As usual, the Wall Street cheerleaders have found a way to persuade investors that the U.S. economy is in good shape and that individuals should continue to invest in equities.
Their latest argument is that the economy will continue to expand at a healthy rate because, according to these "experts," increases in the export component of the nation's total output of goods and services (GDP) will make up for the slumping housing market.
I have a very difficult time accepting this argument.
Although U.S. exports have in fact increased significantly over the past few years, their rate of growth has nowhere near made up for the rate of decline in the housing component of gross domestic product (GDP). For example, residential construction spending has fallen 17 percent over the past year, while exports have risen only seven percent.
And, once declining consumer expenditures on automobiles, furniture, household appliances, food and clothing are added to the equation, the cheerleaders' argument becomes even less convincing, because spending on these items accounts for approximately 28 percent of GDP.
In addition, much of the increase in the reported value of exports has been due to the declining U.S. dollar — not rising foreign demand. In other words, when U.S. companies convert their sales to foreigners into lower-priced U.S. dollars, the reported, dollar value of those exports rises.
But such dollar-value increases don't necessarily translate into higher unit sales. As a result, the fact that the dollar value of U.S. exports has been increasing doesn't mean that the demand from foreigners for U.S.-made goods has risen to the extent propagated by the Wall Street cheerleaders.
This point is clearly illustrated in the chart below, which shows the constant-dollar value of U.S. exports. After taking out the foreign-currency translation effect on U.S. exports — an effect created by the declining value of the dollar — export growth has declined, not risen, since the beginning of the year.
It's true that the declining value of the dollar has somewhat helped to increase foreign demand for U.S. goods. The cost of U.S. goods abroad is in fact lower for foreign buyers, because of the declining dollar.
But there are several negative repercussions to persistent declines in the value of the dollar. First, there are inflation consequences to a decline in the dollar — foreign goods become more expensive to U.S. consumers and the price of oil rises, because oil is priced in dollars.
Second, foreigners who invest in U.S. Treasury securities earn a lower rate of return when the dollar falls. That's because money they earn on those Treasuries is worth less when they convert those proceeds into their home country's currency.
Therefore, if the value of the dollar continues to fall, foreigners might continue to reduce their investments in U.S. Treasury securities, something China and Japan have already done. The U.S. government has been relying heavily on foreign investments in Treasury securities to finance the federal budget deficit, which is expected to widen significantly over the next few years because of slowing economic growth and declining tax revenues, just as foreigners sell off their holdings.
So, I continue to urge you to ignore the self-serving Wall Street "experts" and to instead focus on the facts. The facts continue to indicate that economic growth in the U.S. will slow considerably over the coming months. For example, on Tuesday of this week the National Association of Realtors (NAR) reported that sales of existing homes fell to their lowest level since the NAR began collecting data on such sales in 1999.
In addition, the NAR reported that the supply of existing homes for sale rose to 11 months in September, which compares to an historical average of around 4 months.
Then, the U.S. Department of Commerce announced yesterday that sales of new homes declined 23 percent in September, as compared to the same month a year ago. Although new home sales improved somewhat from sales in August, the latest report from the National Association of Home Builders strongly indicates that sales of both existing and new homes will continue to fall in the months ahead.
Meanwhile, both Wal-Mart and Target announced earlier this week that they expect a significant slowdown in their same-store sales this month. Lastly, a largely overlooked report from the Hudson Highland Group, an employment recruitment firm, suggests that consumer spending will decline over the near term.
Every month, Hudson conducts a telephone interview of approximately 9,000 consumers, asking about their level of job satisfaction, job security, and personal financial security. Hudson then computes an index to quantify the responses. This index fell to 97.1 in September, from 99.2 in August and 105.8 during July.
While many stock market pundits and investors alike often interpret the types of comments I've made in this article as "gloom and doom," I've always told investors that there's never a reason to think negatively about a slowing economy or an impending bear market. That's because there's always a bull market somewhere and there are always investment vehicles that enable one to profit from so-called "negative" developments.
A good example is a consumer services ETF that I've recommended to subscribers to our new investor service, The ETF Strategist. Over the past 10 trading days, this ETF has appreciated 9.1 percent, while the S&P 500 has declined by 3 percent. My research suggests this ETF will appreciate considerably more in the months ahead.
Click here if you're interested in learning about this ETF or if you'd like to read more about my thoughts on the economy and the overall investment environment.
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