Wednesday, May 30, 2012

Notes from the USA (May 2012) - a guest post

The UK and several Eurozone countries are in recession (defined as two straight quarters of negative GDP growth). The US economy has averted a recession but growth remains sluggish. The strong performance of the stock market may have lulled some people into believing that all was going to be well soon, and prosperity of the good old days was around the corner.

Not quite yet, suggests KKP in this month’s guest post. In a report from ‘ground zero’, he explains that a lot of work needs to be done by the government before the US can return to its earlier level of prosperity.

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Looking Forward to Prosperity?

Everyone knows that America means an entrepreneurial, positive-thinking, and future-oriented society. E-governance models have been developed, schools/universities are cranking out real creative talents and geniuses, and enterprises are thinking outside the box to develop solutions that were unthinkable only a few years ago. iPad3 is a perfect ‘poster child’ of this, coming completely from left-field and destroying the best-laid plans of Microsoft, Sony, Blackberry and IBM.

But, it is a sad fact that politics/politicians have not come to grips with the question of on-going national decline. Governing elites have long debated America’s power in the world (still intact today), and whether it’s eroding at the edges or from inside-out is definitely debatable. But most important politicians and pundits have much less to say other than keeping on printing money and expect that the solution lies therein. Despite the bitter public arguments over tax and budget policies, Americans who have their pulse to the ground, share the implicit assumption that even harder times are ahead for the majority of Americans, whether that means 99% or at least 75% is yet to unfold. Even with these facts out in the open, politicians are presenting this as a temporary set-back or inconvenience, with steps being taken to rebalance government’s books and a return to pre-crash prosperity in the near term. Well, near term has now become over four years, with very erratic signs of improvements, and definitely not commonly heard or talked about in the professional community (i.e. educated circles).

The evidence in front of our eyes is that on our current economic trajectory, the American middle class is staring at a further fall in its living standards. This will not bode well for the economy, since these are the people that control/affect the majority of the GDP.

The conventional chatter from the nation’s pundits declares Washington as “dysfunctional” and the bloggers continue to have a field day on the moves that are being made by these buffoons. Yet, the point of view of politicians and some economists (on the side of the government) is that Washington is actually functioning quite well as seen in the unemployment numbers, and also the latest GDP performance. Clearly, it is torn between reality and perception of reality (through complex charts). As I have said before in this blog, if you are working, it is clearly a recession, and if you cannot find a job (as a professional), then this is a long and deep recession (aka depression). The only change I will make to the above in this May 2012 article is “if you are working, it is clearly a recession with an unbelievable amount of inflation affecting take home pay, and if you cannot find a job (as a professional), then this is a long and deep recession (aka depression) that is depleting retirement savings really fast.

We had three decades of policies that undermined the country’s global competitiveness and the bargaining position of its workers, as portrayed by the simultaneous growth in the BRIC and Latin American economies. US economy can no longer provide the means to support its three most politically important American dreams:

  1. Wall Street’s dream of subsidized limitless profits;
  2. the military-industrial complex’s dream of global supremacy; and
  3. middle class dream of rising incomes

One out of three? Certainly plausible. Two out of three? Perhaps likely. All three? Absolutely NO WAY.

The middle class is bearing, and will continue to bear, the brunt with lower paying jobs, sending people back to India/China/Mexico (happening in a big way for Mexico), or just forcing retirement on many who are not even ready to retire (reality), or just riding the wave of government support through ‘welfare and unemployment’ (government programs are at the highest levels in its history of 50+ years). A lot of two income earning families are now one income earners, and surviving. But if these parents have to pay for the college education (rising at 12% per year - non-stop for 20+ years) of their children, then they will be depleting their retirement savings (or taking on debt), and live a poorer life than planned during retirement. Bottom line is that there is pain written all over the middle-income group, which unfortunately includes a very large percentage of the baby boom generation (people born between 1946 and 1964). This pain will also be inflicted on the emerging economies, with many more tidal waves to hit those shores over the coming decade or two, until the developed nations (including Europe) come to grips with GDP, Debt, Jobs, Inflation and Net-Organic-Growth.

Rebuilding economic foundations is no easy task. Neither is it beyond our technical capability. At a recent party at our American neighbours, their views along with those of many of my Indian friends, were that the future is a bit more complex but, in the end, hopeful. People are worried about their jobs and income, and majority think that the next generation will be worse off than ours. Yet these people (as do the polls) show that they have faith that they, personally, and their kids will be OK, which reinforces the optimism that this government will wake up and do the right things for the future (an example is the program of re-shoring jobs). Personally, I am hopeful, but not so sure, and stick out like a sore-thumb at a lot of these gatherings. Hence taking many steps to do the right things for my portfolio, my family/kids and also analyzing/re-analyzing the heck out of macro-trends, and trying to capitalize on the curve-balls that will be thrown in the way of this ‘seemingly prosperous times’. We are definitely in for many surprises, and even more than the past, coming up in the next 1-2-3 years. Let’s plan to cope with those as best as we can….

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

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