Notes from the USA – a guest post

President Obama’s re-election race, which was widely expected to be a closely fought one, ended up being a no-contest. May be hurricane ‘Sandy’, and the President’s response to it, helped his cause. May be the electronic media overhyped the closeness of the race to gather more eyeballs. Whatever may be the reason, the uncertainty of who will be the next President is over.

Stock markets in US and Europe were expected to celebrate the re-election because of the ‘known Devil’ syndrome. Instead they have fallen into a deep funk. Why? It is partly due to the ‘sell-on-news’ strategy adopted by traders. But also because of the impending US ‘Fiscal Cliff’.

Not sure what the US ‘Fiscal Cliff’ is? KKP’s guest post explains the importance of the ‘Fiscal Cliff’, and why all investors should remain cautious till that enormous cliff is negotiated.

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Is Humpty Ready to Roll Down from the Enormous US ‘Fiscal Cliff’?

Christmas lights are on, and Christmas carols are being played in stores……the mood is very festive and people are in a shopping mood thinking about the gifts they want to buy for their loved ones, extended family and friends. While all of this is going on in the minds of the consumer, the Congress and Senate have four weeks until Christmas and their leaders and the president are expecting a deal to be sealed before then. Optimists are shooting for a framework which sets future debt-reduction targets, with detailed tax and spending changes to be approved next year but possibly some initial savings enacted immediately. Absent action by lawmakers and President Barack Obama, roughly $600 billion in tax increases and spending cuts will start to hit households and companies in early January.

The United States is on course to slash its budget deficit nearly in half next year. Closing the gap that quickly is precisely what the Washingtonians refer to as going over a ‘fiscal cliff’. Dropping the deficits is good news on the other side of the cliff, but will guarantee triggering a recession which is where we would see the world economies (humpty) being pushed down the hill from the cliff!!!!! The sign is as clear as the one below, but what is being done about it today? Politicians who are already well-off themselves, and have a job and pension for life, are just talking about it…

Obama and top lawmakers are working hard to push Congress and Senate to produce an agreement that takes a serious bite out of the government's growing $16 trillion pile of debt and puts it on a true downward trajectory. Although like previous times, they might not reach any conclusions initially. If so, it might just get us to an accord heading off massive tax increases and spending cuts that begin to bite in January - that's the massive ‘fiscal cliff’ that everyone is talking/worried about. It is a series of cuts designed in the Bush era (prior to Obama’s election) that happens to have an ending date of Dec 31^st, 2012. Unless re-enacted, these cuts expire and take a big bite from consumers and businesses. But at the same time, a huge amount of revenue is added to the budget if the Bush tax cuts expire. That would reduce the deficit significantly. The same goes for the cuts in domestic spending, including defense, that are part of the ‘fiscal cliff’. Those cuts would also substantially trim projected deficits for years to come, and this is what some of the politicians are drooling about!

“The U.S. fiscal cliff is deeper than advertised,” said PIMCO’s Gross, whose firm oversees $1.9 trillion, in a tweet. “It’s a Grand Canyon. Washington will defer entitlement cuts and raise revenues only marginally.”

O’Neill, chairman of Goldman Sachs Asset Management, warned clients in a note that market momentum was quickly turning down on fears of policy gridlock, unless something is done quickly. “The world and the U.S.’s own people need Washington, D.C. to be sensible,” wrote O’Neill. “We had a rehearsal of life without a fiscal package in August 2011, and it wasn’t very pleasant.”

• Treasury Doesn’t Collect More Taxes — Should we cross the fiscal cliff, income tax rates that were initially lowered by George W. Bush would reset to levels not seen since 2001. A family with a household income of $72,000 would owe a top marginal rate of 28 percent instead of the current 15 percent. Most Americans pay their taxes by having a pre-determined sum withheld from their paychecks, and with a no-decision or delayed decision, employees will have to change their withholding and get smaller paychecks. Now, everyone knows what happens with smaller paychecks.
• Spend Now, Cut Later — Congress approves agency budgets, but the White House often decides how to “apportion” money over the course of the year. Budget office does not have to instantly demand that agencies meet the combined $109 billion worth of cuts to Defense and domestic programs next year. Obama could fund some agencies at their current levels, while planning for later cuts that—if a deal is reached—might never be needed.

