Daily Gains Letter

America’s Middle Class on the Chopping Block
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By for Daily Gains Letter | Mar 5, 2013

050313_DL_clarkThe U.S. economy is going to be low and slow for quite a long time. Cuts to government spending, persistent unemployment, and stagnant incomes all make for a real age of austerity at both the sovereign and individual levels. And there is inflation in this economy, and it’s keeping disposable incomes down. In an economy that is about 70% based on consumer spending, this is not good.

I’ve never been bearish on the U.S. economy, because no other country on the planet is able to pull up its bootstraps and move forward as quickly. But times have changed and after experiencing persistent financial crises (savings and loan, tech bubble, subprime mortgage crisis) and unreasonable government spending, I fear the system can no longer recover from these shocks like it used to. The reason for this is the lack of financial flexibility caused by too much government spending and a lack of will on the part of policymakers to enact ongoing, practical solutions to keep the ship sailing.

And the lack of financial flexibility is present in all the levels of government, particularly following the troubles in the real estate market after the subprime mortgage bubble had burst. I hate to say this, but government spending is a large part of gross domestic product (GDP) in all Western countries. This is why the eurozone is in such trouble, and it’s also why that region is destined for economic mediocrity for years to come.

I fear that the U.S. economy is going down the same path, and breaking out of this cycle is going to be extremely difficult. The single greatest strength the U.S. economy created was a burgeoning middle class, with decent jobs that made it possible for a family to live in their own home, own a decent car, and take a regular vacation. But somehow, the middle class in the U.S. economy have been getting squeezed over the years, while at the same time, government spending has gotten out of control.

I wonder about the reasons why this has happened and the only thing I can come up with is that special interests have slowly (perhaps unintentionally) pulled the U.S. economy and government spending away from reasonableness. Maybe it has always been like this, but the U.S. economy is now in a real pickle—stuck in a cycle of debt. Breaking this cycle of money creation and debt servicing is going to be painful. For the unemployed and underemployed, it’s already painful.

Just like in Europe, government spending in the U.S. is going to be under pressure for a number of years. This will be a big drag on the U.S. economy. Corporate earnings have actually been holding up well, as the Federal Reserve keeps borrowing costs artificially low, and continues to prop up the consumer with massive money creation. So with these fundamentals in place, investor expectations have to be low.

Right now, with government spending on the chopping block, investors need to be extremely cautious about taking on new positions in the stock market. With the U.S. economy growing at a slower rate than inflation, dividend income is your only friend. Currently, I have zero expectations for the stock market this year. If it can stay where it is right now, this will be a major accomplishment. I’m not bearish yet, but the fear factor is going up.

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  • https://www.facebook.com/dsichel Dan Sichel

    When Presidents are elected by bread and circus, can the republic long survive? History suggests not.