there were several worse economic slumps in the period prior to the Great Depression, the most notable being October 1873 to March 1879 when the economy contracted for 65 months, and March 1882 to May 1885 when the economy fell for 38 months.

Yet if we keep our sights on the post-Depression era, the Great Recession was the worst. Prior to the 2007-2009 recession, the worst previous slumps were in 1973-75 and 1981-82. The 2007-2009 recession was exacerbated by the housing slump and the resulting credit crisis.

The question on most Americans’ minds is, why is this economic recovery so tepid? The economy rebounded very powerfully immediately after the prior recessions of 1973-75 and 1981-82. With that question in mind, let’s look at a series of charts I ran across last week (thanks to John Merline of AOL).

The chart above shows the rate of economic growth in the five quarters after these three recessions ended. Clearly, the current recovery is the worst of the three.

This chart shows the unemployment rate in the 15 months after each of these three recessions ended. You might remember that President Obama promised that if we passed the $800 billion-plus stimulus package in 2009, the unemployment rate would not rise above 8%. Yet it rose to 10.1% and remains at 9.6%.

This chart shows the average length of unemployment in the 15 months after each of these three recessions ended. The average person who lost his/her job during the Great Recession suffered for over two years before finding another job, if at all. And let’s not forget that there were 14.8 million Americans who were still unemployed at the end of September, along with another 6.1 million who have given up looking for work or are under-employed who are no longer counted in the official unemployment rate.

This chart shows the Consumer Confidence Index in the 15 months after these two recessions ended. (Data for the post-1974-75 recession were not available.) As I discussed at length last week, consumer confidence never got much of a bump up in this recovery and now appears to be trending lower again.

This chart shows the monthly federal budget deficit in the 15 months following these two recessions. (Data for the post-1974-75 recession were not available.) Notice that in many of these data points, the monthly federal deficit was in excess of $100 billion, and in one month, it was in excess of $200 billion.

Hopefully, the charts above help to put this anemic economic recovery in some better perspective. They may also help to explain why most forecasters are dialing back their economic projections for 2011.

At the end of the day, the question is: When will economic growth get back to normal? As I reported last week, the consensus forecast for 50 leading economists and analysts is that GDP growth next year will average only 2.5%. And as I pointed out, that may well be optimistic.

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.

Putting Obama’s Record Spending in Perspective

Contrary to what many Americans and most of my clients believe, there are a number of highly respected analysts that believe the US economy and financial system had to have a massive government stimulus to avoid another depression in 2008 and 2009. Even the respected Bank Credit Analyst agreed that the US economy needed a big government stimulus to get us through the credit crisis and avoid a depression.

Back in late 2008 when President Bush and Treasury Secretary Hank Paulson announced their $700 billion TARP program, my eyes rolled back at the enormity of the number, but at least it was a loan program, not a government giveaway. And most of that TARP money has been paid back, with interest.

President Obama’s $800+ billion stimulus program, on the other hand, was a massive government giveaway that was very unwisely spent, in my opinion, and was never designed to be paid back. And yet there are some like New York Times columnist Paul Krugman who argue that the government has not spent nearly enough to get the economy back to normal.

As you can see in the table below, federal spending increased over $1 trillion (or 34%) in 2009, President Obama’s first year in office. Part of the reason for that huge increase was Obama’s $800+ billion stimulus package, not all of which was spent in FY 2009.

Fiscal Year	Federal Spending	Deficit

2008	$2.98 trillion	$458 billion
2009	$3.99 trillion	$1.4 trillion
2010	$3.59 trillion	$1.3 trillion
2011	$3.61 trillion	$929 billion (est.)*

* With the automatic annual spending increases in so many federal programs, the budget deficit in 2011 will also be above $1 trillion, not the CBO estimate shown above based on projections that are very likely too optimistic.

The 34% increase in federal spending in 2009 was the largest (in percentage) since 1952. Even between 1932 and 1941, during the depths of the Great Depression and before preparation for World War II began, Franklin Delano Roosevelt raised federal spending by more than 34% only once, in 1934. In that year, federal spending increased by 42% in a failed attempt to bring down a national unemployment rate of 21.7%.

In 1934, federal spending only amounted to 10.5% of gross domestic product. By contrast, with less than half of FDR’s unemployment problem, federal spending as a percentage of the economy surged to an estimated 24.4% in 2010 (from 21.1% in 2008). Spending for all governmental levels (federal, state and local) is running at 42.7% of GDP in 2010, up from 36.4% only two years ago. But that’s still not enough for Mr. Krugman.

Krugman argues that the size of government has remained relatively flat over the last decade. What we don’t know is whether he is referring to the number of federal employees or the level of federal spending. In either case, he is wrong! As illustrated in the table above, federal spending continues to explode, rising by a whopping 34% in 2009 alone.

As for the number of federal employees, President Obama’s proposed federal budget for 2011 noted that the size of the government (not including postal workers) will grow to 2.15 million full-time employees this year, topping 2 million for the first time since President Clinton declared that “the era of big government is over” and joined forces with a Republican-led Congress in the 1990s to pare back the federal work force.

What Mr. Krugman also does not take into account is that there are millions of private contractors that the government uses to outsource many projects. According to a New York University study, the number of private contractors working for the government rose from 4.4 million in 1999 to 7.5 million by 2005. We can only imagine what the number is today.

Krugman also does not, apparently, take into account the multitude of new government agencies that will be created in the next several years to implement ObamaCare and the financial regulatory reform hierarchy. You may recall that the new healthcare law calls for an additional 16,000 IRS agents be hired to enforce the mandate that everyone must buy healthcare insurance or face a fine.

I enjoy reading Mr. Krugman in moderate doses; he keeps me informed on how those on the left are thinking. But when he argues that the government is too small and doesn’t spend enough, I have to take issue with him. Apparently, most Americans agree with me based on the mid-term election polls.

My Two-Cents Worth on the Upcoming Elections

As this is written, Democrats are taking heart that some of the key races are tightening in their favor, which is normal as Election Day closes in. On the other hand, when left-leaning NBC News and others project that at least 100 House seats are now “in play,” as they did last week, you can bet next Tuesday will be a big win for the Republicans.

So, yes, some of the races are tightening, but the number of seats in play continues to rise. More and more supposedly “safe seats” could now go either way.

Normally, in past national election years, we have devoted this “week before” E-Letter to a rather lengthy analysis of the key races, and some specific predictions that I formulate along with my in-house political guru, Spencer Wright. Yet with virtually every poll suggesting a Republican landslide next Tuesday, we figured you’ve probably heard enough about the elections.

I will note that there is one thing that concerns me about this particular election. Voters across the country appear to be set to throw a lot of sitting Democrats out of office in favor of the Republican alternatives. But even if the Republicans win control of the House and the Senate, how much can they really do to turn this economy around and significantly lower the unemployment rate?

Virtually all of the forecasts I read suggest that there are no quick fixes, and that the economy will remain sluggish in 2011. Likewise, few expect the unemployment rate to fall below 9% next year. And no one knows how much things might improve in 2012, if at all.

Then there is the fact that President Obama can (and I believe will) veto any legislation the Republicans pass that he opposes. So what happens if the next two years go by and the economy is not significantly better by the elections in 2012? Could the pendulum swing back the other way again? We’ll see.

Finally, I have included below a link to a very good (as usual) column written last Friday by Peggie Noonan, with her thoughts on how the mood of the country has come to this point, and how the Tea Party saved the GOP. Political talking heads tell us that if the Republicans win big next Tuesday, it will be because of “anti-incumbent” fervor. And that is part of it.

But I happen to believe that it’s also very much about “anti-Obama” fervor, although he will never admit it. So, it was nice to see that Ms. Noonan agrees with me. She closes her piece as follows:

“This election is about one man, Barack Obama, who fairly or not represents the following: the status quo, Washington, leftism, Nancy Pelosi, Fannie and Freddie, and deficits in trillions, not billions.

Everyone who votes is going to be pretty much voting yay or nay on all of that. And nothing can change that story line now.”

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Peggy Noonan – Tea Party to the Rescue
http://online.wsj.com/article/SB10001424052702304023804575566503565327356.html

Debt Commission: Key Tax Breaks at Risk
http://online.wsj.com/article/SB10001424052702304354104575568643889337142.html?KEYWORDS=debt+commission

Why the Economic Recovery is So Slow

Gary D. Halbert — Tue, 21 Sep 2010 21:01:00 GMT

IN THIS ISSUE:

1. Latest Economic Forecasts Don’t Look Great

2. The Economic Recovery Has a Long Way to Go

3. Consumer Spending Faces Strong Headwinds

4. Americans Living in Poverty Hits New High

5. Lastly, My Thoughts on Inflation & Gold

Introduction

The outlook for the US economy at this point is fraught with question marks. For example, is the economy slipping back in to what could be a double-dip recession? Or will it continue in a subpar recovery with continued very high unemployment, as some economists suggest? The truth is, no one knows for sure, and this is one reason why business owners are hesitant to expand.

On another front, Federal Reserve Chairman Ben Bernanke recently said the Fed is prepared to engage in more quantitative easing (ie – printing money) if it looks like the economy is slipping back into recession, but would it really help? The same question can be asked about the latest round of stimulus programs put in place by the president and Congress. Again, no one knows.

What we do know is that US federal debt is spiraling out of control with no end in sight and trillion-dollar deficits as far as the eye can see. Most of us know this can’t continue forever, but our leaders in Washington don’t seem to get it. It will be interesting to see what happens if there is a Republican landslide in November. But have the Republicans learned their lesson?

With these unanswered questions (and many others), let’s now delve into some thoughts and forecasts on the economy over the next year or so and what may lie ahead. We’ll start with the latest consensus outlook from a leading forecasting firm that condenses the predictions from 50 leading economists on the economy and other key indicators. This should be very interesting.

Following that, we will explore the prospects for consumer spending making a much-needed rebound. Consumer spending accounts for apprx. 70% of GDP, and some forecasters believe we are about to see a significant rebound on the part of consumers. I will argue otherwise as there are some strong headwinds that are likely to keep consumers on the defensive.

Next, we will look at the alarming rise in the US poverty rate, which is very sad. And finally, I will give you my thoughts on the prospects for the inevitable rise in US inflation, and when that trend might begin to show its ugly face. That discussion will also include my thoughts on the runaway bull market in gold and what you should be doing now.

That’s a bold agenda for one weekly E-Letter, so 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.

Latest Economic Forecasts Don’t Look Great

The research firm Blue Chip Economic Indicators (“BCEI”) conducts a monthly survey of 50 well-known economists and forecasters and gathers their views on a variety of economic gauges. BCEI reports not only the 50 forecasters’ views individually, but also an average of all their responses to the questions. Their latest report was published on Friday, September 11.

Not surprisingly, BCEI’s latest consensus outlook for economic growth for the rest of this year fell for the third consecutive month. As I have reported in recent weeks, most of the economic data over the summer has been disappointing, and the latest consensus among the 50 forecasters is a reflection of that.

As a quick reminder, let’s review the quarterly numbers of Gross Domestic Product over the last year, and then we’ll go into more details on BCEI’s latest report. A year ago, the economy finally turned higher with a 3Q GDP number of +1.6% (annual rate) after falling for the previous four quarters during the recession. Then 4Q GDP rose 5.0% followed by +3.7% in the 1Q of this year. Then in the 2Q of this year, GDP disappointed with a gain of only 1.6%

According to BCEI’s latest report, real GDP growth in the current July-September quarter is projected to come in at an annual rate of 1.8%, little better than the disappointing 1.6% in the 2Q. We won’t get the government’s first estimate of GDP growth for the 3Q until late October. As for the October-December quarter of this year, the latest BCEI consensus among the forecasters calls for GDP growth of only 2.3%.

As everyone reading this is well aware, the US economy has recovered from every recession since the Great Depression. Since then, recoveries from recessions have been quite robust. Typically, the more severe the recession, the stronger the recovery has been. Based on that, the US economy should be growing by 5-6-7% by this point in the recovery. But we are not growing at even half that rate.

The recession of late-2007 to mid-2009 was no garden-variety recession. It was accompanied by the worst credit crisis since the Great Depression and a much higher than expected spike in the unemployment rate. At the same time, we had the housing crisis and the real estate bust. Bank lending plummeted and has yet to recover. This is why many call it the “Great Recession.”

The Economic Recovery Has a Long Way to Go

Many economists focus on how long it takes GDP to return to its previous high during periods of recovery from recessions. According to the Commerce Department, the peak in US GDP actually occurred in the 3Q of 2008 when Gross Domestic Product topped out at $14.4 trillion. It subsequently fell to a low of $12.8 trillion in the 2Q of 2009. By the 2Q of this year, GDP had only recovered to $13.2 trillion.

Obviously, this is a very slow recovery, and we still have a long way to go to get back to the peak of $14.4 trillion in 2008, and even more to exceed it. This outlook means that the current recovery from the Great Recession – assuming it continues – will be the longest in the post-World War II period by a wide margin.

