Whether you are aware of it or not, a great battle is being waged around us. It is a war of two opposing narratives: the future of our economy and our standard of living. This battle is about to break and when it does, one side will turn out to be much more ‘right’ than the other. The time for action has arrived. It’s time to choose a side; to do your own personal calculus of the risks to determine where you need to be positioned and to take the necessary steps to get well-situated where you assess you need to be, to position yourself in the direction of the break you think is most likely to happen. [This article comments on both positions to help you come to a decision as to whether you should play offense or defense.] Words: 1600
So writes Adam Taggart (www.PeakProsperity.com) in edited excerpts from his original article* entitled Time to Choose – A Fundamentals-Driven Breakout Seems Imminent. But Which Direction?.
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Taggart goes on to say in further edited excerpts:
The dominant story, championed by flotillas of press releases and parading talking heads, tells an inspiring tale of recovery and return to growth. The other side, less visible but with a full armament of high-caliber data, tells a very different story. One of growing instability, downside risk, and inequality.
As different as they are in substance, they both share one fundamental prediction – and this is why you should care: This battle is about to break and when it does, one side will turn out to be much more ‘right’ than the other. The time for action has arrived.
To position yourself in the direction of the break you think is most likely to happen. It’s time to choose a side.
The Case for Playing Offense
The past several months have seen a surge in positive stories celebrating the U.S. emergence out of recession and back to solid economic health.
1) Tapping into shale oil and gas deposits is ushering in a new energy boom: Domestic energy production is on the rise, creating jobs and increasing exports, while reducing our dependency on foreign suppliers to the extent that the U.S. will be close to energy by 2030 (UPI)….[Read: U.S. Is NOT Going to Become Energy Independent – Period! Here are 3 Reasons Why]
2) The stock market is thriving, with several indices at record highs: Corporate earnings and investor confidence are booming, and the expectation of a Great Rotation of massive amounts of capital from low-yielding bonds into the stock market is high… [Read: 5 Reasons To Be Positive On Equities]
3) The global economy has made it out of the woods and is increasingly robust: In the US, the unemployment rate is down several percent from its recession high. The fiscal cliff was averted. The 2013 deficit has been reduced below $1 trillion for the first time in five years. The crisis in Europe has been successfully managed…. [Read: World Economy & Market Forecast: More Sunshine & Less Stormy Weather Ahead]
4) Housing, the engine of consumer wealth, is in recovery: Home prices are on the rise after years of punishing declines and a rebound in consumer spending is visible across a wide spectrum of home-related services… [Read: U.S. Housing Market Has All the Makings of a Turnaround – Look for Yourself]
5) Jobs are being created and consumer income is on the rise: U.S. personal income recently experienced its biggest increase in eight years. Non-farm payrolls have increased every month for the past two years. There are increasing examples of local job markets experiencing a true employment “boom”…
A Rosy Picture
Taken collectively, it’s hard not to feel optimistic – even strongly so – about our future prospects. With these messages constantly being delivered and reinforced, it’s little wonder that the status quo is not under attack, that the energy behind the Occupy movement has dissipated, because a better tomorrow lies ahead, right?
The Case for Defense
As alluring as the offensive narrative sounds, it contradicts starkly with the preponderance of underlying data. Data that requires some – but not too much – digging beneath the headlines.
