U.S. Economic Outlook: Debt, Dollars, Delusion

Using numbers to demonstrate America's debt crisis is like trying to quantify craziness. How many pet cats dressed up like characters from Gilligan's Island does it take to tell you someone's off their rocker? Most often, you just know.

For me, it was the first time I saw that McDonald's was accepting credit cards. That was about four years ago, and I remember thinking, "All right, we're officially screwed." It took a few years, but some key factors are finally exposing the dangerous delusion of the credit-fed lifestyle and how it affects the U.S. economic outlook.

• Debt is up, and consumer confidence is down

• Sovereign-wealth funds are coming to the rescue of drowning U.S. lenders

• Two wars and broken social services mean the national balance sheet will get much uglier

The sub-prime credit disaster and subsequent brake-slam of the international finance industry are tossing momentum back and forth from the highest levels of the economy down to the lowest-paid workers.

Unemployment is also up, and you can bet that driving around to look for a job gets a lot more urgent when gasoline costs upwards of three bucks a gallon.

Yet one economist, Richard Yamarone at New York's Argus Research, told Bloomberg News a week into 2008 that it's "difficult to hear the calls of recession when those cash registers are ringing." I don't know if Mr. Yamarone is visiting old-fashioned drugstores for most of his shopping and phosphates, but I haven't heard anything but a beep from a cash register in years, and the term "cash" must be applied loosely.

Nevertheless, Yamarone's comments highlight the mindset behind what got us to where we are today: Every frail link in the debt chain assumes that the other links must be stronger.

But when U.S. consumer debt rose by $15.4 billion in November, the same month that the Abu Dhabi Investment Authority bailed out Citigroup with $7.5 billion, the bells tolled resoundingly. Then, on January 11, we learned that consumer confidence fell to an all-time low (okay, "all-time" means since the survey started in 2002), and that even Mickey D's is feeling the pain. Shares of McDonald's Corp. (NYSE: MCD) fell as much as 8% on Friday after a poll of franchisees noted a six-year low in sales.

On Wall Street, expectations can move mountains, and November's consumer borrowing numbers were fully double what economists had forecast. Yikes.

Again, this has all been wafting through the American air for some time now, but statistics are finally reflecting a turn of the tide in actual spending behavior. In what seems to be an about-face from less than a week before, the above-quoted Richard Yamarone was quoted in an Associated Press article about the consumer spending downturn, saying, "Consumers are gloomy. The confidence reading suggests that people believe bad times are upon us."

At least analysts are as manic as the consumers they observe. On the academic end of things, a report just released by Harvard economists Ken Rogoff and Carmen Reinhart asserts that, based on international precedents, "The United States should consider itself quite fortunate if its downturn ends up being a relatively short and mild one."

Double Profits from the Downturn

The good news is that there are concrete investment opportunities that materialize out of such a delusional economy. You can hope for consumer spending to pick back up through a combination of Washington policy maneuvering and a touch of elfin magic, or you can hold the realest money in the history of civilization--gold.

With the precious metal passing $880 per ounce for the first time, gold is clearly seen as a safe harbor from the dwindling dollar, which will be subject to more inflationary pressure with more Fed rate cuts (Fed Chairman Ben Bernanke foreshadowed "additional policy easing" in his January 10 speech).

Over the past couple of years, we've seen the debuts of gold exchange-traded funds (ETFs), which let you invest in the stuff without stacking bullion in your basement.

The streetTRACKS Gold Trust ETF (NYSE:GLD), PowerShares DB Gold Fund (AMEX:DGL), and iShares COMEX Gold Trust (AMEX:IAU) have all outshone the stock market in recent months since Wall Street hit the skids.

There is also the Market Vectors TR Gold Miners Index ETF (AMEX:GDX), if you want more exposure to companies rather than just the commodity itself.

And I encourage dollar-based investors to broaden their investments into companies that will not be hurt by the greenback's swan song. This is tricky, since international business means even French and Japanese companies do plenty of dollar deals if they are big exporters. That's why I like plays on domestic markets where currencies like the euro and yen are at or near all-time highs against the U.S. currency.

To that end, you can choose the CurrencyShares Euro (NYSE:FXE) or Yen (NYSE:FXY) Trusts , or you can sign up for my Orbus Investor service to learn about my firsthand picks from overseas that are gaining momentum with the tailwind of rising currencies and solid organic growth in their business at home, while using the UltraShort Consumer Services ProShares ETF (NYSE:SCC), which doubles the inverse of domestic consumer services so you profit from this slowdown.

Disclosure: none

Comments

[floridadon]

With credit card companies running ads showing any other payment method to be unacceptable the credit card lifestyle will only expand.

[hattryx]

that strategy only works if peyton manning is your spokesperson

[Brian Croner]

Perhaps employers can distribute wages to their slaves in the form of payments on their credit cards? Wheelie-dealie with the credit card companies and who knows? 2% extra pay because credit isn't really money- it's the working man's money. You have to pay it back. I bet most employers would give credit cards to their employees as payment if they could get away with it.

[Golden Oxen]

What a sick society we have become. Taking out a bank loan at 18% interest to buy a coke and hamburger. Mr Hopkins has presented an accurate description of our current situation Delusion and Insanity