In short, there is a lot at stake with this ‘Fiscal Cliff’ that we have been talking/hearing about for the last 4-12 months. According to Mohamed El-Erian, CEO of the world’s largest bond fund, PIMCO, (who I respect a lot including his boss Bill Gross and listen to everything both of them have to say):

"We would contract our GDP by 1 to 2 percent. Our unemployment rate -- stuck at 7.9 percent -- would go up to at least 9 percent. Our long-term unemployed, currently 41 percent of the unemployed, would be unemployed for even longer resulting in greater atrophy. Our youth unemployment, we have 24 percent of 16-19 year olds out of jobs, would go up. And at that age, if you are unemployed for a while, you become unemployable -- meaning a lost generation.”

So, I agree that it is not a risk that US based Washington politicians should be taking very lightly and trying to make decision under duress and in ‘overtime mode’ (past deadlines). All of the past issues of raising debt limits, increase in the pool of credit for banks ($700Bn), and the $40Bn per month Quantitative Easing (#3) are all perfect examples of quick, broad-brushed decisions. We have a debt problem that is so huge that it is not something that can and should be solved with such blunt instruments that have a broad and indiscriminate effect on a variety of economic fronts (without specific targets).

Mohamed El-Erian’s recommendation is that we need to have serious adults craft a serious and balanced plan for the next decade that will give markets confidence that we can bring our debt under control -- and that will give Americans confidence that we're doing so in a fair way.

Solutions to such long term problems that will impact every American -- and people all over the world -- should not be crafted in a matter of hours or days. Politicians in Washington need to think about the big picture, and not solve our long-term debt problem like a student cramming for an exam he/she is not prepared for. This will get you past the current course and exam to be called a literate, but are you educated to make a career out of your learning?

You decide how to invest based on this short and long term issue that US and EU governments ponder upon every 2-3 months. Caution is the word since all of our investing today comes with a huge amount of volatility that is unknown from one day or week to another. Invest wisely, carefully and for the long haul. Trust nothing and be ready for a new tomorrow, everyday.

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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.

Notes from the USA – a guest post

For the past 4 months, FIIs have been net buyers in the Indian stock market while DIIs have remained net sellers. QE1 by the US Fed had released a flood of liquidity in global markets that led to a strong bull rally from early 2009 to end 2010.

QE2 had less of an impact on the Indian stock market, but helped the US market to scale new highs. Now QE3 has finally come along, and perhaps in anticipation, FIIs have been in a party mood. Despite all the liquidity flow, the underlying economies in US and Europe have remained weak while China and India are in the midst of slowdowns.

In this month’s guest post, KKP explains some of the new financial terminologies and the ‘fiscal cliff’ that the US will be confronting soon. He also suggests a course of action for small investors. 

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QE3 and Fiscal Cliff – New Vocabulary for our World!

We learned a lot of new words from Greenspan, and in recent years, we have started to hear about Quantitative Easing…LSAP…LTRO from Fed and Central Banks. What does all this mean to us as small investors in the US and India?

Well, LSAPs are Large Scale Asset Purchases that the US Government started in 2008 to create a balance under special circumstances. EU’s version of the same is called LTROs, which are Long Term Financing Options. Both of these flavors are nothing but a method of pumping fiat money into the economy at the discretion of the Fed/Central Bank to create a balance where they determine the situation/environment has created an imbalance. Of course, it is done with a controlled private risk.

The unusual situation is that in the last 50+ years, the primary tool of monetary policy has been the Federal Funds rate. During the recent crisis, however, the Federal Reserve unveiled a variety of new policy measures never used before. What forced its hand initially was the disruption of credit markets in the wake of the deterioration of the subprime mortgage market, which began in August of 2007. By February of 2009, however, a second factor came into play i.e. the Funds rate effectively reached its lower bound (zero), implying that despite the severity of the recession, the conventional option of reducing the Funds rate was no longer available as the common Fed weapon. Fed kept giving solace to the markets that the future path is zero rates for Fed Funds, but had to come up with these special measures to combat and stimulate the economy.