In counterpoint to the above narrative, a sampling of this data reveals the following:
1) Expensive oil is here to stay and will handicap economic growth for decades to come: Peak Oil is alive and well, despite the “shale miracle”. The four major global oil producers…continue to report declining total production numbers despite more than doubling well drilling activity since 2007. Gas prices this February are the highest they’ve been in history…. [Read: Interested In What Oil Prices Will Be In 2013 – and Why? Then This Article Is For You]
2) Financial security valuations are dislocated from the fundamentals of the underlying companies: The trillions of dollars of liquidity pumped into the market by the Fed is, yet again, blowing asset bubbles in stocks and bonds…. Corporate insiders, despite their proclamations of record profitability, are voting with their feet and selling over 9 times more of their company stock than they are buying… [Read: 5 Sound Reasons Investors Would Be Better Off On the Sidelines Than In the Market]
3) The economic “recovery” is anemic at best, and skewed heavily to the top few percent: December saw negative GDP growth and last week saw the persistently-high unemployment rate creep back up. December’s reported personal income increases was primarily a one-time event, as companies sought to pay out excess income and dividends in advance of anticipated 2013 income tax increases. Payroll taxes will rise on all employees, but carried interest and capital gains rates (how the wealthy earn their income) remain unchanged at historically low levels. Nearly two-thirds of Americans now expect anemic economic growth to define our “new normal” way of life….[Read: Gov’t Says: “Happy Days Are Here Again For U.S. Economy” – Don’t Believe It! Here’s Why and U.S. Gov’t Unemployment Deception Masking the Coming Economic Horror Show]
4) The housing market will not return to its former glory: With no real wage growth and further de-leveraging still needed, the consumer is not driving the modest price growth seen in many housing markets; instead, hedge funds are – they are buying up huge tracts of foreclosed homes, renting them out, and securitizing those rental streams. This will not result in the competitive bidding by multiple parties that drove the appreciation pre-bubble collapse…. [Read: Many Not So Sure That Our Housing Problems Are Behind Us – Here’s Why]
5) Our trading partners are as bad off, or worse, than we are: Global markets have rallied in recent months as the news from Europe grew quiet – despite no real resolution to the core problems occurring. In recent days, fresh concerns about forex rates hurting competitiveness, crushing unemployment, and excessive debt have erupted. Meanwhile, Japan is everyone’s leading candidate for the first developed nation of the 21st century to implode under its debts. China, whether it is able to avoid a hard landing or not in the short term, is staring at a mid-term food and water crisis that it has no solution to….[Read: Nouriel Roubini: 5 Downside Risks to Global Economy Are Gathering Force]
6) The risk of external shocks is under-appreciated and unplanned for: Currently financial markets and our just-in-time national distribution systems are geared for clear sailing ahead. Unexpected developments like superstorm Sandy, a Fukushima-like event, or an oil price spike could easily send prices – and availability of goods – swiftly awry…The UN warns that prices worldwide could easily spike this year, as world grain stocks are near historic lows….[Read: Byron Wien: 10 Events That Will Likely “Surprise” Us In 2013 and Grantham: Paradigm Shift Taking Place In Commodity Prices]
Sadly, this list could stretch longer if I didn’t feel the need to end it here to avoid overloading the reader. Suffice it to say that there is certainly enough evidence to at least dispel a material amount of the sanguine outlook of those cheerleading for an offensive stance at this time.
Picking Your Side
Those taking the optimistic view here argue that our economic engine has been running hard to pull us out of the hole we’ve been in for the past five years and now that we’re back on level track, the engine’s built-up head of steam is going to move us forward quickly. Expect better GDP growth, lower unemployment, higher income, high stock prices, higher housing prices, more innovation, and lower energy prices. If this future comes to pass, you won’t want to be left in the dust as the party roars past. Get on the train – go long, perhaps with some leverage, and bet on America’s grit and ingenuity. [Read: Start Investing In Equities – Your Future Self May Thank You. Here’s Why]
To be frank, this has been the winning side for the past year and a half. Those who have sided with the bulls have been rewarded with sizable stock gains and stabilized (or growing) housing prices.
On the other hand, if you, like me, find enough reason in the data for doubting the optimistic case, you need to determine what your defensive plan should be.
The degree of defense you adopt should be based upon your own exploration of the data. Dig further than the samples I could only cursorily provide above. Come up with your own personal assessment of the probability and severity of the downside risks.
If you find you assess the risks at or above the ‘moderate’ level (which I do), then consider strongly the following guidance:
- Exchange paper assets for tangible ones: Acquire exposure to the precious metals; we recommend having at least 10% of your net worth in gold and silver. Above that, if possible, invest in productive hard assets. Holdings like farmland, timberland, energy deposits, and mineral/water rights are assets that will produce units that will generate an income for you. [Read: Grantham’s Advice: Allocate 30% to Resources (15% in Forestry, 5% in Efficiency Investments, 10% in “Stuff in the Ground”) – Here’s Why and Protect Your Future Standard of Living By Buying Gold & Silver Now – Here’s Why]
- Find a sympatico adviser to manage any remaining paper wealth: For many reasons, most of us will still keep a percentage of our wealth in the stock and bond markets (in retirement/pension accounts, 529 plans, etc). If you’re in the defensive camp, make sure the adviser managing your money is, too….
- Defend your income stream(s): Assess your employment situation – how vulnerable is your income? Explore ways to make yourself more valuable to your employer, add additional source(s) of income, and/or create your own business….
If you take the above steps, regardless of what happens, you’ll be able to sleep at night knowing that you’ve acted conscientiously according to your convictions. In the event the bulls turn out to be ‘right’, few of these steps will serve you poorly. In a secular bull market, hard assets should still appreciate measurably….but if the bulls turn out to be the ones in error, the value of these actions could be priceless.
Get to it. Do your own personal calculus of the risks. Determine where you need to be positioned and take the necessary steps to get well-situated where you assess you need to be. It’s time to choose a side.
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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•the still-low rate of new housing starts, and
•the still-depressed level of housing prices in many parts of the country
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