The last two recessions remotely comparable to this one occurred in 1974-75 and 1981-82, and the recoveries took, respectively, three quarters and two quarters before the expansion reached a new high in GDP. This recovery, by contrast, is expected to take at least twice as long.

The recent recession officially began in December 2007, according to the National Bureau of Economic Research, the government’s arbiter of when recessions begin and end. Yesterday, the NBER reported that the recession ended in June 2009. Thus, this recovery has already lasted almost five quarters, and GDP is still nowhere near a new peak.

With that in mind, let’s now look at BCEI’s consensus forecasts for GDP growth in 2011. The BCEI consensus among 50 forecasters is for GDP growth of only 2.5% in the 1Q of 2011. They expect a continued, but slow, expansion where 4Q GDP reaches 3.2% at the end of next year – when GDP might exceed the previous high of $14.4 trillion in 3Q 2008.

With consumer spending accounting for apprx. 70% of GDP, let’s take a look at BCEI’s consensus outlook for personal spending. The forecasters, on average, expect inflation-adjusted consumer spending to equal or exceed the previous peak in the 4Q of 2007 by the end of this year (2010). This forecast may surprise you, but keep in mind that the US population has grown by six million people since late 2007, or about 2%. So, while overall consumption may reach or exceed the peak in late 2007 by the end of this year, spending by the average household is still down.

One reason that the consumer spending rate remains suppressed is the significant increase in the personal savings rate. According to the Commerce Department, the US savings rate fell to a low of around 1% in 2005, on a seasonally adjusted basis. But as the credit crisis unfolded, the savings rate moved rapidly higher in 2008 and reached over 7% in the 2Q of 2009.

As of the end of the 2Q of this year, the national savings rate still stood at 6% as households continue to deleverage. The consensus answer to BCEI’s question on the savings rate is that it will remain at a relatively high level throughout 2011, and that it will not fall back to the 2% level in the foreseeable future.

As for the unemployment rate, the BCEI consensus is that the current unemployment rate of 9.6% will hold steady through the end of 2010. Of course, given the complicated way the Labor Department calculates the headline number, it could fluctuate slightly up or down during the remainder of this year. The point is, the forecasters believe the unemployment rate will remain high for quite some time.

As for 2011, the BCEI consensus is that we will see a gradual decline in the unemployment rate to 9.0% by the 4Q of next year. Even the 10 most optimistic forecasters of the 50 surveyed expect the rate of joblessness to be at 8.4% by the 4Q of next year, which is still quite high. The 10 most pessimistic forecasters believe the unemployment rate will still be running at 9.6% by the end of next year.

The 50 forecasters were asked for their views on the likelihood of a “double-dip” recession. On this question, apprx. 20% of the forecasters said we could well see at least one quarter of negative GDP, while apprx. 80% said that the recovery should continue over the next year, albeit at a slow pace. Even the 10 most pessimistic weren’t betting heavily on a double-dip recession, putting the odds at a bit better than one in three. The 10 most optimistic put the odds at a bit better than one in 10. I wish I were so optimistic!

Finally, as you are probably aware, Fed Chairman Bernanke stated in August that the Fed would not hesitate to implement more “quantitative easing” (ie – printing money) if the US economy looked to be falling back into recession. The BCEI forecasters were asked, if the Fed were to buy another $1 trillion in Treasury securities, what effect would that have on the economy? Only 4% of respondents said it would have any significant effect.

Consumer Spending Faces Strong Headwinds

As I mentioned earlier, consumer spending accounts for apprx. 70% of the US economy. Thus, it makes sense that the economy is not likely to come roaring back until consumers are confident that they can again spend more money. Unfortunately, there are some significant headwinds to increased consumer spending that will make this a difficult task.

First, high unemployment will continue to be a drag on consumer spending. As more and more families exhaust their unemployment benefits, consumer spending will likely suffer, especially for discretionary items not needed for basic survival.

There’s also a question as to whether consumer spending will rebound even if unemployment drops significantly, which isn’t expected anytime soon. I have seen numerous articles discussing how families are rearranging their priorities and focusing less on spending and material things and more on quality of life, both now and in retirement (more about that later).

If you have ever talked to anyone who lived through the Great Depression, you may get an idea of what future consumer spending may be like. Many of the people I know who weathered that period of time as adults are often adamantly opposed to debt and are much more into saving than consuming. There always seemed to be a fear that things could get bad again, so you needed to save for a rainy day. I’m hearing some of the same comments now coming out of the mouths of much younger adults.

Another headwind to consumer spending is the continued rise in poverty rate in the US. The Census Bureau announced last Thursday that the number of Americans living in poverty reached an all-time high in 2009. I will address this sad finding in more detail below.

Another headwind to consumer spending is the need to save for retirement. A recent study published by Boston College’s Center for Retirement Research found that American households are $6.6 trillion short of what they need to have to assure a comfortable retirement. This “retirement deficit” study based its findings on projections of retirement and income for Americans ages 32 to 64.

In the financial planning world, if a client has a “retirement deficit,” the most typical advice is to increase savings. That process, in turn, automatically reduces the amount available to spend on consumer goods and discretionary items. Multiply that by the tens of millions of Americans who have not saved enough for retirement – or whose nest eggs were decimated by the two bear markets in the last decade – and you have another major headwind to consumer spending.

Obviously, the points made above are not the only headwinds to consumer spending, but they are the most likely forces to come into play in the near future, in my opinion. As always, there are a number of economists who are always optimistic and expect consumer spending to return to “normal” and continue to power economic growth on into the future.

I guess they are assuming that Americans will exhibit their typical short memories and resume their old bad spending habits. This time, I don’t think they’re going to be right. This time around, I think that American households are going to be more like those that weathered the Great Depression where cash was king and savings was an obsession. We’ll see.

Americans Living in Poverty Hits New High

The Census Bureau reported last Thursday that the US poverty rate surged to 14.3% last year, the highest since 1994 on a percentage basis, as the recession took its toll on incomes. The actual number of Americans counted as living in poverty was the highest on record.

In 2009, the official poverty level stood at $21,954 for a family of four, based on a government calculation that includes only cash income before tax deductions. It excludes capital gains or accumulated wealth, such as home ownership, which were virtually non-existent for most American families in poverty over the last two years.

Apprx. 43.6 million Americans were living in poverty last year, the highest number ever recorded, the Census Bureau said late last week in its annual report on the economic well-being of US households during President Barack Obama’s first full year in office. By comparison, the poverty rate in 2009 climbed from 13.2%, or 39.8 million people, in 2008.

The latest 14.3% poverty rate, which covers all ages, was actually lower than the estimates of many demographers who were bracing for a record increase based on the skyrocketing rate of unemployment over the last couple of years. Many forecasters had predicted that the poverty rate would climb to a rate of 14.7% to 15%.

Analysts cited the increases in Social Security payments in 2009 as well as federal expansions of unemployment insurance benefits, which rose substantially in 2009 under the economic stimulus program, as the main reasons the poverty rate didn’t rise even more. With the additional unemployment benefits, workers were eligible for extensions that gave them up to 99 weeks of payments after a layoff.

Another likely factor in the poverty number coming in slightly lower than expected was the record number of working mothers last year, who helped households by bringing home paychecks after the recession took the jobs of a disproportionately high number of men.

Poverty rose last year among all race and ethnic groups, but stood at higher levels for blacks and Hispanics. The number of Hispanics in poverty increased from 23.2% in 2008 to 25.3% last year, and for blacks it increased from 24.7% to 25.8%. By comparison, the number of whites in poverty rose from 8.6% to 9.4% in 2009. Sadly, child poverty rose from 19% in 2008 to 20.7% last year.

The official Census Bureau poverty rate takes into account the effects of some “stimulus programs” in 2009, such as extended unemployment benefits, as well as jobs that were supposedly ‘created or saved’ by government spending, as President Obama likes to cite. But it does not factor in non-cash government aid such as tax credits and food stamps, which have surged to record levels in recent months.

At the end of the day, the question is: Why have US poverty rates soared at a time when the government is spending trillions of dollars and extending unemployment benefits to record levels (currently 99 weeks)? Obviously, a big reason is that we’ve just been through the worst recession/credit crisis since the Great Depression.

But it could also mean that spending trillions and trillions of dollars, as we have done in the last few years, and exploding the national debt, is NOT the answer. Interestingly, we are seeing more and more Keynesian advocates in Washington coming to agree that massive spending is not the answer, and it will be very interesting to see how this plays out after the November elections.

I will have more to say about this after November. For now, let’s switch to another topic.

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.

Lastly, My Thoughts on Inflation & Gold

My guess is that just about everyone that reads my weekly E-Letter would agree that we will have a serious bout of inflation at some point down the road, what with trillion-dollar budget deficits as far as the eye can see.

For now, however, deflation seems to be the greater concern. As noted above, the Fed is prepared to print a lot more money to buy up securities if the economy starts slipping back into recession. But what the Fed is really most concerned with is deflation. I discussed the issue of deflation at length in my August 24 E-Letter, if you care to look back at that discussion.

The question that just about everyone asks me is: When do you think inflation will really kick in? No one knows for sure, but a large majority of BCEI’s 50 forecasters believe that inflation will not be a problem at least until the end of 2011 – barring some major surprise. Among the various other sources I read, I find almost no one who believes inflation will start to kick up in a meaningful way before the second half of 2011.

One of the other most common questions I get these days is: What do you think about gold? My pat-answer is: I don’t think about gold. With gold near $1,300 per ounce, there’s not much reason to think about it – unless, of course, you already own it and you’re wondering whether you should stay invested or take profits.

The only gold I own outright is my reserve store of gold coins that I don’t ever intend to sell. What I tell people who are in the gold market now, on a speculative basis, is to keep in mind that gold is really a small market as compared to many other commodities. It can turn on a dime! And when it does top-out, it almost always falls off a cliff.

Another thing that bothers me is, you can’t turn on a radio or TV program without hearing or seeing multiple ads for gold. Maybe gold is on its way to $2,000 an ounce as the promoters tout. I don’t pretend to know. But the idea of buying into gold now, near $1,300 an ounce, is beyond me! Especially with the US economy on the edge of deflation.

I would instead be thinking of taking some profits off the table on this run. Or at the least, make sure you have some type of “stop-out”mechanism to get you out should the price fall below a certain point. Don’t rely on your emotions to get you out!

Finally, as most of you know, my company, Halbert Wealth Management, continually searches the universe of professional money managers, and we recommend those that pass our due diligence scrutiny to our many clients across the country. Interestingly, we have never found a manager with a successful, long-term track record trading gold mutual funds.

We are still looking, of course, but this is another indication of how difficult it can be to navigate the gold market successfully. If you are fortunate enough to be sitting on some big gains in gold, maybe you should consider taking some profits.

That’s all for this week.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Recession ended in June 2009, but the recovery has been very slow
http://news.yahoo.com/s/nm/20100920/bs_nm/us_usa_economy_nber

John Hussman: Why the Economy is Weak and Likely to Stagnate
http://www.benzinga.com/10/09/483972/hussman-why-the-economy-is-weak-and-likely-to-stagnate

Democrats chose the wrong time for big government.
http://www.realclearpolitics.com/articles/2010/09/21/democrats_chose_wrong_moment_for_big_government_107242.html

Has the Liberal Economic Experiment Failed?

Gary D. Halbert — Tue, 07 Sep 2010 20:10:00 GMT

Introduction

Monday holidays always cut into our writing time, so this week we have elected to reprint one of the more interesting articles I have read recently. I think you will like it unless you are a big Obama fan, in which case, you’ll probably find it disappointing. In any event, I think this piece is spot-on as we close in on the mid-term elections.

Following that article, I will update you on the performance of Hg Capital’s Long/Short Government Bond Program which has continued its winning ways in 2010 following its record year in 2009.

The following discussion first appeared at RealClearPolitics.com last Tuesday, and it was published by CommentaryMagazine.com.

QUOTE:

The Failure of the Liberal Economic Experiment?
by James K. Glassman

The plunge in the U.S. economy in 2008 and 2009 became an irresistible opportunity to pronounce the failure of the form of capitalism that emerged at the end of the 20th century. “One had expected competition and abundance for everyone, but instead one got scarcity, the triumph of profit-oriented thinking, speculation and dumping,” said Nicolas Sarkozy, the president of France. The current crisis, he noted with a certain pleasure, signaled the end of the “illusion of public impotence” and the “return of the state.”

There was ample reason for such grave-dancing. Between July 1, 2008, and June 30, 2009, total U.S. economic output, adjusted for inflation, dropped at an annual rate of 3.8 percent—the worst 12-month decline since 1946. The unemployment rate, which started 2008 at 5 percent, had doubled by the fall of 2010. The number of jobs fell for 21 months in a row, and by May 2010 the median unemployed worker had been out of work for 23 weeks—compared with 10 weeks in the depths of the 1973-75 recession.

