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Weekend: The Road to You Know Where

Written By Brian Hicks

Posted May 21, 2011

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. 

We are beginning to learn once again that it’s awfully tough to drive a car with four flat tires.

And no matter how much gasoline Ben Bernanke dumps into the tank, the real economy is running on fumes.

Of course, you would never know this if all you did was watch the price action on the DOW. It’s on a two-year uptrend that would make you believe the engine was hitting on every cylinder.

But like a broken gauge on the dash board, it’s not necessarily an accurate gauge of everything going on under the hood…

Unfortunately, the Dow is still what most people use to gauge the economy. It’s reflexive.

If the Dow is green, they are happy; if it’s red, they are sad.

It’s pathetic, really… But that’s the way the world works for a market of sheep.

Ben’s Illusory Returns

The problem is the two-year run up in the market is, in part, illusory — brought on entirely by Ben Bernanke’s Depression-era playbook. He promised helicopters, and he delivered them.

You see, the markets haven’t returned to levels last seen in 2008 because if the economy has been restored, it has done so because the Fed’s money drops are being put to use in the markets’ levitating asset prices. 

That’s one thing the Fed is quite good at — skewing asset prices to the upside with monetary policy. It’s their default setting whenever there is a slowdown. 

The problem is that this time, the monetary pipeline to Main Street is broken. That leaves money sloshing around the markets instead of actually working to boost the economy.

The Fed, in essence, has spent the last two years pushing on a string.

How do I know this? It’s pretty simple, really….

After spending over $4 trillion to get this car back on the road, the four wheels that drive Gross Domestic Product (GDP) are still flat.

You may have heard of GDP. It’s the true gauge of the U.S. economy, and unlike the Dow, it can’t be juiced the same way the markets can by waves of liquidity. In a GDP world, you are either growing at a healthy clip or you’re not. 

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

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

That means in order actually grow and substantially increase the size of our economy, we will need an increase in some form from C, I, G, and X.

The Real Gauge of  the Economy is GDP

That’s the equation and it cannot be conned by Central Bankers. In this case, the problems are structural in nature, not monetary.

The first roadblock is the biggest of them all, since Consumption 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. Factor in the high cost of food and energy to the equation, and it’s hard to see how this part of the formula is going to add much real growth. 

Next up is Investments.

At just 10% of GDP, there in is not much to work with here, either, since executives are worried about the uncertain economy still aren’t spending as much as they use to…

Despite sitting on record mountains of cash, companies are still nowhere near the levels of expenditures that would be on par with 2008 when Investments made up 15% of GDP.

But wait there’s always government spending, right? Well there used to be…

These days, not so much.

The truth is real government spending has been in serious decline since peaking last fall. And faced with huge fiscal deficits, the call for budget cuts is growing louder and louder every day.

Long story short: Your federal, state, and local governments have fallen down and they can’t get up.

That leaves net eXports to the pick up the slack, which isn’t going to happen, either — not as long as we still buy more form overseas than we sell. 

In essence, we are left with is four structurally flat tires. 

Add it all up [GDP = C + I + G + (X-M)] and the odds are increasing for the economy to end up stuck, broken down by the side of the road — or worse, mired in a double-dip recession.

Of course, don’t expect your friendly local central planner to take any of this lying down. That’s why QE 3 is practically a given at this point. They just can’t help themselves.

After all, the road to hell is paved with good intentions.  

Meanwhile, addressing the real problems facing our economy is much tougher than the path of least of resistance. That’s why precious metals like gold and silver can go much higher from here as the dollar continues to take it on the chin.

And as always, our editors have put together a few of their best money-making ideas for the coming years in this week’s top-read articles from Wealth Daily and Energy & Capital, below.

Have a great weekend.

Your bargain-hunting analyst,

 steve sig

Steve Christ
Editor, Wealth Daily


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