Some things in life are bad
They can really make you mad
Other things just make you swear and curse
When you’re chewing on life’s gristle
Don’t grumble, give a whistle
And this’ll help things turn out for the best
And always look on the bright side of life
Always look on the light side of life
– Eric Idle, “Always Look on the Bright Side of Life”
Today, we continue our showdown with Gary Shilling, John Mauldin and Justice Litle (who responds to our case below).
On one side: people who are looking on the bright side.
In the other: your editor.
On one side is a group of people – bright and well-meaning with facts and logic on their side. They say the US is headed into another period of prosperity, led by better demographics and more energy.
On the other side is your Rogue Economist… with his own view. He believes the US is galloping toward a Zombie Apocalypse – led by the Pentagon, Congress, government parasites, and conniving, crony capitalists coast to coast.
Who’s right?
Perhaps this is a good time to ‘fess up… and admit that we were completely wrong about the trend we saw developing in late August.
So far at least, US stocks are still going up. And gold is still going down. The exact opposite of what we believed would unfold as the lazy, hazy days of summer gave way to the more frenetic, earnest trading days of fall.
Will these trends continue? Or is Mr. Market merely messing with our minds… waiting for us to drop our guard before he makes his move?
We don’t know.
Tomorrow could be a big day. The Federal Open Market Committee – responsible for decisions about buying and selling of Treasury securities – is getting together to discuss policy.
On the table is the “tapering” of QE. Only there is no way Ben Bernanke is going to begin real tapering in the last months of his term.
Even the mere hint of a “taper” sent jitters through the markets during the summer. Why take the chance? Better to delay, procrastinate… buy time… and make it someone else’s problem.
But you never know. So we leave our “Crash Alert” flag up – as a warning, not a prediction.
Stop the Credit Avalanche
Your editor, by the way, gave President Obama a chance. He announced his willingness to serve the United States of America as the next chairman of the Federal Reserve System.
One way or another, the Fed’s mainlining of beaucoup credit has got to stop. And when it does, there’s going to be hell to pay.
No economist with a reputation to protect will be willing to do it. Instead – whether it’s a Yellen or a Kohn – he’ll waffle and hedge… fudge and prevaricate… until the whole Titanic hits an iceberg.
Not so with your Rogue Economist at the helm of the Fed. We’ll take our hands off the wheel… and let Mr. Market have his way. The results will be breathtakingly horrible as investors panic… the economy sinks… and the zombies are flushed out to sea.
But it will only last for a few months. The serious business people and investors will wash ashore… ready and able to begin rebuilding on a much firmer footing.
So far, our Commander in Chief has resisted the temptation to pick up the phone.
Hey, Barack: One call and your financial troubles are over. With the Rogue Economist on the case, your worries about a soft recovery will soon be history.
Heh heh. But that’s a story for another day.
Bottoms Up!
Our story today: One group of economists and analysts has become optimistic. They see the glass as half full. The other group comes along and drinks it. Bottoms up!
Yes, dear reader, here’s Gary Shilling with more reasons the US economy will be a world leader in the years ahead:
Americans have little choice but to save more. They no longer trust their stock portfolios as they did in the 1980s and 1990s to substitute for saving out of current income to educate their kids and finance early retirement.
The nosedive in house prices after heavy cash-out refinancing of mortgages and home equity loans has removed much of the home equity they earlier used to finance oversized spending. The postwar babies have been notoriously poor savers and desperately need to keep working and save much more for their old age.
As the saving rate rises, spending will grow more slowly, the reverse of what occurred when the saving rate slid from 12% in the early 1980s to 1%. That drove consumer spending growth about a half-percentage point per year faster than after-tax income and fueled the domestic economy.
Now, that’s looking on the bright side! For the last 30 years, America’s prosperity has been floating on a rising tide of debt. US households now have to face reality, says Shilling.
He could say that their standards of living must decline – as they are forced to pay for things they consumed years ago. Or he could say that the US economy will remain locked in the doldrums… or that fewer Americans will find jobs.
But no. Gary takes those lemons and makes a truly disgusting concoction.
US savers will now be socking away about $1.2 trillion a year, he reckons.
Hooray!
But wait. Where will that money go? To fund federal deficits!
Think about that, dear reader. Instead of wasting foreigners’ money on their zombie wars and leechy giveaway programs, the feds are going to spend the savings of the American public.
If this is the glass half full, give it to us empty!
Market Insight:
A Tale of Two Americas
From the desk of Justice Litle, Editor, Strategic Wealth Report
Full disclosure: I’m one of those glass-half-full analysts Bill is talking about.
In fact, through my macro investing newsletter, Strategic Wealth Report, I am betting heavily that American declinists have got it wrong. Again.
Why?
For one, because the new US energy boom is a game changer. It will extend America’s geopolitical… and economic… dominance well into the 21st century.
Make no mistake: The 21st century will belong to America. Not to China. And not to the ailing BRICs.