Shortly after the meltdown that followed the Lehman failure in September 2008, Fed initiated QE1, which was purchase of a variety of high grade securities, including agency mortgage backed securities (AMBS), agency debt, and long term government bonds, with AMBS ultimately accounting for the bulk of the purchases. It also set up a commercial paper lending facility, which involved the purchase of commercial paper since the Fed accepted these instruments as collateral for loans made to the facility. In October 2010, the Fed announced a second wave of asset purchases (QE2), this time restricted to long term government bonds that was smaller in scale than QE1.

Finally, in September 2012, the Fed embarked on QE3, specifically targeting mortgage bonds in particular, on the grounds that lower mortgage-bond yields will feed through into lower mortgage rates, which in turn will feed through into healthier housing prices, igniting jobs. In short, the Fed is not trying to kick-start the economy any more: instead, it’s promising a steady extra flow of monetary fuel for the foreseeable future — or at least until the labor market improves “substantially”, which is likely to be a pretty long time. I kid you not, this is a large deal by itself since they have all but promised a zero interest rate environment until mid-2015 with a $40B per month funding out of QE3.

In short, the Fed has already pumped a lot of money into the economy, has already put interest rates at subterranean levels at this point and if those interest rates aren't low enough now to get people to borrow money, it's not totally clear to anyone that it is guaranteed to have the desired huge effect going forward. Ben Bernanke is making a fairly simple bet that a stable stock market is going to be better for the economy than a collapsing stock market, and lower mortgage rates are going to be better than higher mortgage rates at this point. And he's hoping that all of this will boost confidence and give people more money to spend, which in the end can boost job creation.

There's some evidence to support both of those points, but he also seems to realize that this isn't going to really solve all problems. In his commentary carried live on CNBC and Bloomberg, he was very clearly pointing out that Fed can't fix our underlying problems with any guarantee, but will be fully supportive in doing whatever it needs to do. Central Banks in EU are pretty much convinced of making similar moves, and getting similar results. For now, EU is getting support from the investment community, in a similar manner to that in the US.

In the short term, I am expecting to see higher stock markets in EU and the US – probably till November (US elections). I will then look for signs in the economy that will show deterioration in the under-current of the economy (tax dole-outs/receipts, housing, manufacturing, welfare programs, import/export, retail sales, big-ticket-items, leading-indicators, unemployment, corporate revenue/earnings, and of course the insider trades). The biggest of all will be the “Fiscal cliff” - which is the popular shorthand term used to describe the conundrum that the US government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

These laws have to do with the 2001-03 tax-cuts, taxes related to Obama Health Care, 1000+ government program cuts and other elements. We’ll definitely get events from Central Banks in EU as well as the Fed that will shake the perception of the investment community. If all of that is not enough, remember that the first year of a new president is always a down year, since there are no promises of the ‘better world’ (mostly given during the election year). So, between now and November, going long might be OK, but get ready for going to cash or short after that in most global markets.

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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.

Notes from the USA (Mar 2011) – a guest post

The Indian markets are on a tear once again, as the FIIs have renewed their buying after a few months of profit booking. What caused the turnaround? Is it the realisation that the US and European economies are growing a lot slower than expected earlier?

In this month’s guest post, KKP takes a look at the US housing market, and points out that while there are signs of improvement, it may take quite a while before normalcy returns. KKP is a very busy person, wearing multiple hats. Yet he still finds time to write these monthly posts to enlighten this blog’s readers about the real state of the US economy.

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Current State of the Economy and the Housing Market

Guys, as I have been writing about the state of the US economy, there are many things that surprise me and others that just go ho-hum as expected. For example, the housing data for the fourth quarter of 2010 as released in Feb 2011 indicate that the recovery in the housing market continues to remain fragile. In the production sector, single-family housing permits increased and new housing starts remained steady, although completions fell. Multifamily housing permits (i.e. apartment buildings), starts, and completions all fell, although permits and completions were down only slightly.

