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Wednesday, June 5, 2013

Notes from the USA – a guest post

Three successive rounds of QE (Quantitative Easing) programmes has pulled the US out of a recession and on the road to economic recovery. Or, has it? While a recession has been prevented and the value of the US Dollar is reigning supreme again, the state of the economy leaves a lot to be desired.

Those who were laid off and failed to get re-employed are simply leaving the job market, or doing part-time work at lower pay. College graduates are not finding jobs. Education loans are remaining unpaid. People are paying down debt. Durable goods are finding few buyers. Without job growth, there can be no spending growth and no economic recovery.

In this month’s guest post, KKP gives a ‘ground zero’ view of the state of the US economy, and discusses the consequences of tapering down of the current QE programme.

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Good Comes After Bad and Bad Comes After Good Comes

We have been talking about the ‘money pumping’ that the US Fed has been doing for a few years now, to ‘stop the global economy from entering into recession’. Of course, money printing (buying bonds, actually) that has created a level of debt unprecedented by any economy, in any prior times is something that has been supported by politicians and government economists. Who can stop them? No one.

We all know what happens when there is TOO MUCH float in the hands of businesses and consumers. Inflation. Too much money chasing too few goods, right? Well, the Fed now realizes that the housing market is starting to turn a bit, although most of the housing turn is money that cannot sit at 0.01% annual interest, and that is pouring into Real Estate, showing the artificial demand for ‘housing’. What is not associated with it is the reduction in Foreclosures, Short Sales and also First Time Home Buyers. Most of the housing demand is ‘upgrading’ (if it is not ‘investors’ like me).

Let’s look at jobs growth…..Unemployment is coming down, but when the government stops counting the people who are NOT paid unemployment benefits, then you are counting less people entering unemployment, and you are dropping a large number of unemployed at the back end of the pipeline (ones who have run out of their 27 or 52 weeks of unemployment benefits). Bottom line, it is showing that unemployment levels have improved from 9.5%+ to just under 7.5% recently. In reality, the Federal Reserve Act calls for 'maximum employment', not 'minimum unemployment' which is a more popular phenomenon.

The quarterly GDP is coming out with decent numbers, but the subsequent revisions are always down. True inflation is much higher, but the numbers (like India) are being reported with some skew in it, showing 3% to 4%. If that is the case, and if I am even partly right about everything above, then why “stop the QE program”? See announcement below:

“Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy an effort to preserve flexibility and manage highly unpredictable market expectations.

As I said, all of this is Fed’s business with very little that we can do/influence. We just have to be proactive to their moves, since some people are calling this a bubble itself, built on a ‘house of cards’ that will not need much of a ‘phook’ (whiff of air) to crumble down quickly. Markets come down 3 times faster than they go up! Remember that adage.

As and when this happens, we will feel like being driven off the cliff, with the government driving, and of course, we are in a car without a parachute.

All of this started to show that ‘US is not going to run out of money in its massive $14T economy’. The economy has not improved from the $14T number at all, so what does Obama and Bernanke have to show with the additional $4T (to a debatable $6.5T) debt that we have amassed already.

The current buying of $45 billion a month of Treasuries is to fund the government and throw liquidity at the banks to flow to the consumers. If it did not do this, of course, rates would rise and therefore, we would owe more money through debt payments, and naturally, we would have to cut our spending (government, military, other programs etc). And of course, cutting back might also starve some of the credit programs through Fannie Mae and Freddie Mac (lenders for people to buy houses). Not happening. Therefore, it will be a slow cutback of the $45B and not a sudden shutdown.

A lot of this money is showing up as ‘excess credit’ at cheap lending rates through businesses and investors, pouring money into ‘investable real estate’ and ‘investable funds in stock market’. As a result, the real estate indices are going up, and stock market indices…..well you know (going to New Highs). Consumers are feeling good, and saying that Fed has averted the ‘bad times’ and we are ‘off to the races’. Barrons, Times, Forbes, Wall Street Journal etc are all printing this positive news and smaller investors (retail) have been calling me again to find out what to invest in. Gold going down simultaneously is also part of the same move, squeezing the ‘inflation believers’ out of commodities, by putting funds into equity investments.

In reality, with this news coming out, the markets got affected a bit, but it seems we are stabilizing. Fed wins again in its move. If the support of the parent is moving away, will the child fall down again? We are in for a wild volatile ride, and Asian markets will ride up and down with this.

Keep your eyes open, and let your fingers itch to get out of the non-long-term positions……Protecting capital is a key to success.

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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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