October 2009

Artificial Growth

As if on cue, the Dow Jones Industrials Average surged back above the 10,000 level and closed above it briefly. The market subsequently sold off in the days following. At this writing, the Dow is approaching 200 points to the upside in steady fashion on the better-than-expected GDP news this morning. The Commerce Department reported that the nation’s Gross Domestic Product, or the value of all goods and services, expanded at a 3.5% rate during the third quarter of 2009, technically marking an end to The Great Recession. Of course, the important question is whether the recovery is sustainable. The technical recovery in GDP can be largely credited to inventory rebuilding and stimulus programs such as “cash for clunkers”. These events are winding down or in the case of “cash for clunkers” have ended. Without other like programs, GDP for the coming quarter might not be as rosy. Meanwhile, unemployment continues to rise. Next week will offer the latest readings on initial claims and unemployment levels.

At the risk of sounding parrot-like to the news media, we will attempt to “bottom-line” the current status of the financial crisis as we see it in the following way.

At the current time, the Federal Reserve is attempting to engineer an economic recovery that won’t include inflation. President Obama’s administration struggles more with the lack of jobs growth than inflation worries. Meanwhile, banks are gorging themselves on a free lunch from the Fed, building capital and lending little to nothing. Further, credit continues to contract and households have little or no borrowing power left since home equity has dried up, credit cards are reducing available limits, and job security is anything but certain. At the same time, government stimulus via direct purchases of financial assets of all kinds is winding down. We do not believe that the private sector is in any position to run the next lap around the economic track, if you will, without continued assistance from the Federal government. In other words, we are firmly on the path of artificial growth for the foreseeable future. What this portends for the U.S. dollar we do not know? But, it will not be pretty. Thus, sustainable economic recovery remains doubtful, in our opinion.