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Dr. Stephen Leeb
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Dr. Stephen Leeb is a recognized authority on the stock market, macroeconomic trends and commodities, especially oil and precious metals. Dr. Leeb is founder of the Leeb Group, which publishes a line of financial newsletters including The Complete Investor, Leeb Income Performance Letter, Leeb... More
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  • Stunted "Green Shoots"

    In the wake of efforts to find "green shoots" of growth in the economy, it now appears that they will require more time to sprout in significant numbers.
    This week, for example, brought the release of the minutes from the last meeting of the Federal Reserve's Open Market Committee in late April. It turns out that the Fed lowered its outlook on the economy for both 2009 and 2010, saying that it will contract more sharply, with unemployment rising higher, than previously expected.
    The Fed currently projects that the U.S. economy will decline 1.3-2 percent in 2009, vs. its previous forecast in January of only a 0.5-1.3 percent drop.
    The Fed's weak outlook is backed by what we called the new economic consensus in our weekly update two weeks ago. This is that the economy likely is now declining less than before, and that actual growth will begin later this year. But the recovery will be long and slow, weighed down by continued high unemployment and lackluster consumer spending.
    If there's any good news here, it's that the massive fiscal and monetary stimulus has prevented a much worse scenario. On that score, the Fed considered during last month's meeting whether to raise the amount of Treasury and mortgage-related securities it will buy beyond the $1.75 trillion already committed. Presumably, that will occur if the economic situation deteriorates further.

    May 21 5:18 PM | Link | Comment!
  • No Surprise: Economy Not Ready for Lift-Off Yet…


    Retail sales fell in April for the second straight month, signaling that the economic recovery hasn't arrived yet. This shouldn't be a surprise, given rising unemployment and continued high anxiety about financial security. While the rate of job loss may be declining, job growth appears far away.

    Consumer caution is also showing up in tepid loan demand. The focus has been on unavailability of credit because of financial institutions' weak balance sheets and tightened lending standards. But Americans, at long last, also are waking up to the ongoing need to boost savings and trim debt.

    The economic recovery—when it comes—is likely to be subdued. One reason is that job growth probably will lag, just as it did in the recovery after the 2000-2001 economic downturn. The priority of employers will be profitability first, with job creation to follow only as they're more confident the economy is getting better.

    Another risk to recovery is rising long-term interest rates. The yield on the benchmark 10-year U.S. Treasury bond is 60 percent above its December low, which admittedly was extremely, excessively depressed because of the financial crisis and a global flight to safety.

    Rising long-term interest rates go hand in hand with an expanding economy as demand for credit typically pushes yields higher. But this time interest rates have jumped even though the economy is still showing signs of merely stabilizing, not actually growing. Continued low long-term rates, which directly affect the cost of mortgages and other loans, are essential.

    What's more, the massive government efforts to support the financial system and stimulate the economy cannot continue indefinitely. At this point, the economy and investors are too dependent on government largess.

    …But Financial Markets Look Ahead to Better Times

    The overdue financial-markets correction arrived this week. Now the question is how deep it will be.

    The Standard & Poor's 500 ended last week at its highest mark in four months, following a big two-month rally. This week, investors supposedly have tempered excessive optimism about the economy and sold accordingly. In our view, it's basically old-fashioned profit-taking after a valid run-up that got ahead of the fundamentals.

    But a measure of improvement has been the ease with which companies have been able to raise money in the financial markets.

    In 2008, even the largest companies found it difficult or impossible to raise cash. Now they're issuing equity and debt at the fastest pace in many years. Amazingly, May already is the busiest month ever for secondary stock sales from publicly traded companies. Sales of both higher-quality and junk bonds are also impressively brisk.

    Some of the activity is from banks that have to boost capital in the wake of the government stress test and/or that want to repay government money. But companies outside the financial sector are selling stock or debt too. And it's not just the weak companies. Even AAA-rated Microsoft has raised some cash.

    A key reason that this is possible is that there's a huge amount of investor money on the sidelines searching for a decent return at a time when cash-equivalents pay very little. That dynamic led to a rush into riskier assets over the last two months.

    Skeptics say this has happened because of a deliberate, ultimately unsustainable government rate-slashing policy to get investors back into the markets, among other goals. Well, nothing lasts forever. We'll take it.

    We think there's ample fuel for the advance to continue. First, though, it's only natural we'll first see some softness in the near term. So we reiterate our core advice: Buy quality on market weakness.


    May 15 2:12 PM | Link | 1 Comment
  • Norway's Economics Lesson


    If we were to live elsewhere in the world outside the U.S., we wouldn't choose Norway. Too cold and too expensive, among other drawbacks.
    But it turns out that the U.S. could learn a few things from that small country (just 4.6 million inhabitants). It's one of the few nations that's largely unaffected by the global financial crisis. An article in today's New York Times details some of the reasons.
    Undeniably, Norway has a big advantage: It's the world's third-largest oil exporter, creating great wealth for such a small country. But even though oil prices have declined sharply, Norway is well prepared because it avoided the spending binges of many energy-rich countries. Norway’s economy grew in 2008 by almost 3 percent. The government has an 11 percent budget surplus and is entirely debt free.
    Norway is known for its cradle-to-grave welfare state. Yet government spending actually has declined steadily in recent years. What's more, Norway's oil revenues go directly into its sovereign wealth fund, which invests around the world. Amazingly, Norway's sovereign wealth fund now is among the world's largest.
    Home prices soared in Norway, as they did elsewhere. But there has been no real estate crash because there were few mortgage-lending excesses. Norwegian banks represent just 2 percent of the economy and did not take big risks. Yet credit is widely available.
    All is not rosy in Norway. One economist there describes the situation as "an oil-for-leisure program,” adding that Norwegians work fewer hours than citizens of any other industrial democracy. "Some day the dream will end,” he says.
    For now, though, the lesson is clear: Over time, we need to rein in spending and borrowing, both individually and as a nation. It's worth noting that the U.S. is also energy-rich. Unfortunately, our energy consumption and imports have grown much faster than our production for several decades. We need to invest in productive resources instead of seeking growth through debt and asset bubbles.


    Tags: Norway, oil, economy
    May 14 5:57 PM | Link | Comment!
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