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March 9, 2013 / 74

Good Things Are Being Said About the Economy

Lottsa good things are being said about the economy. All the positives I’m seeing out there in the media makes me want to say, “Ho! Things are getting better!!!”

But I can’t.

Things like that the unemployment level (U3) went from 7.9% to 7.7 %. But that’s not really a good thing because it doesn’t mean that the economy is improving – in fact, it may (and in this case does) mean that the economy is getting WORSE!!!

Brad DeLong, a professor of economics at the University of California at Berkeley, commented on his blog, “There has been no closing of the output gap and no decline in the unemployment rate from putting a greater share of the adult population to work. All of the decline in the output gap and all of the decline in the unemployment rate is from the collapse in labor force participation.” (“Unemployment Down, but February Jobs report Not All Rosy“)

So what we are seeing is a structural change in the number of jobs available in the economy. Or to put it another way, the businesses that hit the wall and laid off workers have decided that business is not improving, and WILL NOT improve in the foreseeable future, and that the “laid off” workers are now considered terminated workers because their job no longer exists. ie The total economy is permanently SHRINKING.

NOT good, Maynard!

If the total economy is shrinking, that means less wealth generation from workers making things, less income for the people to raise their families and buy houses and cars and go to movies, in short – it means LESS of EVERYTHING!!!

Another thing about that “unemployment” number is that they always use “U3” as their main indicator. U3 is the total number of people working – period. If a person works only one hour a week, for the purposes of U3 he/she is considered “employed.”

If you want a better picture of unemployment you’ll want to see “U6” which adjusts for the one-hour a week workers and for the workers who are asking if you want fries with that while holding a PhD in nuclear physics (“the under employed”).

Another thing that ordinarily would make me take a positive view of where the US Economy is going is the level of the US Stock Market (the DOW). It has been reaching record highs lately – but I see a few problems associated with that. First and foremost is before we throw a party, we need to think about the possible REASONS that the stock markets are rising.

In my mind – first among these is the inflation that the FED is unwilling to admit is occurring, because they are causing it. When the FED says that we are experiencing only 1 or 2% “core” inflation rate, that means that if only we didn’t have to eat or buy energy (gasoline, electricity, etc) then we’d have almost no inflation, because you see, the FED excludes such frills as food and energy from their “market basket” of goods/services when they calculate inflation. But unlike the FED, we all have to eat, and we use energy to stay warm/cool depending on the season. So for us food and energy are very much important to the inflation we do or do not experience.

For about a two year period (2010 and 2011) I selected my own market basket of common food items available in WalMart, and then tracked their prices for specified product package sizes. (5oz canned tuna – generic label, frozen burritos, Hershey’s Fun Bars… etc). Over the two years I saw a 20% to 30% increase in prices per year. Soo… Ben? When you say 1 or 2% inflation, you’re lying. Period. And prices are not going down.

Inflation will cause the prices of stocks to rise, while at the same time causing them to lose value. When you sell the stocks, you will be able to buy less with the proceeds than you could have bought with the money that you used to buy those stocks.

Another aspect that could be causing the stock markets to go up is what I believe is similar to “churning” In this case, it is when a small group of people buys and sells a stock, and each transaction causes the price to go up. It is a method of creating an artificially high dollar cost for given stocks or assets. So if this is going on, what you have is not an increase in the value or even the real price of the stocks. What you have is the financial world playing a game of catch with your stock values.

And of course there could also be a lot of the good old “pump-and-dump” thing going on – especially with HFT (High Frequency Trades) being, (as it was the last time I checked), completely unregulated by the government. It is my understanding that an HFT series of transactions can take only 4 seconds and move the price of a stock quite a bit.

So there are really quite a few reasons to not view the record highs in the stock markets as any sort of economic indicator.

So… how’s the economy REALLY? My call is that it’s still experiencing rough weather with severe weather approaching.

I sold my last stock (at a loss) this past year. Some people ask me what they should invest in. Personally I think that investing in the stock market could indicate that you have monetary suicidal tendencies (unless you are a professional Hedge Fund trader or the brother in law of a mega-bank CEO, or a member of Congress since I understand that it is not illegal for members of Congress to do insider trading, like it is for the rest of us.) Many think that buying gold would be a good idea. I’d disagree – and I have my reasons.

So when asked, I just say this: Get a copy of Maslow’s Hierarchy of Needs. (It’s arranged as a pyramid.) Look at the row of the things that people MUST HAVE TO LIVE!!! Those are the things that, come what may, people will be buying.  So what you do is find a way to invest in something that is directly related to those things. You may not get rich… you may lose your shirt… but that’s a better idea than giving some money-mogul your savings so he can lose it for you. (See South Park, Season 13, Episode #3, “Margaritaville”)

“And, it’s gone.”

Just my opinion.

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