Signup for our free newsletter:

Ben Plans, Markets Laugh

Written By Brian Hicks

Posted July 24, 2010

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

I must admit it’s kind of fun to watch pointy-headed intellectuals squirm under the weight of their grandiose schemes.

You see, somehow their ideas never seem to work out exactly as they are planned — even though “the smartest guys in the room” have promised they will.

Inevitably though, the cleat of reality arrives.

They struggle in places they used dominate, and under the glare of the bright lights, their voices suddenly become whispers.

It’s as predictable as the sunrise. Men plan; markets laugh.

So looking like a bit like a deflated balloon on Wednesday, all Ben Bernanke could come up with was this: The outlook was “unusually uncertain”.

Which roughly translates into: It’s so screwed up that your guess is as good as mine

I guess it beat a shrug of the shoulders, but not by much.

Not to worry though, Ben continued… He’s warming up Plan P just in case.

Moments later, the markets promptly fell off the cliff.

Here’s why…

Everyone knows that his forecasts of 3%-3.5% GDP growth are unusually optimistic. After all, the formula used to calculate GDP is hard to con.

It works like this: GDP = C + I + G + (X-M)

In other words, the sum total of our economic activity is arrived at by adding Consumption (personal and business) to Investments, plus Government spending, plus exports (X) minus imports (M).

That means that in order substantially to increase the GDP, we will need an increase in some form from C, I, G, and X.

Simple enough…

Or is it?

The first roadblock is the biggest of them all, since C currently accounts for 70% of our GDP.  In a society buried under debt and beset with high unemployment, growing C is going to be pretty tough to pull off.

That’s especially true when income growth is negative and credit is either tight or virtually unwanted. So I don’t think the Fed can hang their hat on that one, as we slam head-first into the new normal.

That, of course, is where our friend Keynes enters the picture. Politicians and Central Bankers just love this guy.

Because in order to offset the losses in C, Keynesians like to argue that you have to keep dumping more and more money into G to keep it all afloat. Or as they like to say, “prime the pump” — hence the various stimulus packages, all of which have all landed with a thud.

The problem with this angle is we have reached a point in the cycle where throwing more and more money at G is becoming completely untenable. Think of is as bailout fatigue or better yet, a dose of common sense.

That means headed into the second half of the year, the G portion of the equation will also begin to shrink as governments catch the austerity bug, especially at the state and local level.

Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities. And since these states can’t print money, drastic spending cuts will be the order of the day — no matter how painful.

Add when you add falling tax revenues into the mix at every level, it’s easy to see why growing G is pretty much of a non-starter this go-round, too.

That leaves Investments and net eXports to the pick up the slack, neither of which is going to happen.

In fact in a stronger dollar environment, exports actually begin to fall as U.S. goods become more expensive overseas. As for businesses, they are more concerned with hoarding cash — not investing it.

Add it all up [GDP = C + I + G + (X-M)] and the odds are increasing that the economy will end up mired in a double-dip recession.

It’s really not much more complicated than that.

Unless, of course, you are a pointy headed intellectual… Then you call it “unusually uncertain” as you sweat through your suit jacket.

Honestly, Mr. Chairman, after pouring $3.7 trillion down the rat hole, that’s all you’ve got?

Personally, I’d have split it all up. At that rate, we could’ve given every man, woman, and child a little bit over $12,000 each and created a five-hour wait at the Outback in the blink of an eye. 

(But what do I know? Afterall, Harvard turned me down.)

That being said, don’t be surprised if the markets mount a counter-trend rally from here — even as the Fed drives the bus off a cliff.

As for places to play these trends, here are a few of best investment insights from the pages of this week’s top-read articles in Wealth Daily and from our sister publications, Energy & Capital and Green Chip Stocks.

Good Investing,

steve sig

Steve Christ
Editor, Wealth Daily

Obesity Drug Stocks: The Fat of the Land
Wealth Daily Editor Ian Cooper examines how one weight-loss drug could fatten your wallet in the next 60 days.

China’s Energy Future: 1.3 Billion Chinese Can’t Be Stopped
 Editor Steve Christ takes a look at China’s energy future and explains what it means for the price of oil.

How to Front-run the Chinese, Legally: Investing Secrets for an Empire’s Life Cycle
Publisher Brian Hicks explains the seven stages of an empire’s life cycle and how they pertain to the United States, China, and most of all, your portfolio.

Smart Grid Reaching Critical Mass :Smart Grid Saves Energy, Makes Money
Energy & Capital
Editor Nick Hodge discusses the coming-of-age of the smart grid via a Kohl’s case study.

Going Long Uranium: Say Hello to the Easiest Gains You’ll Make this Summer
This one’s for the books: Top metals investor Greg McCoach explains how one company’s multi-billion dollar goof just created the easiest gains you’ll make this summer.

China’s Silent War for Canadian Energy: Is it Time to Buy the Oil Sands?
Energy and Capital Editor Keith Kohl explains why China’s grab for Canada’s oil sands may have been a huge mistake.

Approaching Solar Earnings Season: Big Banks Bullish on Solar Stock
Green Chip Editor Nick Hodge talks about big banks warming up to the solar sector and how you can turn a quick profit as earnings season approaches.

Is Mongolia the Next Big Gusher?: The Big Find China’s Backyard
Editor Christian DeHaemer shares his insider intel as to why Mongolia is about to ride the Chinese oil craze into a golden age.

Winning Biotech Investments: This Bull Market is Just Heating Up
Wealth Daily
Editor Steve Christ discusses the biotech bull market and the one overlooked American company that just made your immune system 1,000 times more effective.

Ecosystem Investing: A $2 Trillion Discovery that May Piss You Off
Green Chip‘s Jeff Siegel reviews the annual liquidation of $2 trillion, and how it affects the true value of conventional fossil fuel-based energy.

The World’s Hottest Gold Region: Two Gold Stocks with Big Finds
Wealth Daily
Editor Luke Burgess discusses the investment highlights of investing in junior gold stocks with exposure to major gold trends in Nevada, including the Carlin and Cortez Trends.