This really means that overall, the existing resale of real estate as well as new constructions were down in the 4^th quarter. As a result, inventories of available homes at the current sales rate decreased in the fourth quarter of 2010, reaching an average rate of 8.0 months’ supply of new homes and 9.4 months’ supply of existing homes, down from rates of 8.5 and 11.7 months’ supply, respectively, in the previous quarter. This seems like contradictory data, but it is really still a soft market. Here is a graphical representation from the CSI for Chicago:

As we started March 2011, I continued the zeal to own more real estate, and my searches have led to too much competition from other buyers like me who are snapping up ‘deals’. When I say ‘deals’, this means housing that is at the low end of the market for any sub-division or area. This means that ‘bargain hunters’ like me are tracking these houses and apartment building and bidding on those. When a home comes on the market, within a week or so there are multiple buyers, who then go into Best and Final Offers, and then the highest price wins. The above is not in the ‘auction market’. In the auction market higher prices are bound to happen since the auctioneer creates this type of a competitive environment, collects all the buyers, and sets a time-line of when someone can bid on homes. I have used ‘auctions’ to my advantage to put a competitive bid on the table for a home being sold by a broker versus an auction bid in progress for a home on the same street.

Home pricing across the US is still soft, as depicted by the two graphs below. It will take some time for the tide to rise again, although all of it depends on how the overall economy performs, and how job growth fares.

My most recent home purchase was a contract that we finalized on Dec 21^st, 2010, that finally came to a conclusion this week (March’2011)…..3 months to come to a conclusion is normal these days, and this one was purchased in a bid, although not an auction. It takes a lot of courage to put hard earned money to work, but when we get a deal for 29.723 cents to the dollar, it was hard to refuse for a 4 bedroom, 2 bathroom, 2 kitchen, and 1 car garage property (basically 2 flats in one building). You might ask, why do you think it was being given away? Because these are homes where the owner cannot pay the mortgage for more than 1 year, and it was time for the Bank to own it and then the Sheriff to come and get the home evacuated. We will do some fixing up to make it pretty and upgrade a few things and rent it out. That is a successful model with a high ROI (Return on Investment) on the investment from the rents. ROIs in property investments of this kind range from 12% to 26% on the investment today, without accounting for any capital gains on the property when we eventually sell it.

Mortgage rates are slowly coming down due to soft demand, but we are still looking at 5½% to 6% borrowing rate on any home loans with people who have a decent job. If one does not have a decent job, or no job at all, it is impossible to get a mortgage from a bank, which means that their intent to buy the house is only a dream. Too many people fall into the latter category, which is why the rental market is really hot relative to buying.

Hostels/Dormitories where kids have to live while they are in college are also raising their prices simply due to demand at Universities, but also because, rents are going up. Well, an alternative that a parent has to getting a kid into a hostel is to buy a condo/apartment/flat near the university and allow their kids to stay in it. This is my plan for my kids, although it takes time to pull off a strategy of this kind. Many parents are trying based on my research and findings. This again must be due to the fact that condos have gotten cheaper and dormitory fees have gotten higher ($11,000 per year per child for 8 months of University studies which consists of 2 semesters).

Jobs on the other hand are very selective and almost a privilege to have, and hence everyone is working their tail off to keep their job, and advance in their career. Corporations are optimizing their resources heavily while putting a ton of automation into their business processes to eliminate heads. This steady reduction in work-force and the doldrums in the economy are going to continue to put a lid on real estate market (ownership), whereas it is going to keep the rental market alive and well for 2 to 5 years (minimum). I do see the real estate market starting to turn in 2-5 years (by 2015) assuming that we do not get any effects like Japan in the US, or economies like Japan does not affect the overall US economy or US dollar.

Technologies that make the US economy more efficient are being implemented by corporations with video conferencing, Voice over IP, variety of portals, automated scripting, cloud computing, Web 2.0, alternative energy, Pads of all kinds, mobile platform (along with automation) etc making our world simpler/faster/better. This is bringing some stability to the people who are part of the leading edge technologies (sales, implementations and operations). Service industries that serve the running of the economy are also surviving, but if the business model is weak, then those are getting weaker day by day, and the weaker ones are tumbling. This is keeping the unemployment at the published 9-10% levels, although who knows what the real number is below the surface.