The quarter-century that began shortly after Ronald Reagan’s election had been widely viewed as a period in which a free-market approach had proved its superiority to state direction of economies. In the United States, cutting top income tax rates in half, reducing regulatory burdens, and spreading free trade seemed to have produced significant prosperity and remarkable stability. Between 1983 and 2008, gross domestic product grew at an average of 3.2 percent annually. Only once did output fall in a calendar year, and that was by just two-tenths of a percentage point. Inflation, interest rates, and unemployment were tame.

Then, suddenly, an asset bubble in real estate exploded, the growth and stability vanished, and the United States suffered its worst economic misery in (take your pick) 34, 53, or 71 years. So you would expect that the American public, following President Sarkozy, would see the recession as a severe setback—or even a death blow—to conservative economic policies that were aimed at limiting the power of government and liberating the private sector.

You would have expected that, and you would have been right—but only briefly. Since the beginning of 2010, a surprising reversal has occurred. Rather than supporting and encouraging government intervention to mitigate an economic calamity caused by “profit-oriented thinking,” Americans have come to believe that government has failed to fix the problem and may, in fact, have made it worse. Now it is liberal, not conservative, economic policies that are suddenly in jeopardy.

_____________

While the recession has at least bottomed out and appears technically to have ended, the recovery, by historic standards, has been anemic. Within two years of the start of every one of the three previous recessions, GDP had rebounded significantly—to 4 percentage points above where it was when the downturn began. But 31 months after the start of the current recession, GDP was still below its starting point. The employment situation is even worse. In the nasty recession of 1981-82, the economy had regained the jobs it lost within just 26 months. This time around, we still have 5 percent fewer jobs than at the recession’s start in December 2007.

What bothers the public, plain and simple, is that the steps that were taken to mitigate the recession—which involved greater government involvement, including ownership of the largest auto and insurance companies, and vastly more federal spending—have not worked.

Worse, the public believes federal action was especially unhelpful to the mass of Americans. Only 27 percent of respondents to a Pew Research Center/National Journal survey in July agreed that “government economic policies have helped [the] middle class.” A poll in June by Greenberg Quinlan Rosner Research for Democracy Corps, a Democratic organization, asked American adults to choose between two statements:

1: President Obama’s economic policies helped avert an even worse crisis and are laying the foundation for our eventual recovery.

2: President Obama’s economic policies have run up a record federal deficit while failing to end the recession or slow job losses.

By 49 percent to 44 percent, respondents chose Statement No. 2, and for those who identified themselves as independents, the margin was 52-38. Among independents, the results for backing a statement “strongly” were 42 percent for No. 2 and just 22 percent for No. 1.

Some politicians and economists, notably Paul Krugman of Princeton and the New York Times op-ed page, have argued that the persistent sluggishness of the economy is the result of not doing enough. Again, the public disagrees. As Jodie Allen of Pew wrote about her organization’s study: “Far from demanding that the government reinforce its efforts so as to help neglected middle and lower-income groups, a majority of the public views cutting the federal budget deficit as more important than stimulating the economy.” In June 2009, Pew found that, by 48 percent to 46 percent, Americans favored “spending more to help [the] recovery” over “reducing the budget deficit.” But in July 2010, deficit-cutting was favored over spending by an 11-point margin, 51-40.

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.

_____________

Government played two distinct roles during and after the crisis. The first was shoring up shaky financial institutions. On March 24, 2008, the Federal Reserve Bank of New York issued JPMorgan Chase a $29 billion non-recourse loan that allowed it to buy Bear Stearns, an investment bank on the verge of collapse. Six months later, the Fed provided $85 billion (more came later) to save AIG, the insurance giant with assets of more than $1 trillion. Congress then enacted the comprehensive Troubled Asset Relief Program, or TARP, which authorized loans and equity purchases for hundreds of institutions (mainly banks but also auto companies).

By June 30, 2010, the U.S. Treasury had disbursed $386 billion in TARP funds. Another $145 billion went to keep afloat the two government-sponsored (though ostensibly private) institutions that provide lenders with mortgage money, Fannie Mae and Freddie Mac.

How did all that work out? The Bear Stearns, AIG, Fannie Mae, and TARP dispositions were far from perfect. Robert Pozen argues in his book Too Big to Save? that too much of the federal money injected into AIG was used to bail out banks—many of them foreign—that AIG had insured against mortgage losses through credit default swaps. Those banks, he writes, could have taken a severe haircut without jeopardizing the global financial system. Also questionable was giving General Motors and Chrysler more than $80 billion (though President Bush acted honorably in keeping the automakers alive until the start of the Obama administration.) A good case can be made that automakers should have been allowed to go bankrupt through the normal legal process, with their assets passing from weak hands to strong. As for Fannie and Freddie, had perfectly sensible warnings from experts like Peter Wallison been heeded, they might not have collapsed at all, and the entire subprime-mortgage meltdown might not have occurred. So far, Congress and the president have simply kicked the Fannie-Freddie can down the road, delaying a long-term solution.

Overall, however, it has to be said that the TARP and the other financial rescues were necessary and efficient. The global financial network did face systemic failure, mainly because of a lack of liquidity, or cash to meet immediate demands. The U.S. government was able to provide that liquidity, using its authority as lender of last resort, and most of the direct beneficiaries could eventually repay their loans, with interest, as they recovered. In fact, within a year and a half after the TARP was launched, the Treasury had been repaid $211 billion—or more than half what it had put out.

The second role government played, however, was far more questionable. Instead of lender of last resort, it determined to be the spender of last resort. And this decision, more than any other, is what has led to the crisis in the liberal economic experiment.

_____________

John Maynard Keynes argued in 1933 that in a deep recession, consumers and businesses were too frightened and broke to spend and invest, so it was up to government to do the job with massive public-works projects and short-term tax cuts. Following Keynes’s theory, Congress and the White House enacted the American Reinvestment and Recovery Act of 2009, which allotted $787 billion to a potpourri of stimulus programs to invigorate the economy.

In an article in Commentary (“Stimulus: A History of Folly”) in March 2009, I recounted the discouraging history of Keynesian stimulus and predicted its failure this time out as well. The surprise, both to me and I’m sure to those who planned, advocated, voted for, and implemented the stimulus package, is just how quickly the American public came to recognize the sweeping nature of the failure.

The reasons for the failure, and for the literally depressing pessimism that the failure seems to herald, were first described 160 years ago by Frederic Bastiat in his essay “The Seen and the Unseen.” Bastiat was describing the effects of economic actions, including public spending. That spending leads to results that are “seen,” meaning, in the case of the current stimulus, the jobs of medical residents, teachers, road builders, and the like—jobs created or preserved by stimulus dollars. Then there is the matter of what is “unseen”—meaning all the money government used for those projects that has been diverted, through taxes or borrowing, from other uses.

Usually, the public is too dazzled by the seen to take account of the unseen. So politicians often get away with saying they have “created” this or that many jobs by spending taxpayers’ money. Few follow the trail back to where the money came from or project it forward to divine the consequences. That was not the case this time. Quite the opposite, in fact.

In the current crisis, advocates of stimulus and of government intervention in general have been badly hurt by two developments. First, the short-term effects of the stimulus—the “seen”—have been extremely disappointing. The stimulus was signed into law on February 17, 2009. In the preceding month, unemployment stood at 7.7 percent. A study released at the time by Christina Romer, who shortly thereafter became chair of the President’s Council of Economic Advisers, and Jared Bernstein, economic adviser to Vice President Biden, predicted that unemployment would never exceed 8 percent and would fall to 7.5 percent by June 30, 2010, if the stimulus were enacted. Without the stimulus, they claimed, unemployment would rise to 9 percent.

Instead, unemployment rose above 10 percent and was a still horrific 9.5 percent in June 2010. Perhaps a lack of stimulus spending would have made matters even worse. No one knows. You can’t do a controlled experiment. But you can understand the public reaction: We spent all this money, and got almost nothing.

Bastiat would have appreciated one of the obvious explanations for the impotence of the stimulus. In 1957, Milton Friedman argued that attempts to increase consumer demand through government spending are doomed. The reason, Friedman wrote, is that individuals make their decisions about consumption by looking at their likely income and wealth far into the future. (He called it the “permanent income hypothesis.”) If the government starts spending huge sums today, consumers foresee higher taxes and, by inference, presume that their lifetime incomes will drop because of the increased level of their tax burden.

If government spending is short-term or one-time-only, which is what the stimulus was supposed to be, then individuals might be expected to take a more benign view. But the 2009 stimulus did not take place in a vacuum. It was soon accompanied by other economic policies and proposals of the Obama administration and the Democratic Congress: health-care reform extending public coverage to 30 million new people, cap-and-trade energy proposals featuring vastly higher taxes, and the imminent expiration of the Bush tax cuts at the end of 2010.

Because of these policies, the “unseen” became “seen” in a fashion devastating to the politicians supporting them. Americans judged that the party in power intends the radical expansion of the size of government in perpetuity. That expansion will have to be paid for. There is no reason to expect very much good from the future if you are the sort of person who generates income and creates jobs. Your “permanent income” is going to decline, and your gut response will be to husband your resources.

More disastrously for the Democrats, the “unseen” became “seen” almost immediately, in the form of metastasizing budget deficits. In order to spend all that money it didn’t have, the federal government was, of course, forced to borrow. So Treasury debt held by the public has grown from an easily manageable 36 percent of GDP at the end of fiscal 2007 to a troubling 62 percent at the end of 2010. Only once in U.S. history—during and right after World War II—has the debt-to-GDP ratio ever exceeded 50 percent.

With the new health-care law and other increased spending on the horizon, the debt-to-GDP ratio will keep rising—to 66 percent in 2020 and 79 percent in 2035, under what the Congressional Budget Office calls its “extended-baseline” scenario. In a worst-case scenario (using reasonable assumptions of spending growth), the ratio may jump to about 100 percent in 2020 and nearly 200 percent in 2035, predicted the CBO.

Americans are worried about this rising debt, and they have reason to be. As the CBO puts it, “Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels.”

What does “unsupportable” mean? Interest rates—and thus borrowing costs—could rise significantly as lenders worry about America’s ability to repay. And if history is a guide, a debt-to-GDP ratio in the 100 percent range will seriously constrain the economy, according to This Time It’s Different: Eight Centuries of Financial Folly, a 2009 book by Carmen Reinhart and Kenneth Rogoff that may turn out to be the most influential analysis of the current crisis.

For the public, the worry extends beyond the debt itself to the very role of the federal government. According to Gallup, by a margin of 57 percent to 37 percent, Americans say there is “too much” rather than “not enough regulation of business by government.” Big business is unloved, but more and more, government is seen as clumsy, venal, and self-serving.

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.

_____________

There is no denying that the narrative about how greedy financiers caused the economic crisis still has currency. But another narrative now looms larger. It is that the government’s attempts to fix the problem through spending have been ineffectual at best and, more likely, dangerous to our economic health.

When the financial meltdown occurred, it seemed almost certain that Americans would judge that the conservative economic experiment of 1981-2008 had failed. Instead, they seem to be leaning in the opposite direction—toward a conclusion that it was the liberal economic experiment of 2009-10 that has failed.

This conclusion is not being warmly embraced so much as reluctantly conceded. Things could change. Conservatives will face a challenge later this year over whether to extend tax cuts that, at least from a “seen” viewpoint, will further increase the debt. Still, when you consider that a repudiation of free-market capitalism and what President Sarkozy called a “return of the state” appeared almost certain when the crisis broke, we should be both humbled by and thankful for this strange and constructive turn of events.

The decline in GDP came in 1991. On inflation: Between 1992 and 2007, the Consumer Price Index never increased more than 3 percent in any calendar year. By comparison, between 1967 and 1982, annual inflation was always over 3 percent and 12 times over 5 percent. Despite two recessions, annual unemployment exceeded 7 percent only once between 1986 and 2008 (7.5 percent in 1992) and was below 6 percent in 17 of the 23 years—including every full year of the George W. Bush presidency.

James K. Glassman, former undersecretary of state for public diplomacy and public affairs, is executive director of the George W. Bush Institute in Dallas and host of the weekly program Ideas in Actionon public television.
END QUOTE

Check Out Hg Capital’s Latest Performance

Earlier this year, I introduced you to the professional money managers at Hg Capital Advisors. Now that August is behind us, I wanted to update you on the performance of Hg Capital’s Long/Short Government Bond Program (LSGB), and suggest that you check it out for a portion of your portfolio. To recap this innovative strategy, the LSGB Program trades index mutual funds that track the 30-year Treasury bond, both on a long and inverse basis. I’m pleased to report that the Hg Capital LSGB Program has continued to produce impressive returns:

The Hg Capital LSGB Program posted a monthly gain of +3.94% as of the market’s close on August 31, lifting its 2010 year-to-date performance to an impressive +14.71%. And this is on top of an impressive +60.4% gain in calendar year 2009. These are actual results, net of all fees and expenses, or what we call “net to investor.”