Yes. America is an “empire,” much like the British Empire and even the Roman Empire. But those empires lasted not for decades, but for centuries.
All empires fall. But sometimes they take 400 years (or longer) to do so. And true empires mature at a slow rate, at least on the evidence of history.
An empire can easily take 200 years to reach its peak. By that standard the US is an “adolescent,” to borrow from Stratfor analyst George Friedman.
We may not see full American strength – “Peak Empire,” if you like – until 2050 or so. That’s plenty of time for most investors to bet against the declinists… and clean up.
I find myself at odds with Bill on this. This is a strange place to be. There are few thinkers I respect more deeply.
But my ultimate commitment is to the facts as I see them… and to making outsized returns for my readers by aligning my investment recommendations with the major trends.
And when it comes to America’s current and future trajectory, I must respectfully disagree with the declinist argument.
Devil’s Tears
Let’s look a little closer at Bill’s argument for America’s decline. From yesterday’s Diary:
What counts is not how much energy you produce, but what you do with it. As stable societies mature, they tend to use their energy less efficiently. Energy is wasted complying with regulations… paying for lobbyists… filling out tax forms, dodging taxes… and supporting zombies.
True. There is a reason why oil is known as “the devil’s tears”… why many oil-rich countries are awful places to live (let alone start a business)… and why many poorly governed countries find that oil riches are a curse. (Look at Venezuela.)
It is also generally true that inefficiency and waste rise along with wealth. Mature societies can get fat and lazy. This is certainly the case with Rome. And America is not without its problems in this regard.
But this is not always the case… And America’s increased energy efficiency is a fastball pitch straight down the middle for the “bullish on America” case.
In spite of being a mature economy, the US is still the most efficient and productive countries on the planet. And its efficiency is growing, not shrinking.
Skeptical? Excellent. Consider the following: In 2012, America used less oil than we did in 1973.
Think about that. Not only is US oil production at quarter-century highs (thank you, North Dakota and Texas), but also US crude oil consumption is at multi-decade lows.
It’s truly amazing. Last year, Americans used less of the gooey black stuff than when Nixon was president… than when Roberta Flack, Marvin Gaye and Diana Ross dominated the charts… and less than when the US economy was one-third of its current size.
The Blind Men and the Elephant
How is this possible?
There are some simple answers. We’re driving less. (More people living in large urban areas). The cars and trucks we drive are far more fuel-efficient. Our factories are more energy-efficient. Our supply chains are better run.
But there is a deeper answer too: There are not one, but two Americas.
I suspect it is this “two Americas” paradigm that explains why Bill and I disagree on the future of the US.
We are looking at two different parts of the same whole. Like the blind men and the elephant: One holds of the trunk. The other has the tail. Neither understands that these two objects are part of the same beast.
There is the “Zombie America” Bill sees… and the “Dynamic America” I see. These two Americas co-exist. But they are very different.
“Zombie America” is bloated, indebted, poorly run, and generally a shambles. This is the America epitomized by Washington DC. It is also the America that, sadly, you probably know first-hand. It is a land of welfare checks, bureaucratic red tape, and political cowardice.
But there is another America that is dynamic, efficient and, quite frankly, amazing. An America that is No. 1 in technology, entrepreneurial flexibility, resource extraction, knowledge growth, rule of law, property rights and asset wealth.
And this is why I remain bullish, despite Bill’s valid points. In my view, it is this second America that is more important.
Are there zombies walking among us? Absolutely. Is there an epic waste and debt build-up with Washington at the epicenter? Yep. Are there millions of Americans struggling to pay their bills as the painful but necessary transformation to a “knowledge economy” leaves them behind? Sadly, yes.
The Zombies Won’t Win
But “Zombie America” is no match for “Dynamic America.”
Did you know that America is projected to be the lowest cost manufacturer in the Western World by 2015? And that our edges in energy and technology are what will enable this? Did you know that China is projected to lose its low-cost labor edge to Africa and Central Asia within the next decade?
Technological prowess and resource availability (not to mention intellectual property and entrepreneurial dynamism) are huge advantages. Dynamic America has these advantages in spades. No other country even comes close.
The US is not going to get “rich” off of oil. The US is already rich. Domestic oil and gas is simply going to help us extend our already massive advantages.
So shed a tear for Zombie America… but raise a glass to Dynamic America. Because it is this second America that will carry the first like a 400-pound linebacker with a tiny racehorse jockey on his back. Just as it always has.
In fact, Dynamic America is just rolling up its sleeves…
Carpe Divitiae,
Justice
Editor’s note: What do you think? Will Justice’s vision of America win out? Or will Bill’s? Write to us by simply replying to this email. We’d love to know your thoughts. And if you’d like to hear more from Justice on why he believes America could confound its critics… and how you can profit… you can access the August issue of his new Strategic Wealth Report newsletter here free of charge.