We shall see what 2011-12 brings with it…..Once again, if one has a good job and is keeping up with the changes, then this economy is soft or in recession. If one is not keeping up with the technological changes, then this is a recessionary environment for them, but if one has lost their job, it definitely feels like a depression.

In the meantime, enjoy the super-bull-market of India – everything has a cycle, so just as the pundits say, things do not grow to the sky, and everything that goes up has to come down. So, capitalize while you can, since everything does not stay green all the time!!!!!! Please put views from your rose coloured glasses on the blog as usual….

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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.

Notes from the USA (Dec 2010) – a guest post

Despite QE2 and the combined efforts of Bernanke, Geithner and Obama, the American consumer is not spending as much as is required for the US economy to get back on track. Corporations are sitting on cash but job openings are few. Consumers have become debt-shy and are using debit cards or cash – as KKP elaborates in this month’s guest post (written before the Christmas holidays).

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How’s the 2010 Shopping Season shaping up in the US?

Santa is out there packaging the gifts for all the deserving kids……How good is he going to be this year? Well for Santa to be good, the parents have to be out there shopping and hiding the gifts in the attic or basement!

People who live in Asia are very used to using cash, although some have started to leverage the ‘other people’s money’ concept. In the US, consumers are all used to leveraging the plastic money and soon moving to electronic money. It seems that with all the debt default issues of the past three years, and the advent of ‘debit’ card, people are shunning credit cards like never before in history. Card issuers are fighting back with huge incentives to get people charging again, as they used to do pre-2008. So far in 2010, it’s not working!

The New York Times reports that the lowest percentage of shoppers in the 27-year-history of a national survey have used credit cards over the Thanksgiving weekend (Nov 21 to 28), while the use of general credit cards like Visa and MasterCard fell 11 percent in the third quarter from a year earlier, according to the credit bureau TransUnion. One of the biggest reasons developing this season is an extremely cold winter season. Temperatures in the upper northern part of the US is between -20 degree and 0 degree Centigrade (bone chilling cold). My friend who called me from the mall today told me that there are barely 200 people including employees in a huge mall with 100 stores (some of them being multi-story department stores).

The consumer has been feeling the pinch in a huge way and just like the 2009 shopping season, we will see the 2010 shopping season to be weak relative to the go-go years. These consumers are just trying to come out of the hole, and there are many avenues teaching the consumer to cut those cards and get back to basics, i.e. debit card or cash. Debit cards allow purchasing to be done if there is money available in the checking account where the card is directly linked.

In the US, the Thanksgiving weekend kicks off the ‘shopping season’ where family and friends buy gifts for people they love, they like and they are related to……This sounds like a big list, and for millions of families, it is a big list. My kids buy gifts for all of their cousins and friends at school. It does get expensive, which is why the normal American spending pattern has shown an average spending of $250 to $500 per family during this season. This used to be $800 to a $1000 per family a few years ago. $250-$500 might not sound a lot, but this is an average. Middle income to high middle income families spent way in excess of this number in the great years, with the ‘replace or upgrade’ attitudes of American consumers.

We have already bought the gifts and handed them to the kids this year, so our Christmas tree is not going to have any surprise gifts on Christmas Eve! It was Aero-jeans, Aero-face jacket, iPod external speakers, Cell phone and fancy head-phones for their iPods. Per Asian tradition, they will probably get some cash on Christmas day, which they will appreciate very much……Kids enjoy the gifts at Diwali and also at Christmas in most Indian families in the US.

In reality, some people are shunning credit cards for budgeting reasons, while others do not have a choice. More than 15 million Americans lost their cards because of strict credit-card regulations that were passed last year, or when issuers cut back on credit during the recession. My tenants at the apartments do not carry credit cards. They all deal with cash or a check book. As per my annual tradition, I closed out many of my cards that we do not use, since it is usually a risk to have them open. After this recent clean-up (closing 7 credit cards), I still have approximately 12-14 cards open for one reason or another. This might be a bit high for an Asian, but I take ‘huge’ advantages of the ‘promotional offers’ that are offered from time to time.

