We have often remarked on how the USA will lead the recovery and that the next economic cycle will make its way through the doom and gloom in today's market. We now have visible evidence that this is starting to happen.
European Debt Crisis
Pundits continue to insist that the EU (European Economic Union) must flounder because of the heavy debt loads of its weaker members. Don't be misled. The EU is an economic powerhouse that has had its troubles and will continue to have its troubles, but it remains an economic powerhouse. It is true that its debt are far too heavy and that the union is based on political will rather than sound economic footing. It is true that some members seem to have no perception of fiscal restraint, and so on.
Yet look at what is actually happening rather than the news media that floods the airwaves with hysteria. The supposed basket case that is Italy: too much debt and interest rates skyrocketing. Can default be far off? Yet in the most recent bond auction, Italy was able to borrow money below 2% again, for the first time in more than two and a half years. Doesn't sound like a default to me.
How about Spain? The word is that they will have to ask for bailouts. They owe more than they can ever repay. Yet they haven't asked for any bailout and insist that they will not. There has been unrest in Spain as budgets have fallen, but reality is sinking in. Governments are slowly and painfully taking the necessary steps. No default is now forecast.
How about Greece? Despite social unrest, Greece is still in the EU. Surprise. Surprise. Even if Greece left, which is possible, so what? The national budget of Greece is insignificant.
Bottom line - The EU will continue and the countries comprising the EU will gradually recover, albeit with some strains. Countries adjacent to the EU are continuing with their applications for membership in the community.
We heard forecasts of doom and gloom, and how China is headed for a disaster and so on. The price of iron ore plummeted as demand for iron ore dropped, because China has stopped growing. China seemed not to need as much. The price of copper was forecast to plummet as China's demand curve dropped. Then the forecasts of new Economic Stimulus of gargantuan proportions that would surely bring China to its knees.
Instead of listening to the drivel on the airwaves, look at the facts. China's exports and imports most recently reported growth. No reports of a collapse or anything similar. Instead, after some temporary market movement, iron ore has completely recovered in price and demand is growing. Copper has held its price. Some metals such as platinum palladium are moving strongly higher.
Once again, we repeat our earlier comments. China, like Japan before it, and Europe before that, moved from either devastation or 3rd world status, to a strong economic power, and while moving up and down somewhat, remain strong economic powers. When a nation moves to a modern economic economy, it doesn't fall by the wayside in a month or a year. All of the industrial knowledge remains. All of the masses of newly created middle class (economically) people remain, and they all want goods and services. Demand may vary somewhat, but when you create millions of people demanding goods and services, that is what they want. The demand doesn't dissipate overnight.
The Precious Metals - Gold & Silver
We have often remarked on these metals. In times of great economic stress, there always arises new economic gurus who insist that the only way to avoid personal economic disaster, is to buy gold, or the poor man's gold - silver. We have discussed that relationship before and will again in the future.
The theory is severely flawed and arises from economic upheavals in Europe of the previous centuries where when countries were invaded by their neighbors, the currencies of those countries became worthless. Therefore the protection against losing your money was to hold gold which was valuable in every currency. Let's look at gold from another perspective.
If Gold Portends Trouble, What Does Gold Moderating in Price Portend?
Now examine the theory of holding gold in modern times. The belief is that when the economy falls, or inflation increases, gold rises in value. In fact, gold rose in value quite dramatically over the last decade, but so did every other metal - some rose more than gold. Putting that type of debunking aside, let's accept that flawed theory for a moment. Since gold reached its peak in late 2011, it has moderated and remained in a consistent channel. Some upward movements were soon exhausted and today gold is about $1,600 an ounce. exactly where it was a year ago, and roughly where it was 18 months ago.
If you believe that gold is a barometer of economic troubles, it sounds to me as if the signal is "fair weather ahead".
Another persuasive reasoned rational we hear is that we are in for trouble because gold is trading at roughly 8 x higher than it was a decade ago. However, so is copper and so is every other metal that has has had a consistent demand curve.
United States of America
The USA remains the economic powerhouse of the world with roughly 25% of world economic production. A world economic recovery will be led by the USA as other countries rely on USA demand for their goods and services for their own economic prosperity. As we have previously said, all signs in the USA are positive. Bidding wars for real estate in prime locations have started. US auto sales are now at pre-2008 levels. Banks are being recapitalized and are meeting new standards. Unemployment lags, unfortunately just as it has in every economic recovery of this or the last century as older workers, and less trained workers fall by the wayside. This is difficult, but is normal and to be expected. Airlines are flying at capacity on some routes. Manufacturing in the USA is increasing measurably. Jobs are returning to the USA for overseas as wage costs moderate. Union membership continues to decline and many states have brought in 'right-to-work' laws.
A recent conference held in 2013 by a major investment house had one over-riding theme. The recovery in the US is gaining momentum and the place to invest is in the USA.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.