opposing traffic in the economy

Last month I said I might make a monthly entry here on the subject of the economy, and even thought it has been less than a month, I have been chomping at the bit to make this next entry.


This economy is presenting many serious paradoxes that will act like pitfalls over the next several years (actually, forever - but in a few years, some people will catch on, and compensate).

First, there is a slight up tic in some of the market indexes. Don't be fooled. As I stated on Combat Effective (ninth comment), corporations are not us. They can experience some gains without any benefit to the public at large.


Second, I have been asked why the price of gas has been going up. It is going up because demand is continuing to be high. Normally this runs up the price in May and then through June and July, the price drops a few cents. It isn't dropping this summer. In fact it raised about a dime since the end of May, and looks like it will raise another dime. But US gas consumption is mostly flat, so what is this rise all about? China.


The Chinese economy (repeatedly called "cash rich" in the media), is surging ahead with some early growth, and (as you can see from another article) they are moving to secure vital resources to insure future growth.



While we may be at the bottom (even the G8 is talking about this) , real recovery is looking even further away. Currently, there are a lot of forecasters expecting gold and the Euro to remain near flat, the pound to take a slide and the US economy to turn around. (Indeed, the dollar and pound may have already both taken a slide this past week, but it is too early to tell.) Of course, they are partially correct, and partly because in the short run, economic forecasting is somewhat a self fulfilling prophesy. But this is one prophesy that may backfire for the public at large.



Much of what looks like gain for the US economy falls into two broad categories. Increases in spending, much like an unemployed person going on a spending spree because he got a job interview. He doesn't have a job, but he feels better so he goes out and spends more money that he does not have. Second, there may be a lot of repositioning of corporations to take advantage of improving conditions in China and some other third world economies. Neither of these are good for the US public at large.



As a couple of final notes, I previously stated that unemployment wouldn't likely turn around for a year, and housing for at least two years. Well, on further thought, I would double that. Expect the job market to be dismal for at least two years, and housing prices to be down for at least four. Nothing has really changed, except my view of the timeline.



How do I get my view of the timeline. Not real scientific (I don't spend enough time on it to get any more science into it), but I look mostly at the interest rates on 6mo, 1yr, 2yr, 5yr and 10yr bonds. In (not very) recent history, they have been around .45, .9, 1.9, 2.9, 3.9 percents. respectively. I watch for trends in deviations from those numbers. In more recent times, the interest rates on the first three have been going down, and the interest rates on the last two have been steady. Therefore, I expect meaningful gains somewhere between 2 and 5 years.



As for gold, still overpriced. But, maybe a good idea anyway. If you can buy some, and hold it for at least 4 years. Of course, this entails a great deal of security, both of your financial position, and physical security. I am discussing physical gold coins, and therefore you have to have a place to store them. I would still recommend other durable things. By durable, I mean lasting more than ten years, so that rules out almost anything electronic. My choice is hand tools, but there may be other things too. A good bicycle should last more than ten years, except for the tires. You get the idea.



Well that is it, until next month.