Why has Hg’s LSGB Program been able to navigate the current market environment when other types of strategies have failed? We believe it’s because Hg’s proprietary strategy seeks only to determine Treasury bond price movements over the next trading day. Since Hg does not attempt to identify extended market trends, they have been largely unaffected by the range-bound fluctuation of Treasury yields.

Another advantage of the LSGB Program is that it has the ability to trade both long and short, which we feel gives them a distinct advantage in today’s market environment. Many economists expect us to experience at least some level of deflation in the near future, so it’s important to have the potential to participate in upward moves in bond prices.

However, we also know that interest rates are about as low as they can go and must eventually move higher. When they do, this will be bad for long-term Treasury bond prices – but Hg Capital has the potential to gain even when bond prices begin to fall. And should volatility and uncertainty become too extreme, the LSGB Program can go to the sidelines and sit in cash to await another trading opportunity.

Check Out Our Hg Capital LSGB Online Webinar

If you were unable to sit in on our live webinar featuring Hg Capital’s LSGB strategy, you can view a recorded version of this presentation on our website at the following link: http://www.halbertwealth.com/webinar/hg20100805/hgwebinar.php.

It is important to remember that the Hg Capital LSGB Program is an aggressive strategy and is capable of significant volatility. As such, it should only represent the “risk capital” portion of your overall portfolio. Obviously, there’s no guarantee that Hg Capital will always make the right calls. Though the LSGB Program has produced positive monthly gains 68% of the time since its inception in 2004, this past performance can’t guarantee similar results in the future.

I urge you to consider Hg Capital’s Long/Short Government Bond Program for the aggressive part of your portfolio. We feel that having an allocation to an investment that can take advantage of both rising and falling yields on long-term Treasury bonds may make a lot of sense for investors seeking additional portfolio diversification – especially in light of predictions that the US economy may experience deflation, inflation and maybe even stagflation in the future.

If you would like to learn more about this program offered by Halbert Wealth Management (HWM), you can call us at 800-348-3601 and talk to one of our Investment Consultants, send us an e-mail to info@halbertwealth.com, submit an online request form by clicking HERE,or check out Hg Capital’s strategy and historical performance on HWM’s website. As always, be sure to read all of the Important Notes that follow my signature below.

Wishing you profits in these crazy markets,

Gary D. Halbert

CBO: U.S. Debt Crisis On The Horizon

Gary D. Halbert — Tue, 10 Aug 2010 23:05:00 GMT

IN THIS ISSUE:

1. The Economic Recovery is Faltering

2. CBO Warns of a Debt Crisis on the Horizon

3. Treasury Bond Yields Near Record Low – What Next?

4. Protecting Your Assets When Interest Rates Spike

5. Conclusions – Dangerous Times Ahead

Introduction

The non-partisan Congressional Budget Office (“CBO”) released a very troubling new report in the last week of July. The new report is entitled “Federal Debt and the Risk of a Fiscal Crisis” and warns that we will face financial calamity if we do not get our massive budget deficits under control.

The CBO report points out that the national debt, which was 36% of the gross domestic product three years ago, is now projected to be 62% of GDP at the end of fiscal year 2010 on September 30. And it continues to ratchet up every year thereafter, even in the CBO’s “baseline” (more conservative) projections.

The CBO specifically warns that our out-of-control deficits could lead to the ultimate debt crisis when buyers of Treasury securities lose faith in the government’s promise not to default on these most trusted financial instruments. No kidding!

I have been writing about the perils of increasing our national debt year after year since back in the 1980s when I criticized President Ronald Reagan for doing so, and every president since him. The concern was that in 20-30 years, the ultimate debt crisis would come. Guess what: it’s now been 20-30 years, and even the CBO now warns that the day of reckoning is on the horizon.

This week, I’ll summarize the latest CBO report. After reading about it, you need to think seriously about how you will protect your assets when the day comes where US Treasury securities are no longer trusted – think sharply higher interest rates! This will be a continuing theme in the weeks and months ahead.

But before we jump into the latest troubling CBO report, let’s take a quick look at the latest economic reports, most of which have not been favorable. It has been several weeks since I wrote about the economy specifically, so let’s get caught up.

The Economic Recovery is Faltering

While it didn’t come as a surprise to my clients and readers, the latest report on 2Q Gross Domestic Product was weaker than expected. The Commerce Department reported the 2Q GDP rose only 2.4% (annual rate). That was well below the pre-report estimates of 2.5% to 3.0%. In fact, some forecasters had predicted growth well above 3.0% in the 2Q.

The news was not all bad, however. The Commerce Dept. revised its estimate of 1Q GDP from 2.7% to 3.7%, which was considerably better than the consensus estimate. Still, the trend is not good: 4Q +5.0%, 1Q +3.7% and 2Q +2.4%. With most of the latest economic reports looking negative, growth in the last half of the year could do well to stay in positive territory.

The Index of Leading Economic Indicators (LEI) fell 0.2% in June (latest data available) and has been down in two of the last three months. However, the LEI is still well above its recession low in early 2009. It remains to be seen if this is merely a pullback in the LEI, or if it is rolling over to the downside ahead of a double-dip recession.

Consumer confidence remains in a free-fall. After plunging sharply in June, the Consumer Confidence Index fell from 54.3 to 50.4 in July. Here is the official statement that accompanied the release of the Conference Board’s confidence index on July 27:

“Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season.”

The Reuters/University of Michigan Consumer Sentiment Index also fell sharply again in July. The index fell from 76.0 in June to 67.8 in July. This report also cited the weak employment situation and continued weakness in home prices as the primary reasons for the fall in sentiment. They also warned that consumer spending could fall even more as a result.

Rasmussen reported yesterday: “Following the release of Friday’s government report on unemployment and job creation, consumer and investor confidence has fallen to the lowest level of 2010. Just 21% of Adults nationwide now believe the economy is getting better. That's down from 30% on Friday morning. The number who believe the economy is getting worse is now up to 54%.”

The Commerce Department reported last week that consumer spending remained low in June (latest data available). Personal spending was unchanged in June, reflecting a third straight month of lackluster consumer demand. Incomes were also flat, the weakest showing in nine months.

Not surprisingly, the US personal saving rate continues to rise. The government reported last week that the personal savings rate climbed to 6.4% of disposable income. That’s the highest rate since the early 1990s. Most Americans are clearly concerned about another recession, so they are saving more even if they are not making more. On a related note, consumer credit continues to be in free fall. It’s no wonder then that retail sales fell 0.5% in June.

On the manufacturing front, the ISM index fell to 55.5 in July, down from 56.2 in June. Durable goods orders fell 1% in July, when forecasters had expected a gain of 1%. The government reported last week that factory orders fell 1.2% in June (latest data available). On the positive side, industrial production rose a modest 0.1% in June.

Last Friday’s unemployment report for July was dismal, to say the least. While the official unemployment rate remained at 9.5%, the internals of the report were considerably weaker than had been expected. The economy lost another 131,000 jobs in July, and the June report was revised from 125,000 jobs lost to 221,000 according to the Labor Department report. The unemployment rate held steady mainly because 181,000 people stopped looking for work last month, and are no longer counted as unemployed.

On the housing front, the news was mixed. New homes sales beat expectations in June with 330,000 units sold according to the Census Bureau. Sales of existing homes fell, however, in June to 5.37 million units, down from 5.66 million units in May. And the number of buyers who signed contracts to purchase homes fell in June, down 19% from a year ago. Housing starts were also weaker than expected in June at 549,000 units.

Economists continue to adjust their forecasts downward for the second half of this year in light of the latest mostly disappointing economic reports. Congressional leaders in Washington are now talking about more stimulus (read: pork-barrel spending), and President Obama seems more than willing to go along – surprise, surprise.

CBO Warns of a Debt Crisis on the Horizon

On July 27, the non-partisan Congressional Budget Office issued a new report entitled “Federal Debt and the Risk of a Fiscal Crisis.” The report warns that we will face financial calamity if we do not get our massive budget deficits down in the years just ahead.

The CBO report points out that the national debt, which was 36% of the gross domestic product three years ago, is now projected to be 62% of GDP at the end of fiscal year 2010 on September 30. And it goes up every year thereafter, even in the CBO’s “baseline” (more conservative) projections.

Most Americans glaze-over when they hear numbers about the debt-to-GDP ratio. Perhaps the following chart from the CBO will put it in some better perspective. As long-time clients and readers know, I have been warning about this problem for over 25 years.

Tracing the history of the national debt back through our history, the CBO finds that the national debt did not exceed 50% of GDP, even when the country was fighting the Civil War, the First World War or any other war except World War II. As you can see in the chart, the national debt declined sharply after World War II as the nation began paying off its wartime debt when the conflict was over.

By contrast, our current national debt is still going up and may end up in “unfamiliar territory,” according to the CBO, reaching “unsustainable levels.” They spell out the following economic consequences -- and it is not a pretty picture:

“Although deficits during or shortly after a recession generally hasten economic recovery, persistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually: A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that ‘crowding out’ of investment would lead to lower output and incomes than would otherwise occur.

In addition, if the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output. Rising interest costs might also force reductions in spending on important government programs. Moreover, rising debt would increasingly restrict the ability of policymakers to use fiscal policy to respond to unexpected challenges, such as economic downturns or international crises.

Beyond those gradual consequences, a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors’ confidence declined, giving legislators advance warning of the situation and sufficient time to make policy choices that could avert a crisis. [Emphasis added.]

But as other countries’ experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply. The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory and in part because the risk of a crisis is influenced by a number of other factors, including the government’s long-term budget outlook, its near-term borrowing needs, and the health of the economy. When fiscal crises do occur, they often happen during an economic downturn, which amplifies the difficulties of adjusting fiscal policy in response. [Emphasis added.]

If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation. A sudden increase in interest rates would also reduce the market value of outstanding government bonds, inflicting losses on investors who hold them. [Emphasis added.]

That decline could precipitate a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt—losses that might be large enough to cause some financial institutions to fail. Foreign investors, who owned nearly half of U.S. debt held by the public in May 2010 (or about $4.0 trillion, $1.7 trillion of which was held by Japan and China alone), would also face substantial losses.” [Emphasis added.]

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.

Folks, this is some VERY STRONG language by the number-crunchers at the CBO!

Earlier this year, I reprinted the CBO chart showing their projected deficits over the next decade. Let’s take another look. As you can see in this table, the CBO forecasts the deficit to fall below $1 trillion in 2012 but it never falls below $724 billion, and then goes back to almost $1 trillion by 2017.

To be clear, the darker bars in the chart above represent the CBO’s “baseline” deficit projections before Obama released his 10-year budget forecasts back in February. The lighter bars are the deficit projections after Obama’s forecasts were released. Take special notice of the magnitude of the deficit increase every year compared to what the CBO previously projected.

If we include the then-record fiscal 2009 budget deficit of $1.4 trillion, our national debt will soar by almost $13 trillion by 2020. Here are the CBO’s latest deficit estimates through 2020, including the actual FY 2009 deficit:

FY 2009 $1.4 trillion	FY 2015 $793 billion
FY 2010 $1.5 trillion	FY 2016 $894 billion
FY 2011 $1.3 trillion	FY 2017 $940 billion
FY 2012 $914 billion	FY 2018 $996 billion
FY 2013 $747 billion	FY 2019 $1.2 trillion
FY 2014 $724 billion	FY 2020 $1.3 trillion

TOTAL $12.7 Trillion

Worst of all, the projections illustrated above may well be too optimistic. Most obvious, the CBO assumes there will not be a recession between 2010 and 2020. Really? They estimate that the economy will grow by an average of 3% in 2010-2011, and then grow by an average of 4.9% a year in 2012-2020. No recessions and nearly 5% GDP growth for nine years in a row is almost certainly a pipe dream.

With the global debt crisis still worsening, I don’t know anyone who believes these rosy CBO projections will be nearly accurate. If they are too optimistic, and I believe they are, we could be adding much more than another $12.7 trillion to our national debt by 2020. Frankly, I don’t believe the markets will allow this to happen.

Treasury Bond Yields Near Record Low – What Next?

As you can see in the chart below, the yield on the 30-year Treasury bond is incredibly low, currently at around 4%. But as you can see, it has been below 4% recently and may be headed to yet new record lows just ahead. There are a variety of reasons for this historic drop in interest rates but suffice it to say, for now, it is largely due to the sluggish economic recovery and the growing deflationary forces in the global economy.

Many investors do not understand how we can be running trillion-dollar deficits and exploding the national debt, yet interest rates are at or near historical lows. I will write in more detail about this in the weeks just ahead. But the main thing to keep in mind is: 1) these historically low rates won’t last for long; and 2) when they do start back up, they will almost certainly rise dramatically.

Protecting Your Assets When Interest Rates Spike

Whether you have a large or small investment portfolio, you need to be thinking about how you can protect your nest-egg if US interest rates spike higher. Why? If interest rates spike higher, that will be bad news for bonds and stocks. Most of us have stocks and bonds in our portfolios, so such a scenario could be doubly devastating.