As an example, the “Chase Freedom” and “Discover More” cards are offering $100 bonuses when new credit card customers spend a certain amount within the first three months, along with 5 percent cash back on holiday purchases at department stores and other categories. See, this is what makes me a sucker for these kinds of cards! $100 is enough to get me to act for 20minutes of work (to open, shop and close card)! And, of course, I now have an extra card in my wallet.

Citibank is giving Dividend cardholders 5 percent cash back on spending at department, clothing and electronics stores through Dec 31, 2010. Stores like Target is giving its cardholders a 5 percent discount on purchases, Neiman Marcus is advertising extra rewards points on most purchases on certain days this month, and Sears has been running a variety of no-payment, no-interest offers on its credit cards throughout the holidays.

Back to the report…….it showed that credit-card debt fell for a 26th consecutive time, showing Americans continue to pay down debt, one reason spending has been slow to recover. Revolving debt, which includes credit cards, dropped by $5.64 billion in October, according to the Fed. Non-revolving debt, which in addition to student borrowing also includes loans for cars and mobile homes, rose by $9.02 billion.

Total Revolving Credit

Worries Still Out There

All the worries that we were facing in 2008, 2009 and 2010 are still around. They are masked by the stimulus spending, renewal of tax-cuts, extension to unemployment payments, reconstruction of highways (with stimulus money), and other government programs. If this stays in place long enough while the economy revives, we are out of the woods. If not, then we will go into a much deeper recession/depression again, and will be compounded with the fall in US$. Obama and Bernanke are really struggling to keep the economy going, but the undertone is really still very grim. See stats released recently….

Bottom line is: Attitudes Rule

It's consumer attitudes that Bernanke is fighting in a huge way since he cannot seem to give this economy the kick start, even with all of these finance infusions rolling out. Corporations are also very leery in doing new hiring and according to an ex-CIO I met today, Corporations with job openings are looking for ‘purple monkeys’! This means that they all look for a ‘perfect candidate’ who does not exist and hence delay hiring for months. The QE2 (quantitative easing part 2) is coming out although consumers are still not feeling the ‘comfort’ to spend. So, it is a battle that Bernanke seems to be losing. Let us see what the rest of December brings to this season, and is it credit, debit or cash….

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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.

Notes from the USA (Aug 2010) – a guest post

This is Kiran’s first-hand, ground-zero view of the state of the US economy. If you like what you read, or would like to ask him a question, please leave a comment using the link beneath this post.

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Economics of the USA from Ground Zero

Lets do some detailed macro economics here, and then bring it home to how things are unfolding in the US.

The US Govt says that the increase in real GDP in the second quarter primarily reflected positive contributions from non-residential fixed investment, exports, personal consumption expenditures, private inventory investment, federal government spending, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, also increased.

If you see the graph below it shows a slow-down. The US Govt says that the deceleration in real GDP in the 2^nd quarter primarily reflected an acceleration in imports and a slow-down in private inventory investment. This is not good.

What makes the situation even more convincing is that a few days ago, the Q2 ’10 GDP was revised down to 1.6% (instead of the earlier estimate of 2.4%).  So, the slowdown has already begun and we are just finding out.  Inventory buildup was the real reason for the jump in growth, in addition to the stimulus to housing and autos, but that is fading away. This is not good at all!

The reality of what is happening can be seen in the following chart which I follow closely to track the future of the US economy.  The newly reported Consumer Metrics Institute’s Daily Growth Index (CMI) annualized growth rate is 1.6%, down from a 2.4% rate published just 28 days earlier -- a 33% downward revision of the growth rate in four weeks.  It overlays well on the GDP chart, portraying what is about to happen to the US GDP.

Views from Ground Zero

My view of the US economy from ground zero is that we are definitely slowing down, and the slowdown is more rapid than most people are ‘feeling’ and obviously more than what the government is telling us.  The revision and the overlay chart above proves this point even more. 

Of course, do not forget that the US Govt created an artificial demand for housing sales in Q1 and Q2 ‘10.  If you were a first time home buyer you got a $8000 tax subsidy from the government, and if you were a 2^nd time home buyer, you got $6500.  Contracts needed to be done by Apr 30, 2010 and the purchase has to conclude by Sep 30, 2010.  Now, the sales of new homes in the US fell to an all-time record low in July ‘10, as demand from consumers dried up after the tax breaks were withdrawn.  So, we may see a positive GDP number in Q3 ’10, but we should be close to zero (0%) in Q4 ’10!