But there are ways to help protect your portfolio from a spike in interest rates. Last week, I featured Hg Capital which has a Treasury bond strategy that invests both long and short, with the potential to protect you regardless which way long-term interest rates move. Think of it as a “hedge” if bond rates begin to move higher, as they inevitably will at some point.

We hosted an hour-long Internet “webinar” with the principals of Hg Capital last Thursday. You can view and hear that very interesting presentation at the following link:

Click here for the Hg Capital webinar replay.

I highly recommend that you listen to at least the first half of this webinar, whether you consider investing with Hg Capital or not. You need to be thinking about how to protect your bond portfolio should interest rates spike higher. Again, this is a theme I will be focusing on in the weeks and months ahead.

You may also want to take another look at Wellesley Investment Advisors, another bond advisor that I recommend highly. Wellesley invests in high quality, investment grade convertible bonds that have “put” and “call” options that provide additional flexibility when it comes to exiting the positions.

Most investors do not know how to participate in convertible bonds, so Wellesley can be a great diversification tool. More importantly, Wellesley’s excellent 15-year performance record has not been correlated to the performance of Treasury bonds or stocks in the past. I have a large allocation of my own money in this program, and I highly recommend it.

To view our recent webinar with Wellesley’s founder Greg Miller, click on the link below:

Click here for the Wellesley Investment Advisors webinar replay.

** If you cannot download the webinars, click on the following links to our written Advisor Profiles on these two professional money managers:

Click here for the Hg Profile.

Click here for the Wellesley Profile.

For years, most investors have been indoctrinated by the financial community to believe in the “buy-and-hold” investment strategy, especially when it comes to their stock holdings. As long-term clients and readers know, I have advocated for alternative investment strategies that have the flexibility to move out of the market from time to time, especially during bear markets.

Despite my persistent arguments, most investors remain in buy-and-hold strategies. However, with two bear markets in stocks in just the last decade alone, more and more people are now looking seriously at the “active management” strategies I recommend. So in addition to Hg Capital and Wellesley Investment Advisors, now may be the time to reconsider the actively managed equity programs I recommend as well.

As always, past performance is not a guarantee of future results.

Conclusions – Dangerous Times Ahead

Folks, I don’t know how to put it any more succinctly: the government’s own Congressional Budget Office is warning that we will face a serious debt crisis if we don’t get control of our trillion-dollar budget deficits soon. Believe me, government bureaucrats don’t make these kinds of inflammatory warnings unless they are truly scared.

Yet President Obama’s 10-year budget forecasts would have us almost double the national debt between now and 2020. This will be very bearish for bonds and stocks, in my opinion. Your investment and/or retirement portfolio has probably been hammered already by two bear markets in stocks in the last decade. If the CBO is right about a full-fledged debt crisis – one that takes down both bonds and stocks – it could make the financial crisis of 2008-2009 look tame.

All of us that have money to protect need to start thinking now about how we are going to do that. Buy-and-hold strategies, whether in stocks or bonds, will likely get hammered even harder if the debt crisis the CBO warns about comes to pass.

Whether it’s the active management strategies I recommend, or some others that may be out there, you need to be thinking about and planning for what may lie ahead, if and when we get to the point that investors (US and foreign) no longer trust the US government to make good on its debt. That will be the Mother of all debt crises.

Sorry to be negative but it is what it is,

Gary D. Halbert

SPECIAL ARTICLES:

CBO warns of a sudden “fiscal crisis” (official summary of the report)
http://www.cbo.gov/doc.cfm?index=11659

National debt set to skyrocket
http://blog.heritage.org/2010/07/29/cbo-warns-of-the-risk-of-a-u-s-fiscal-crisis/

The Economy & This Rocky Recovery

Gary D. Halbert — Tue, 11 May 2010 18:49:00 GMT

IN THIS ISSUE:

The Economy is Improving Slowly
Other Recent Economic Reports
All This Sounds Good, But…
How Do We Grow More Jobs?
Home Foreclosures Hit Record High

For the most part, the economic reports over the last month or so have been positive. On Friday, April 30, the Commerce Department released its “advance” estimate of 1Q GDP. The number came in more or less as expected, showing a rise of 3.2% (annual rate) in the 1Q, following the gain of 5.6% in the 4Q of last year. The report noted that the gain in the 1Q was primarily the result of increased consumer spending, inventory investment, and non-residential fixed investment (in that order).

Personal consumption expenditures (consumer spending) increased 3.6% in the 1Q, compared with an increase of only 1.6% in the 4Q. It was the best quarter for consumer spending since 2007. Durable goods orders increased 11.3% in the 1Q, compared with an increase of only 0.4% in the 4Q. Services increased 2.4% in the 1Q, compared with an increase of 1.0% in the 4Q.

The fact that GDP growth decelerated from 5.6% in the 4Q to 3.2% in the 1Q is largely attributable to a slowdown in state and local spending during the Jan-Mar quarter, additional weakness in the commercial real estate sector, a slowdown in inventory rebuilding and an increase in imports (which are a subtraction from GDP, unlike exports which are an addition).

The estimated rise in 1Q GDP of 3.2% marks the third consecutive quarter of positive economic growth, following the 5.6% rise in the 4Q and 2.2% rise in the 3Q of 2009. Most economists agree that this means the recession has ended. However, the National Bureau of Economic Research (NBER), the private, non-partisan arbiter of the economy, failed to declare that the recession is officially over at its latest meeting, noting that they are still working to determine the exact month in which the economy hit bottom.

The official NBER numbers say the recession began in December of 2007. In the 4Q quarter of 2007, Gross Domestic Product – the measure of all the goods and services produced in the United States – was $13.39 trillion (annualized rate), according to the Commerce Dept. As the recession struck and then deepened, the size of the US economy shrank. By the 4Q of 2008, US GDP was down 1.86% to $13.14 trillion. That was about $250 billion in lost economic activity. The economy got smaller and smaller in the first half of 2009 with GDP falling to $12.90 trillion in the 2Q. That was a drop of 3.7% from the peak in the economy in the 4Q of 2007, and it represented about $490 billion in lost economic activity.

Most analysts now agree that the economy hit bottom sometime in late 2Q or early 3Q of last year. In the 3Q, the economy expanded by a mere $71 billion according to the Commerce Dept., but at least it was positive. By the 4Q of last year, GDP was back to where it had been in the 4Q of 2008. With the latest report showing +3.2% GDP in the 1Q of this year, the economy has recovered all the ground it had lost since the fourth quarter of 2007 – on paper at least.

Of course, this does not reflect the anticipated GDP growth that vanished when the economy plunged in the last half of 2008 and the first half of 2009. And it does not reflect the fact that unemployment soared during this same period and remains extremely high, as I will discuss later on.

Other Recent Economic Reports

The Index of Leading Economic Indicators (LEI) rose 1.4% in March (latest data available). That marked 12 consecutive months of increases in the LEI and suggests that economic growth should remain positive for the next several months at least.

Perhaps the best economic report in the last several weeks was a surprise jump in consumer confidence in April. The Consumer Confidence Index unexpectedly jumped from 52.3 in March to 57.9 in April. This was well above the pre-report consensus of 53.5.

According to the Conference Board, which maintains the Consumer Confidence Index, consumers’ appraisal of present-day conditions was more positive in April. Those claiming conditions are “good” increased to 9.1% from 8.5%, while those claiming business conditions are “bad” declined to 40.2% from 42.1%.

However, some analysts are questioning the validity of the latest consumer confidence number because the University of Michigan Consumer Sentiment Index actually fell in April to 72.2, down from 73.6 in March. Normally, the UM Consumer Sentiment Index tracks closely with the government’s Consumer Confidence Index.

Another recent poll would also seem to question the latest consumer confidence report. Just 21% of Americans consider the economy to be in good condition, according to an Associated Press-GfK Poll conducted April 7-12. So it remains to be seen if the Consumer Confidence Index will be revised lower in the weeks ahead.

The Commerce Department reported that retail sales rose 1.6% in March. The same report noted that retail sales in the 1Q were up 5.5%, and for the last 12 months, retail sales rose 7.6%. In a related report, the Commerce Dept. noted that personal consumption expenditures (PCE) increased a healthy 0.6% in March, marking the fifth consecutive monthly rise.

On the manufacturing front, the much watched Institute for Supply Management (ISM) Index rose to 60.4 in April, up from 59.6 in March. The manufacturing sector in general has seen a significant improvement over the last year. Remember that any number above 50 in the ISM suggests an economy that is expanding. And factory orders rose 1.3% in March following a revised gain of 1.3% in February as well.

Believe it or not, there was actually some good news on the housing front in the latest reports. New home sales soared 26.9% in March, following four previous monthly declines. New home sales spiked in every region of the United States in March as buyers snatched up properties to take advantage of the new home tax credit of up to $8,000 that expired on April 30. Of course, it will be interesting to see how much new home sales fall now that the tax credits are gone.

Sales of existing homes also rose in March, up 6.8%, following a big decline of 7.2% in February which put existing home sales at a 7-month low. The Commerce Dept. reported that housing starts rose modestly in March, up 1.6% at an annual rate of 626,000 units. February housing starts were revised upward as well.

Unfortunately, not all the news on housing has been good recently – more on this below.

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.

All This Sounds Good, But…

As noted above, most in the economic and forecasting world agree that the Great Recession ended sometime in the second half of last year. The positive economic reports above are a reflection of that. But for a lot of Americans, no matter what the numbers say, the pain of the recession will go on, especially with unemployment likely to remain high for at least a couple more years, if not longer.

Obviously, the negative effects of the recession are far from over. When GDP began to rise again in the 3Q of last year, the US economy kept shedding jobs. Since June of last year, apprx. 900,000 workers have lost their jobs. Even though we are over three quarters into the recovery, the official unemployment rate was still 9.7% in March, even though the economy reportedly added 162,000 jobs that month.

The mainstream media would have us believe that the unemployment situation is getting better. Each week, we get a report from the Department of Labor indicating how many Americans filed for unemployment benefits for the first time. This report is commonly called the Initial Claims report, and it comes out on Thursdays.

On April 29, the media reported that the trend in unemployment was getting better because only 448,000 Americans filed for first-time unemployment benefits the week before. Only 448,000? This was considered good news because it was the first time in several weeks that the number fell below 450,000.

But the fact is, the weekly initial claims numbers have been hovering up and down in a range of 435,000 to 500,000 over the last six months. So no one knows if unemployment is really trending lower. It may well be stuck in a sideways range, and as I will discuss later, there are some possible reasons why the unemployment rate could go higher just ahead. In fact, last Friday’s unemployment number for April jumped from 9.7% to 9.9%.

The unofficial full unemployment rate, the one that includes discouraged workers who have stopped looking for jobs and those who have found part-time work but really want to work full time, actually went up in March, to 16.9%, from 16.8% in February. In the latest report for April, the total unemployment number rose to 17.1%, some 15.3 million Americans.

Among the 15.3 million unemployed are the so-called “long-term unemployed,” those who have not actively looked for work in 27 weeks or longer, and are not counted in the official monthly unemployment rate. The number of workers out of work for 27 weeks or longer climbed in April to 6.7 million from 6.5 million in March. That means that 45.9% of all the unemployed have been out of work for half a year or more. That was the highest percentage since the government began keeping records in 1948.

The extraordinarily high percentage of long-term unemployed isn’t just a feature of this recession. Labor Dept. figures show that long-term unemployment has been rising over the past 10 years, and that the recent recession only exacerbated this trend that has been visible since the 2001 recession.

Sadly, according to the Congressional Budget Office, apprx. one-quarter of the long-term unemployed leave the work force permanently. Based on the 6.7 million April unemployment number, that means that almost 1.7 million able-bodied Americans are now lost from the job market.

The latest unemployment number for April, which jumped from 9.7% to 9.9%, came as a surprise. Most forecasters expected the number to remain unchanged at 9.7%. The April report showed that the economy generated apprx. 290,000 new jobs last month (including 66,000 temporary Census workers), the best month since March 2006. The March jobs number reported last month was revised upward from 162,000 to 230,000.

So, how did the unemployment rate go up in April? Keep in mind those long-term unemployed people I discussed earlier. With the improvement in the economy, just over 800,000 of those that had not looked for work in the last 27 weeks or longer once again started looking for work in April. These people had not been counted in the official unemployment rate, but now that they are looking for work, they are counted once again. This is the main reason the unemployment rate rose in April to 9.9% which, in this case, is a good thing.

How Do We Grow More Jobs?

While the 290,000 jobs figure for April was a welcome surprise, it is still not high enough to bring down the overall unemployment number. Peter Morici, an economics professor at the University of Maryland, calculates job increases would have to average at least 400,000 a month to return to a 6% unemployment rate by the end of 2013.