The worry that the global economies, and in particular people in China or India should have is the likely slow-down in US spending in Q1 & Q2 ’11.  If the GDP is negative for 2 quarters in a row, then US Govt. calls that a recession, and if we get to a recession, then the global markets are going to get affected. 

Employment Situation

All of this stems from a simple rule of economics.  We have approximately 140 Million people employed today in the US.  If there is more unemployment in this pool, then spending gets curtailed.  If spending is curtailed, the discretionary spending (flavored coffee, ice-cream, gambling, cosmetics, nice clothing, cool electronics, jewelry, luxury items, vacation/resorts, upgrades to anything/everything, outsourcing home-chores etc) gets cut back, which then spirals into affecting the GDP and the global employment further.

On the other hand, the US is still considered to be the land of opportunity with the lowest cost of food and clothing.  On top of it, the average hourly earnings of all employees on private nonfarm payrolls increased to $22.59 in July ’10.  Over the past 12 months this has increased by 1.8%. In July ‘10, average hourly earnings of private-sector production and nonsupervisory employees increased to $19.04.  Wouldn’t you say that this is enough for a money-conscious family to live decently? The problem is due to the personal debt habits of many people in the US - the spend-thrift patterns, utilizing most goods as disposables, tendency to spend money before it is earned.  When things slow down, trouble is right around the corner for this large subset of people in the US.  This is precisely why we are in this situation.

Life Style of Majority

You might ask, what do the streets of the US look and feel like at ground zero? Well, I get around in my city/suburb and see two sides of the coin.  If households have a job, life is 90% as merry as it always was, and spending continues, albeit at a slower pace.  If one of the jobs in the family has been affected by downsizing (layoffs), then there is budgeting going on, and everyone in the family spends less.  If no one in the family is working full time, then life is tough and spending is completely curtailed.  The latter is the situation for lower and lower-middle America (housing, construction, manufacturing and related industry workers). 

Case in point……we just got invited by two of our American friends to the usual neighborhood parties of Fall 2010, to say our last hurray to the summer. One of them is a Wine-Tasting-Party.  We open nearly 40-50 bottles of wine over a period of 6 hours and taste it, as part of the annual ritual at our friends’ house.  In both of these households, one of the jobs in the family is gone, and yet, the lifestyle continues to be the same!  A good guesstimate would be that they both have huge borrowings on their homes (mortgage) and credit cards.  Both have kids in colleges, and are making their kids study on ‘college loans’.  Hunkering down into a ‘savings’ mode is not yet an acceptable practice for the lavish life-styles of middle and upper-middle America.

Now, 80%-90% people who were employed earlier are still employed with similar or slightly lower pay.  Hence, if one goes around in the ‘good’ suburbs, you will see less people in stores, buying less ‘stuff’, and yet, the businesses continue to operate.  There are ‘high end’ stores that are affected and are closing ‘under 10%’ of their corporate/franchised locations, but majority of them still survive.  The Christmas shopping season between Nov 1^st, 2010 and Jan 5^th, 2011 will be the biggest proof, although I project that it will prove the ‘slow-down’, and a ‘recession’ scenario for sure.

Reality of Indians/Asians

If you are wondering how all this affects Indians/Asians, then I can tell you that it affects less than 1% of Indians/Asians in America.  Why?  Because, the 1^st and 2^nd generation Indians/Asians are highly conservative, money conscious, big savers, and leverage the land of opportunity to the hilt.  Many Indians/Asians work two jobs if necessary, shop aggressively at every “weekly special sale” in town, and cut corners by in-sourcing everything (cutting grass, cleaning house, cooking foods from scratch, picking up freebies, taking lunch to work).  Also, Indians/Asians figure out that buying is better than renting, and driving used cars is good for the pocket book. Such prudence allows savings to grow rapidly, for leveraging during a rain day.