Most economists agree that it takes 3% or better in GDP growth to create enough new jobs just to keep up with population growth. Likewise, there is general agreement that GDP growth would have to be around 5% for a full year just to drive the unemployment rate down by just 1 percentage point to 8.7%, which is still too high.

After the last severe recession in the early 1980s, GDP grew at an annual rate of 7% to 9% for five straight quarters, and the unemployment rate plunged from 10.8% to 7.2% in 18 months. No one I read believes we are headed for 7-9% growth in the next year or the year after.

With 1Q GDP having fallen well below the 5.6% rate in the 4Q, most of the sources I trust now believe we’ll see growth of only 2-4% for the balance of this year. Consumers increased spending in the 1Q by the largest amount in three years, +3.6%, but most economists agree that there was a good deal of pent-up demand that is not likely to repeat itself during the balance of this year. Consumer spending may do well to reach a 3% increase this year overall.

Notice in the chart below that consumer spending has rebounded far more slowly coming out of this recession, as compared to what happened near the end of the severe recessions of 1973, 1981 and 2001. [Should you have trouble reading the text in the chart, note that the lowest, thicker line is the current cycle with the slowest rebound in consumer spending.]

There are numerous reasons why consumer spending is so slow to rebound this time around. Obviously, the plunge in home values is a big reason. High unemployment and uncertainty is another. And of course, having been through two nasty bear markets in stocks in the last decade is another reason.

Given the dim prospects for consumer spending, a number of economists now believe it will take until at least the middle of the decade to lower the unemployment rate to a more normal 6% or so. And these projections do not consider that another recession and/or financial crisis will occur in the next 3-5 years.

The bottom line is that we are very likely looking at continued high unemployment for at least the next several years. And it could get even worse if we have another recession and/or financial crisis.

Home Foreclosures Hit Record High

New data show that during the 1Q of this year, foreclosure filings – default notices, scheduled auctions and bank repossessions – were reported on 932,234 properties, a 7% increase from the previous quarter and a 16% increase from the 1Q of 2009. The data was supplied by RealtyTrac, a real estate research firm.

Foreclosure filings were reported on 367,056 properties in March alone, an increase of nearly 19% from the previous month and the highest monthly total since RealtyTrac began issuing its report in January 2005. RealtyTrac warns that we could see up to 4.5 million home foreclosures in 2010.

Homeowners continue to fall behind on payments because they’ve lost their jobs or seen their mortgage payments rise due to an interest rate reset. Many are unable to refinance because they now owe more on their mortgage than their home is worth. It is not surprising that the states with the highest foreclosure rates continue to be those which have been terribly troubled in the past – Nevada, Florida, California, Arizona, Washington and Arkansas.

While there was some tax credit-driven improvement in new and existing home sales in March, the continued glut of home foreclosures will keep downward pressure on home prices, especially given the way banks fire-sale these homes. If we are going to hit over 4 million foreclosures this year, it would not be unreasonable to see median home prices decline again in coming months.

Modified Home Loans Default Anyway

You may recall that the Obama administration earmarked $75 billion of TARP money last year in an effort to stem the tide of foreclosures. The Home Affordable Modification Program (HAMP) has only been able to help a small fraction of troubled homeowners.

Only about 231,000 homeowners have completed loan modifications as part of the foreclosure prevention program through March. That’s only about 21% of the 1.2 million borrowers who requested the information and forms over the past year.

While participation in this relief program has been weak, the results for those who have participated are very troublesome. The US Office of Thrift Supervison reported on March 25 that 51.5% of homeowners that got HAMP relief defaulted on their new mortgages by the end of last year. That same office reported that over the 12 months ended February, 57.9% either defaulted or were at least 30 days late on their reduced mortgage payments.

The number of homes nationwide with mortgage payments at least 60 days late climbed to 2.39 million in the 4Q, up 49.6% from the year earlier period, according to the report. The median price of a US home was $165,100 in February, down 28% from its peak in July 2006, according to the National Association of Realtors.

The problem with the loan modification program, and foreclosures in general, is that millions of Americans are “under water” on their mortgages. Even if the monthly mortgage payments are reduced, many homeowners believe their home value will never recover to what they paid for it, so they just walk away. As noted above, there were over 367,000 home foreclosures in March alone – the largest ever recorded. And as also noted above, total foreclosures are expected to reach 4.5 million for all of 2010.

Even if the latest home sales figures for March were positive, the housing sector is still in deep trouble. This, plus the continued tight credit markets, are among the main reasons the economy is likely to post slow growth for the 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.

This Crazy Stock Market!!

As most of you are aware, the stock markets experienced one of their most volatile days ever last Thursday, May 6. At one point that day, the Dow Jones Industrial Average plummeted almost 1,000 points in short order, but then recovered sharply to close down 347.8 points on the day. At the intra-day low, this was the largest single day point decline in the DJIA’s history.

All kinds of theories have been advanced as to how this one-day waterfall decline could have happened, and as this is written, we still don’t know exactly why this huge plunge played out. Securities regulators are hotly investigating as this is written, and it remains to be seen if we will ever know the real answer.

But I will give you my initial thoughts, very succinctly. I believe that the global debt crisis is the root cause. I further believe that as global debt continues to rise by unprecedented proportions, market volatility is going to continue to rise. Unfortunately, days like last Thursday may come to be somewhat commonplace in the years ahead. I hope I am wrong, but I fear that I am not.

I will have much more to say about this in the weeks to come. As always, your comments and suggestions are welcomed.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

Obama’s Grand Plan: Bankrupt America (excellent)
http://www.washingtontimes.com/news/2010/may/10/a-choice-for-the-condemned/

The Welfare State’s Death Spiral – Robert Samuelson
http://www.realclearpolitics.com/articles/2010/05/10/the_welfare_states_death_spiral_105503.html

Near trillion-dollar bailout of Greece won’t work
http://www.bloomberg.com/apps/news?pid=20601039&sid=aCOKSoGY6hLs

On The Economy & The CBO's Credibility

Gary D. Halbert — Tue, 30 Mar 2010 20:02:00 GMT

IN THIS ISSUE:

Editor's Note: About Last Week's Letter
The Economy – What to Expect Going Forward
Stocks & Bonds – What Lies Ahead?
Speaking of “Faith”… What About the CBO?

Editor's Note: About Last Week's Letter

I felt really bad about sending out last week's E-Letter in which I predicted that we will face another serious financial crisis and perhaps another depression sometime in the next several years, especially when few mainstream economists envision such a dire future anytime soon. However, within a couple of hours of pushing the “send” button last Tuesday afternoon, I read a brand new poll with some very surprising results.

The latest poll by Fox News/Opinion Dynamics shows that 79% of registered voters believe that an economic collapse is still possible. 84% of Republicans, 80% of Independents and 71% of Democrats all agree that the worst may not be over. Only 18% still cling to the White House position that a collapse will not happen. 65% now believe that the National Debt is more of a threat than terrorism – wow! Only 35% think Obama has a plan to fix the economy, down from 42% last July. For Congress, the numbers are even worse. Only 24% think the Democrats have a clear plan to heal our economy, and only 16% think Republicans have a solution.

This poll was a shocker, not only to me but also the mainstream press. Obviously, there are a LOT of Americans that agree with me that Obama's trillion-dollar deficits and the skyrocketing national debt represent the biggest threat to our economic and financial futures.

The American people have already demonstrated that they were against the massive healthcare bill passed by Congress and signed into law by Obama last week. But it is very clear from this latest poll that millions of Americans want this runaway spending stopped at all levels. If Obama continues this out-of-control spending, despite the public's widespread concern, I predict he will be defeated in 2012.

In this week's letter, we will touch several bases. We begin with a look at the latest economic reports, which are mixed. We will take a look at the stock and bond markets and ponder whether the equity gains so far this year will continue. And finally, we will explore how the Congressional Budget Office calculates its cost estimates for the various government spending programs it “scores,” such as the latest healthcare reform legislation. I think you will be very surprised, and I doubt you'll put much faith in their estimates going forward.

It's a lot to cover, so let's jump right in.

The Economy – What to Expect Going Forward

Barring some negative surprise, we have seen the worst of the recession and the credit crisis, at least for a while. The Commerce Department released its third and final report on 4Q GDP last Friday, showing that the economy expanded at an annual rate of 5.6% in the final three months of 2009, down from the 5.9% earlier estimate. The downward revision was somewhat unexpected as the consensus was that growth remained at the 5.9% rate in the 4Q.

The greater question is how will the economy perform in 2010? We won't get our first estimate of 1Q growth until late April. In the meantime, we have to look at other economic reports. Most all of the sources I read and respect believe that the economy will grow in 2010 by much less than the 5.6% rate in the 4Q, which was largely due to inventory rebuilding.

Before going into the latest reports, I will tell you that there has not been much to give us a definitive view of what lies ahead, other than another few quarters of 5.6% GDP are not likely.

The widely followed Index of Leading Economic Indicators (LEI) rose less than expected in February, up only 0.1%. While the LEI has risen briskly over the last year, it now appears to be flattening out as shown in the chart below, suggesting a sluggish economy going forward.

The government's “Coincident Economic Index” (CEI) shown above is much more influenced by the level of unemployment, which remains very high, so its rise since bottoming last June has been very modest as would be expected.

Speaking of unemployment, the numbers continue to look discouraging. The official unemployment rate for February was unchanged at 9.7%. New weekly filings for unemployment benefits continue to run around 450,000. Remember that the official unemployment rate does not include those that have stopped looking for work or have been forced to accept part-time jobs. The real rate of total unemployment is approaching 20%.

In other reports, orders for durable goods increased 0.5% in February following a 3.9% gain in January. Industrial production rose a scant 0.1% in February following a 0.9% gain in January. The ISM manufacturing index fell to 56.5 in February from 58.4 in January. Retail sales rose 0.3% in February from +0.1% the month before.

Consumer confidence took a sharp drop in February after rising for the three previous months. Upon releasing the February confidence data, the Conference Board stated:

“Consumer Confidence, which had been improving over the past few months, declined sharply in February. Concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level in 27 years. Consumers' short-term outlook also took a turn for the worse, with fewer consumers anticipating an improvement in business conditions and the job market over the next six months. Consumers also remain extremely pessimistic about their income prospects. This combination of earnings and job anxieties is likely to continue to curb spending.”

The University of Michigan Consumer Sentiment Index, another widely followed barometer of confidence, also fell in early March from 73.6 in February to 72.5. Remember that consumer spending accounts for apprx. 70% of GDP, so these confidence numbers suggest slow growth in the economy this 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.

Late Note: the latest Consumer Confidence report released this morning showed that the Index improved somewhat in March. The accompanying language from the Conference Board stated:

“Consumer confidence, which had declined sharply in February, managed to recoup most of the loss in March. However, despite this month's increase, consumers continue to express concern about current business and labor market conditions. And, their outlook for the next six months is still rather pessimistic. Overall, consumer confidence levels have not changed significantly since last spring.”

On the housing front, there was across-the-board bad news last month. New home sales plunged for the fourth consecutive month to the lowest monthly rate ever recorded. New homes sold at a seasonally adjusted annual rate of 308,000 units in February, a 2.2% drop from an upwardly revised January pace of 315,000 units and 13% below the 354,000 sales for February 2009. It was the lowest sales level since the government began tracking these statistics in 1963.

The number of new homes for sale in February rose 1.3% from January to 236,000, a 9.2-month supply at the current pace. Existing homes sales also fell in February. The National Association of Realtors reported that sales of previously owned homes in February slumped for the third consecutive month to 5.02 million units. Housing starts fell 5.9% in February from January levels, and building permits declined as well last month.

Analysts point to the inclement weather in February as a reason for the big declines in all the housing numbers, and that factor can't be totally dismissed, but remember these numbers are all “seasonally adjusted.” So, unless we see a significant rebound in the March numbers, this is just one more indication that we're in for a sluggish rebound in the economy in 2010.

Stocks & Bonds – What Lies Ahead?

Despite the recession and the credit crisis, stocks unexpectedly bottomed a year ago and have staged an impressive rally. As measured by the S&P 500 Index, US equities have rebounded a surprising 73% since the lows just over a year ago. The S&P is up over 5% so far in 2010 as this is written.

Unfortunately, millions of American investors bailed out of the equity markets last year near the lows, and most have not gotten back in as suggested by the mountain of cash still on the sidelines. In fact, many retail investors continue to bail out of the stock market. According to Morningstar, investors pulled $3.7 billion out of US stock funds in February, the fifth month of outflows in the last six months. A March 25 survey by the American Association of Individual Investors showed 34.7% of respondents are bearish, which is more than the 32.4% who are bullish and up from a 23% bearish reading at the end of 2009.

The S&P 500 Index plunged 57% from the peak in late 2007 to the lows last March. That bear market followed the decline in the S&P 500 of 49% in 2000-2002. The good news is that the S&P 500 has rebounded 73% since last year's low.

After two major bear markets in the last decade, many of these investors have written off the equity markets forever – they will not be back. I could launch into a discussion on how the actively managed investment strategies I recommend serve to limit these kinds of massive losses, but I assume you've read these discussions before if you have read me for long.

The real question now is, will these kinds of stock market gains continue? We know that the Fed pumped a massive amount of liquidity into our monetary system during the height of the recession/credit crisis. Short-term interest rates were ratcheted down to near zero. Money had to go somewhere, and much of it went into the stock markets, both here and in the global equity markets. This, not surprisingly, drove prices up more than most analysts expected.

Now, expectations are becoming more realistic. The economy, after experiencing a big jump in the 4Q due largely to inventory rebuilding, is coming back to the reality that consumers are still retrenching – lowering spending and increasing savings. This trend will continue, for how long we don't know. So, we are not likely to see 5.6% GDP growth in the near future.

What does this mean for stock market returns? Simple – they are not likely to remotely equal the returns we have seen over the last year. Stock market returns, while they may, or may not, take a big hit just ahead, are likely to mirror the trend in the economy. I continue to recommend actively managed stock market strategies that have the flexibility to move out of the market, or hedge long positions, during bear markets and extended downward market corrections.

The bond market experienced a huge upward move (interest rates fell) in late 2008 and investors moved in droves to the safety of US Treasuries. However, as you can see in the chart below, long-term interest rates have risen since the downward spike in late 2008. Since about this time last year, bond prices have moved in a narrow trading range.

There is widespread agreement that Obama's trillion-dollar budget deficits will lead to higher inflation at some point in the future, which will be bearish for bonds. However, this could be several years down the road. As noted above, consumers are still deleveraging (ie – paying off debt and increasing savings). Given that this trend is likely to continue, and given that the economy is likely to slow down appreciably this year and next, the threat of a significant rise in inflation anytime soon is very low.

As a result, I would expect the bond market is likely to remain in a generally sideways pattern for some time to come, especially in regard to US Treasury bonds. I don't see much opportunity in T-bonds just ahead, unless you invest in them via one of the actively managed bond strategies I recommend.

Finally, it is most interesting that the current yield on some US Treasury debt is actually higher than that of several high-profile corporate bonds. According to a recent Bloomberg article, debt issued by Berkshire Hathaway, Procter & Gamble, Johnson & Johnson and other major US corporations traded at lower yields than Treasuries of similar maturity over the past couple of months. In other words, these corporate debts were deemed to be safer bets than the US government, a situation that Bloomberg called “exceedingly rare.”

Unfortunately, higher Treasury yields may become more common in the near future. By now I'm sure you've heard that the Treasury auctions held last week indicated a lower demand for Treasury debt, especially among foreign investors. This lower demand, in turn, led to higher yields to attract buyers. Treasury debt ended up being sold at prices below those of not only some corporate issuers, but also prices found in the secondary market for similar Treasury debt. Thus, last week's auctions could be an omen of things to come as interest rates rise to combat concerns about rising US budget deficits.

This is clearly another indication of the growing global distrust and anxiety over the current runaway spending on the part of our government. So much for the “full faith and credit” of the United States.

Speaking of “Faith”… What About the CBO?

One side benefit (if you can call it that) of the year-long healthcare bill debate has been that the public has been exposed to a variety of political maneuvers used to make legislation more palatable or even twist the arms of reluctant legislators. We've witnessed everything from outright bribes to tricky procedural maneuvers that few Americans knew even existed.

Even worse, it came to light that some of these kinds of tricks had been used in the past, apparently by both parties at times, to get their way on various pieces of legislation. In the effort to get the massive healthcare bill passed and to take over more than one-sixth of the US economy, the intense political maneuvering, the backroom sweetheart deals and bribes among the Democrats were over the top. President Obama and congressional leaders would stop at nothing to get this bill passed into law. Unfortunately, these tactics may become “business as usual” in Washington going forward.

Nowhere was the search for political “cover” more evident than in the cost estimates prepared by the Congressional Budget Office (CBO). Lawmakers made great efforts to convince the public that these CBO estimates are unbiased and very accurate projections of future costs. Unfortunately, these cost estimates are often little more than fantasy, as I will explain below.

Don't get me wrong, I don't think that the CBO is necessarily politically biased or in the camp of one party over another. Instead, I think the faith placed in CBO estimates is misplaced because of the huge limitations they encounter when producing these cost estimates. Here are just a few examples of the limitations faced by the CBO in doing their job, which most Americans are not aware of:

Assumptions – As in any projection of future events, the CBO must make a number of assumptions when scoring a piece of legislation or projecting future budget deficits. While the analysis involved in any particular assumption might be sound, future events rarely conform to the initial assumptions, especially when projecting 10 years into the future.

As one example, when determining future budget deficits 10 years into the future, the CBO assumes that the Bush tax cuts will sunset (end) at the end of this year as scheduled, even though President Obama has proposed that they remain in place for most families. Should Obama extend these tax cuts for families earning under $250,000 per year, then the deficit projections by the CBO will be too low for the years after 2010.

Another well-documented assumption in regard to healthcare was the fact that the 10-year projection period included 10 years of taxes and fees but only six years of benefits. Obama attempted to fix this by having the CBO project out another 10 years, but if the 10-year numbers are questionable, the 20-year numbers amount to little more than fantasy.

Actually, Congress has employed the strategy of immediate revenue but delayed benefits many times in the past. This was the case when Social Security was enacted in 1935, so this is nothing new with the current administration.

Suspended Reality – CBO projections must also assume present law, not expected changes or even recurring congressional actions. One good example that came out during the healthcare debate was the so-called “doc fix.” In 1997, Congress voted to reduce Medicare reimbursements to physicians. However, these cuts have never been implemented because each year, Congress has passed a “doc fix” that prevents the cuts from becoming effective.

A bill has been introduced to make the “doc fix” permanent but until that happens, the CBO will have to assume that these 1997 cost savings will be effective in future budget years. The same goes for the annual Alternative Minimum Tax (AMT) fix, which is handled by annual patches rather than a permanent fix.

Another altered state of reality exists in relation to tax revenues from various sources. A good recent example is the additional tax on investment income for high-income taxpayers in the healthcare bill. As we have seen at various times in the past with the ill-fated “luxury taxes” that have been imposed, high earners have the flexibility to alter their activities and greatly reduce expected gains from additional taxes. Just Google “Laffer Curve” to see what I'm talking about.

Legislative Stability – Closely related to the above discussion about suspended reality, the CBO assumes that the provisions of any bill they are scoring will stay static over the entire time window being projected. In other words, when scoring out the Senate healthcare bill, the CBO had to assume that only the provisions of that law would apply, and that these provisions would stay constant over the next 10 years.

This is far from a realistic assumption as major legislation is often changed in later years. In fact, many people believe that the tax on high-end “Cadillac” healthcare plans will never be enacted due to its strong opposition by unions. If this part of the healthcare bill is changed, then the savings assumed to come from this tax will never occur, greatly affecting the actual long-term costs of the legislation.

Again, it has not been my intent to cast a cloud over the non-partisan nature of the CBO. Instead, I think it's important for all voters to know that the CBO is subject to a rather rigid set of rules when projecting deficits or scoring legislation. Since Congress knows these limitations and can tweak legislative proposals to take advantage of them, we shouldn't base our opinions about proposed laws based on the CBO cost estimates alone.

I don't know about you, but I have much less respect for CBO projections now than in the past, not because they provided political cover for passage of the healthcare bill, but because any analysis they perform is subject to restrictions that cannot help but affect their accuracy. In addition, politicians have become adept at crafting bills that take advantage of the inherent limitations governing CBO projections. As long as elected officials from either party can game the system, then no CBO projection will be reliable, no matter how non-partisan they may be.

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

It occurs to me that I have been warning about the precipitous rise in US debt for almost 30 years. Yet ever since the serious recession of 1981-1982, the US economy has surprised on the upside despite the continued rise in the national debt, and periodic recessions have been brief and relatively mild over this same period.

That is, until the subprime meltdown, the credit crisis and the severe recession of 2008-2009, which was the worst economic/financial debacle since the Great Depression. You would think that our leaders would have learned a thing or two from that gut-wrenching experience, and would be working hard to get our government on a firm financial footing.

But instead, President Bush ran the largest federal budget deficit in history (at that time) in his last year in office, a record $459 billion. President Obama saw fit to more than triple that amount with a massive $1.4 trillion deficit in 2009 and is on track to add more than $5 trillion to the national debt of $12.6 trillion in his first four years in office alone. His own projections show the national debt doubling by 2020. And keep in mind that several of his economic assumptions (such as no recessions in the next decade) are too optimistic.

Like sheep, we are marching in lockstep toward our financial and economic Armageddon. The larger our debt becomes, our options for a non-crisis solution diminish. As I warned last week, there will come a day when the foreigners who own over half of our national debt will decide that we no longer have the ability to make good on those debts. When that day comes, it's game-over for the US – and we may be much closer to it than we think, at least based on last week's Treasury debt auctions.

We had a very large response to my alarming E-Letter last week. Like the latest Fox News poll showing that almost 80% of Americans fear that another financial crisis may well lie ahead, many of you let me know that you indeed share my concerns about our nation's future. Seems I hit a nerve that is on the minds of millions of Americans.

By far the most common question I was asked was, “What do we do to protect ourselves and our assets?” I will be writing more about that in the weeks and months to come. In the meantime, you need to be thinking beyond Wall Street's conventional buy-and-hold mantra.

In closing, I very much appreciate your comments and suggestions – all of them – including the negative ones (with a few exceptions). Please remember that your comments make me think, so please keep them coming.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

The Hollow Economic Recovery
http://www.washingtontimes.com/news/2010/mar/30/hollow-recovery/

Social Security is Running Out of Money
http://www.realclearmarkets.com/articles/2010/03/30/social_security_is_running_out_of_money_98399.html

Why the Economy May Disappoint in 2010

Gary D. Halbert — Tue, 26 Jan 2010 21:38:00 GMT

IN THIS ISSUE:

4Q GDP to Rise - But by How Much?
Retail Sales - Worst Drop on Record in 2009
Uncertainty and the Slow Recovery
Political Implications & How to Move Forward
Conclusions: Expect the Economy to Disappoint
P.S. Pelosi & Reid Plot Secret Plan for ObamaCare

Introduction

All eyes will be on this Friday's Gross Domestic Product report for the 4Q of last year. Pre-report estimates suggest the 4Q GDP number will come in around 4.5% (annual rate), as compared to 2.2% in the 3Q. There are a number of widely-followed analysts that believe the 4Q GDP number could surprise on the upside in the 5-6% range, but that remains to be seen.

Yet even if the GDP number comes in at or above expectations on Friday, there are increasing fears that the economy will fall short of earlier forecasts for the first half of 2010. Reasons for such concerns vary but the December retail sales report sent shivers down the optimists' spines. As I will discus below, retail sales for all of 2009 fell by the largest percentage decline on record, following a disappointing performance in 2008.

With consumer spending accounting for apprx. 70% of GDP, many economists are downgrading their 2010 forecasts. Previous forecasts of 5-6% growth in the first half of 2010 are being scaled back to 2-3% in many cases, and even that could be optimistic. This is consistent with what I have been suggesting for the last several months.

An excellent article appeared in the Wall Street Journal earlier this month that sums up our economic and financial dilemma as well as any I have seen. It is co-authored by three University of Chicago economists. If you want to understand why we likely face a year of anemic economic growth in 2010 – as opposed to 5-6% growth that some analysts predicted late last year – I suggest you read this article very closely; it is reprinted later on in this E-Letter.

Finally, there is word that Nancy Pelosi and Harry Reid are plotting a backdoor way to pass the Senate healthcare reform plan, even though the Senate no longer has the 60 votes to override a filibuster. If this is true, it is disgusting! I have included a link to this story as a P.S. at the end of this E-Letter. If you think healthcare reform is now dead, you need to read this.

4Q GDP to Rise - But by How Much?

The Commerce Department reported late last year that 3Q GDP rose by 3.5%, but later revised that number down to only 2.2% (annual rate). Even with the downward revisions, most economists proclaimed that the positive growth in the 3Q of last year marked the end of the worst recession since the Great Depression.

Here are the quarterly GDP reports for 2008 and 2009 (through the 3Q) as reported by the Bureau of Economic Analysis within the Commerce Department:

2008	2009
1Q -0.7%	1Q -6.4%
2Q +1.5%	2Q -0.7%
3Q -2.7%	3Q +2.2%
4Q -5.4%	4Q ???

The Commerce Department noted that 3Q economic growth was fueled primarily by consumer spending, exports, private inventory rebuilding and federal government spending. Most analysts believe that these four areas of growth continued in the 4Q as well. However, as we will discuss later on, there are some reasons to question whether consumer spending continued to rebound in the 4Q – but I'm getting ahead of myself.