Bottom Line

The US is still a land of opportunity, the land of the simplest processes, and a country with methodical execution of almost 99% of human wants/needs.  It is still a country filled with ‘what is in it for me’ and ‘I want it now’ syndrome. My kids are growing up with the same natural instincts and I am fighting to teach them the Indian Values and Common Sense Smartness.  I have been a beneficiary of this land of opportunity for decades, and love the simplicity and clarity of everything that America offers.

A combination of high debt (personal, professional and country level), high pay scales relative to other countries, open borders to bring anything/everything in, and finally, a fiscal policy where government wants to play in every circle, is the recipe that has created this challenging situation.  There is some improvement in the savings rate (as shown above), but all in all, it may take another decade to get back on the original track, although with this shake-down, it may never get on the original track.

What do you think, dear readers?

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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.

Notes from the USA (July 2010) – a guest post

I have been writing a weekly technical analysis of the Dow Jones (DJIA) index for some time. Most of the information sources for those posts have been ‘second-hand’, viz. data available on the Internet and from magazines.

Kiran Patel has been working and investing in the USA for a long time. He is also a regular participant in various investment group discussions. Here are his first-hand, ground zero views about the US economy and investment opportunities.

Hopefully, these posts will appear every month – depending on how much time Kiran can spare from his busy schedule. Readers are requested to encourage and motivate him by leaving your comments and questions.

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Is the US Economy Recovering?

There are many who are enjoying the thought of recovery, others who are hoping for a recovery and still others who are asking everyone ‘what recovery’! So, what is the real truth when it comes to the US? This is a ground zero view from the US.

Recovery of an economy really should translate to job growth, consumer spending, corporate spending and most importantly, reduction in unemployment benefits. Well, none of these factors reported by the US Government show a real recovery. So, where is the recovery and why the sudden feeling that things are OK? The only recovery that one sees is the comparison of quarterly earnings of corporations between 2010 and 2009. Last year’s earnings were so weak that any improvement in this year’s earnings is giving a false impression of recovery in comparison with a much lower base.

Obama had offered a special incentive of $8000 to first time home buyers who have a signed contract by Apr 30, 2010, and do the ‘closing’ (execute the purchase) by Sep 30^th, 2010. There is a huge backlog of deals in the works that is in the process of ‘closing’. All of this has created a temporary bump up in economic activity, reduced the inventory of homes, but at the end of the day, I still call this ‘artificial’. It is artificial since it was created by a stimulus injection, and now that the effects of that stimulus injection have worn off, housing sales have slumped since May 2010. Inventory of homes is increasing, and homes that did not sell are coming back to the market place at reduced prices.

Why are investors like me buying? Home is where the heart is. Everyone needs a home, whether it is small, medium or big. People who have lost their homes due to non-payment of mortgage, bankruptcy, foreclosure, short sale or any other fancy word used today in the US, need a place to live. So, my deal is to buy deeply undervalued homes (30c to a dollar), fix them up, and rent them out to some of the large population of people who have to rent since they cannot afford to buy, or do not have the credit to purchase a home (with a mortgage). Inventory for homes that fit my ‘buy profile’ is a bit depleted due to the Obama incentive, but since May-June, it is starting to go back up. As winter approaches starting from Nov, these deals will get mouthwatering once again. In the meantime, investors are making offers to purchase these deeply undervalued homes from the banks, who own them today (reclaimed from the original home owners who could not pay their mortgages) and are pricing it way below market prices.

So, recovery? A bump up might be the closest thing it can be called, but we will probably see a dip back down to a soft-landing or a double dip recession in the next 6-9 months (starting this winter). Manufacturing activity (ISM report), Leading Economic Indicator (LEI report), and other internal indicators are pointing to this upcoming dip. The best of the best is the WLI – Weekly Leading Index Growth Indicator (created by an Indian Scholar along with 3 other partners) is pointing downward. That means the US economy is about to turn back down, since the WLI is a leading indicator.

Are the BRICs (Brazil, Russia, India and China) ready to withstand this bruising from the potential double dip recession? Are they going to have their own corrections, once again showing that each of those markets is still co-related and inter-dependent on the US? I think so. What do you think, dear reader?

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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.