The government's first “advance” estimate of 4Q GDP will be released this Friday. As this is written, the pre-report consensus is for a rise of 4.5% in the 4Q. But some respected analysts believe that 4Q GDP likely rose by 5-6%, mainly due to inventory rebuilding. That remains to be seen. And don't forget that the “advance” GDP report this Friday, whatever it is, could be revised significantly lower (or higher) over the next couple of months, as was the case with the 3Q GDP report.

Retail Sales - Worst Drop on Record in 2009

Every year we hear conflicting reports during the holiday season as to how retail sales are going. Inevitably, some reports suggest that sales are running above expectations, while others indicate just the opposite. The real facts don't become clear until the following January when we get the official retail sales report for December.

The latest retail sales report for December was quite the negative surprise, marking the largest annual percentage decline on record. Retail sales fell in December as demand for autos, clothing, appliances, electronics, etc. all slipped more than expected to finish an already disappointing year.

The Commerce Department reported earlier this month that retail sales declined 0.3% in December compared with November. This was much weaker than the 0.5% rise that economists had been expecting. For all of 2009, retail sales fell 6.2%, the biggest decline on record, and it comes on the heels of a modest decline in 2008.

While a record decline in retail sales last year is bad enough, we must put it in a broader perspective. Retail sales typically increase every year, even during recessions, if only modestly. In fact, retail sales have risen every year since such records have been kept with the exception of 2008 when annual sales fell a modest 0.5%, and then fell again in 2009 as noted above.

The 0.3 percent decline in December was the first setback since September when sales fell 2%. Sales posted strong gains of 1.2% in October and 1.8% in November, raising hopes that the consumer is starting to mount a comeback. Yet for the year, retail sales fell by the largest amount since records have been kept.

The December drop in sales was a surprise given that the country's largest retailers reported better-than-expected sales during the last week before Christmas. But even with the late rebound reported by the nation's biggest chains, these retailers suffered their worst annual decline ever.

The weakness over the year reflected the battering that consumers have taken from the worst recession since the Great Depression, a downturn that has cost over 7 million jobs and left households trying to rebuild savings depleted by losses on Wall Street and a crash in housing prices.

Economists are worried about consumer spending in the months ahead given their forecasts that unemployment, currently at 10%, will keep rising until perhaps midyear. The growing worry is that GDP will slow significantly in at least the first half of 2010 unless consumers continue to spend at 3Q and 4Q levels, which is looking increasingly doubtful.

The trends in personal consumption spending are considered critical to any sustained economic revival, since consumer spending accounts for apprx. 70% of total economic activity (GDP). This explains why many forecasters are downgrading their predictions for 2010.

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 Struggling Economy – Putting It All in Perspective

A big part of my job as a writer has always been to try and make complicated matters understandable for my clients and readers. I was advised many years ago to try and keep things simple, and that advice has served me well.

But occasionally I run across articles and research papers that do a much better job than I when it comes to handicapping our economic and financial situation and putting it all in perspective. Such is the case with the article below, which was published earlier this month in the Wall Street Journal by three noted University of Chicago economists.

If you want to truly understand the economic and financial pickle we are in, I suggest you read this article carefully.

QUOTE:

Uncertainty and the Slow Recovery
A recession is a terrible time to make major changes in the economic rules of the game.

by Gary S. Becker, Steven J. Davis and Kevin M. Murphy

In terms of U.S. output contractions, the so-called Great Recession was not much more severe than the recessions in 1973-75 and 1981-82. Yet recovery from the latest recession has started out much more slowly. For example, real GDP expanded by 7.7% in 1983 after unemployment peaked at 10.8% in December 1982, whereas GDP grew at an unimpressive annual rate of 2.2% in the third quarter of 2009. Although the fourth quarter is likely to show better numbers—probably much better—there are no signs of an explosive take off from the recession.

We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government. The confidence of bankers and venture capitalists has been shattered, at least for a while, and it will take time for them to recover from the financial turmoil of the past couple of years. The household sector also faces a difficult period of financial retrenchment in the wake of a major collapse in home prices, overextended debt positions for many, and high unemployment.

The second factor is less obvious, but possibly also of great importance. Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations—changes that could radically transform the American economy.

The efforts to transform the economy began with a fiscal stimulus package of nearly $800 billion. While some elements served the package's stated purpose and helped to soften the recession's impact, the overall package was not well designed to foster a speedy recovery or set the stage for long-term growth. Instead, the “stimulus” was oriented to sectors that liberal Democrats believe are deserving of much greater federal help. This explains why much of the stimulus money is going toward education, health, energy conservation, and other activities that would do little to soak up unemployed resources and stimulate the economy.

In terms of discouraging a rapid recovery, other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes. In addition, discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.

Congressional “reforms” of the American health delivery system have gone through dozens of versions. The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest, expand and hire harms households as well, because it slows the creation of new jobs and the growth of labor incomes.

The administration also indicated early on that it would take a different approach to antitrust policy, reversing a 30-year trend toward more consumer-based interpretations of antitrust laws. Likewise, the installation of a pay “czar” in Washington is scary, even though his activities are so far confined to companies that received substantial bailout assistance from the Treasury. Perhaps as a next step, Congress will decide that executive pay is too high generally and levy special taxes on bonuses, or impose other controls over executive compensation—as the British and French have done. Congress is also considering major new regulations on consumer financial products.

In its efforts to combat the financial crisis and recession, the Fed created over $1 trillion of excess reserves at banks through various bailout programs and open market operations. When banks draw on these reserves for loans to businesses and households, there is a potential for the money supply to grow rapidly, possibly producing a substantial inflation. How hard the Fed will fight inflationary pressures through open market sales and other actions that raise interest rates is a significant source of uncertainty about future inflation and about the potential for monetary policy tightening to choke off the recovery.

The uncertainty about monetary policy has important political dimensions as well. The Fed now faces greater political pressures than at any other time in the past quarter century, as seen from the grilling the Senate Banking committee gave to Fed Chairman Ben Bernanke in deciding whether to approve his reappointment. These pressures may intensify greatly if, and when, future Fed actions to restrain inflation conflict with politicians' desires to prop up housing and the major government enterprises enmeshed in housing finance.

Even though some of the proposed antibusiness policies might never be implemented, they generate considerable uncertainty for businesses and households. Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending—despite their huge excess reserves—reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases. [Emphasis added, GDH.]

Several pieces of evidence point to extreme caution by businesses and households. A regular survey by the National Federation of Independent Businesses (NFIB) shows that recent capital expenditures and near-term plans for new capital investments remain stuck at 35-year lows. The same survey reveals that only 7% of small businesses see the next few months as a good time to expand. Only 8% of small businesses report job openings, as compared to 14%-24% in 2008, depending on month, and 19%-26% in 2007.

The weak economy is far and away the most prevalent reason given for why the next few months is “not a good time” to expand, but “political climate” is the next most frequently cited reason, well ahead of borrowing costs and financing availability. The authors of the NFIB December 2009 report on Small Business Economic Trends state: “the other major concern is the level of uncertainty being created by government, the usually [sic] source of uncertainty for the economy. The ‘turbulence' created when Congress is in session is often debilitating, this year being one of the worst. . . . There is not much to look forward to here.”

Government statistics tell a similar story. Business investment in the third quarter of 2009 is down 20% from the low levels a year earlier. Job openings are at the lowest level since the government began measuring the concept in 2000. The pace of new job creation by expanding businesses is slower than at any time in the past two decades and, though older data are not as reliable, likely slower than at any time in the past half-century. While layoffs and new claims for unemployment benefits have declined in recent months, job prospects for unemployed workers have continued to deteriorate. The exit rate from unemployment is lower now than any time on record, dating back to 1967.

According to the Michigan Survey of Consumers, 37% of households plan to postpone purchases because of uncertainty about jobs and income, a figure that has not budged since the second quarter of 2009, and one that remains higher than any previous year back to 1960.

These facts suggest that it was a serious economic mistake to press for a hasty, major transformation of the U.S. economy on the heels of the worst financial crisis in decades. A more effective approach would have been to concentrate first on fighting the recession and laying solid foundations for growth.

They should have put plans to re-engineer the economy on the backburner, and kept them there until the economy emerged fully from the recession and returned to robust growth. By failing to adopt a measured approach to economic policy, Congress and the president may be slowing the economic recovery, and thereby prolonging the distress from the recession. [Emphasis added, GDH.]

END QUOTE

Political Implications & How to Move Forward

You may or may not agree with the analysis and conclusions offered by the three economists above. Obviously, I think they hit the nail squarely on the head, or I would not have reprinted the article. But whether you agree or disagree, one thing is very clear:

President Obama and his administration made a conscious decision to pursue the most aggressive and politically charged elements of their agenda – healthcare reform, cap-and-trade and card check (pro-unions) – in the first year of his presidency. And they decided to enact the $787 billion stimulus package in ways that did not create a lot of near-term job growth.

We can argue about why this was the path they chose, but one reason has to be that they knew these policies would be unpopular, and thus they needed to pass them as quickly as possible before the president's enormous popularity faded (as it always does).

Now that Obama's key initiatives (namely healthcare and cap-and-trade) have failed to pass, at least for now, and now that the Democrats have lost their filibuster-proof 60-vote super majority in the Senate, it remains to be seen how the president will move forward. I would not even venture a guess at this point.

Obama's senior adviser, David Axelrod, said last week that the president intends to move full-speed-ahead with his agenda, despite what happened last week in Massachusetts. But that remains to be seen, and in my opinion, is quite doubtful. Without admitting as much, I expect President Obama will quietly move to the center, as so many presidents have done before him.

Of course, there are others who believe what Axelrod said last week – that the president will continue to press ahead with his controversial agenda, precisely with the goal of labeling the Republicans as “obstructionists” going into the November mid-term elections. Whatever the president decides, it will be very interesting to watch it all unfold.

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: Expect the Economy to Disappoint

Whichever political path the president decides to take just ahead, the US economy is likely to disappoint in at least the first half of this year. As noted above, many economists are now scaling back their estimates for growth in the first half of this year.

Consumer spending is not likely to rebound to pre-recession levels anytime soon. As a result, we may be lucky to see GDP growth of 2-3% for the first half of this year, with much of that the result of debt-financed government spending.

Oddly, I am seeing few, if any, suggestions for what growth may be in the second half of this year. That is partly because no one knows when the employment trend is going to pick up. As a result, consumers remain pessimistic and this mood could persist even in the second half of the year. The same may be true for businesses and plans for new capital spending later this year.

All of this does not bode well for a continued rise in the stock markets, which rose meteorically in 2009 after the March lows. The S&P 500 Index (see chart below) is approaching major overhead resistance at 1200 and above. With economic forecasts being revised lower, we could see stocks come under pressure just ahead, or simply move into a broad trading range. In my view, the easy money in stocks is behind us.

Given all the uncertainties and challenges facing us, I would suggest that this is a good time to consider some of the “actively managed” investment programs I recommend (and where I have most of my own money). Most importantly, these professionally managed programs include the flexibility to move to the safety of cash (money market) or hedge long positions should the market trends turn lower once again.

The primary objective of these actively managed programs is to minimize losses during down periods in the stock markets, while also participating in market gains during upward trending periods. The equity programs I recommend fared much better in 2008 than the S&P 500 Index, and some even made money in the bear market. (Past results are no guarantee of future results.)

For investors who held onto their equity positions through the nasty 2008 bear market, the stock market recovery last year served to improve their portfolios; however, buy-and-hold investors are nowhere near where they were at the peak of the bull market in late 2007.

If you'd like to learn more about the professionally managed investment programs I recommend, please feel free to give one of our Halbert Wealth Management Investment Consultants a call at 800-348-3601. You can also send us an e-mail at info@halbertwealth.com, or obtain more information on our HWM website at www.halbertwealth.com. We look forward to hearing from you.

Wishing you profits,

Gary D. Halbert

P.S. Healthcare reform is now dead, right? With the latest election of Republican Scott Brown to the US Senate in Massachusetts, most political pundits have concluded that healthcare reform is dead, at least for now. However, Dick Morris, political commentator (and former senior adviser to President Bill Clinton), says that Nancy Pelosi and Harry Reid are quietly crafting a plan to ram through the Senate healthcare plan, despite widespread public disapproval. Whether you like or loathe Dick Morris, you may want to read his latest warning on healthcare reform moving secretly ahead, despite the loss of the 60-vote super majority in the Senate. Here's the link:

Pelosi & Reid Plot Secret Plan for ObamaCare
http://www.dickmorris.com/blog/2010/01/25/pelosi-and-reid-plot-secret-plan-for-obamacare/

SPECIAL ARTICLES

The Economy: Smooth Sailing Now, Icebergs Ahead
http://articles.moneycentral.msn.com/Investing/JubaksJournal/smooth-sailing-now-icebergs-ahead.aspx?page=1

Banks didn't cause the housing/credit crisis, government did.
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=518758

Investors Face Three Market Dangers
http://www.nytimes.com/2010/01/24/business/24fund.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

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

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/