Investment advisory | Daniel J. Disimile, CFP® LLC

We remain in a deflationary credit mode, two years after the recession officially ended. Households and corporations are saving more and spending less. Corporate balance sheet liquidity has been rebuilt and cash is building across the private sector. Banks have shrunk their balance sheets as loans outstanding loans have retrenched and without growth in bank balance sheets; there is no money supply growth.

Personal incomes are not growing. Most retailers are not reporting sales gains. Home prices are down 33% from the peak, and gas is up 52% in two years. The 30-year Treasury bond has been declining since December and higher commodity prices or taxes will intensify deflationary pressures elsewhere in the economy.

The federal government added 418,000 new jobs since the recession BEGAN. The private sector lost 4,000,000 since it ENDED. Total jobs in the US are down 6,900,000 from the peak set in 2007. There are eight unemployed people for each job opening and 20% of households have at least one person looking for full time work.
This economic recovery is the worst since the Great Depression.

THE DEEPER YOU GO, THE HIGHER YOU FLY…

The strongest stock market period in the presidential election cycle is from the low before the mid-term election, to the high after the election. This usually happens during the 3rd year of a presidential cycle and over the past five mid-term elections, during this period, the S & P 500 has averaged a 41% gain.

When combining the fourth quarter and the first quarter of the year following the past five mid-term elections, this has been the strongest period for stocks and has averaged a +7.9% compounded gain. In comparison, the average performance during the second and third quarters of these years was - 6.4%.

2011 is a pre- election year, which are usually positive for stocks as the administration tries to fire up the economy so voters will be feeling good at election time. In three of the past four pre-election years, the Dow Jones Industrial Average posted 20% plus gains, and while some fiscal sanity would help make that target a reality, the way our legislators spend our money, it won’t come easy.

RUST NEVER SLEEPS

10 years after 9-11, the armies of Iraq, Libya, the Taliban and al Qaeda are weaker. Women can vote in Iraq and Kuwait, drive in Saudi Arabia and go to school in Afghanistan.

When global military and economic alliances once dropped bombs on five sovereign countries, we called that a World War, twice. As Turkey gets involved with Syria, this could be the charm.

Tyrannies from the Maghreb to the Mashriq have fallen, while others cling to power murdering their own. This Arab Spring (civil war) in these crack house countries is a cry for political and economic freedom and a rejection of corrupt, inefficient powerful centralized government.

The goal of the Muslim Brotherhood is to create “an Islamic caliphate from Spain to Indonesia built on the ruins of Western Civilization.” Their credo is “Jihad is our way, and dying in the cause of Allah is our highest hope.” They are anti-capitalist, anti-Semitic, reject Western values and will likely take power in Egypt when elections are held in September.

GOIN HOME

Israel, the only good thing in the Middle East, believes in freedom, democracy, and the rule of law. As the 100th smallest country, with less than 1/1000th of the world’s population, Israel has the fourth largest air force in the world and their economy is larger than all its immediate neighbors combined.

Ranking second behind the U.S. in the number of companies listed on NASDAQ, this nation of 7 million, from 1980 to 2000, registered 7,632 patents in the US while Egyptians registered 77 and Saudis 171.
Israeli’s have the highest percentage of home computers per capita in the world, the highest ratio of university degrees to the population in the world, and produce more scientific papers per capita than any other nation by a large margin, 109 per 10,000 people.

Israel faces Islamic extremism on five fronts, with Syria, Lebanon, Iran, and with Egypt in the West Bank and the Gaza Strip. That 7th century mind-set is not exactly pole position when competing in the global marketplace. Soon, Israel may be forced to win one for the free world and in doing so, the entire region will prosper when she becomes the Hong Kong of the Middle East.

WORLD ON A STRING

Greece owes $240 billion to European Union banks and governments, Portugal owes $290 billion, Ireland $870 billion, Spain $1.2 trillion & Italy $1.4 trillion. Half of this debt is held by France and Germany and most certainly, any economic dislocations in Europe will impact US.

The IMF has given Greece $ 17 billion. The government must cut $40 billion. The Greek people face tax hikes for five years, and the self- employed will pay a flat tax, if they make money or not. Spending for education and health care is being slashed, along with social security, which will also be means tested. The retirement age becomes 65, salaries for public employee union members get cut 15% and there is more…

FDR wrote “collective bargaining cannot be transplanted into public service as the very nature and purposes of Government make it impossible for officials to bind the employer, who is the whole people who speak by means of laws enacted by their representatives”.

No one is representing the taxpayer when temporary politicians make promises to special interests, which cannot be kept because of economic realities. This is why governments with generous social welfare programs all over the world are being forced to restructure the way they do things.

HEART OF GOLD

The U.S. economy with 4.5% of the world’s population, produces 25% of it’s the goods and services in a very competitive global economy. Our allies prosper when we are strong and suffer when we are weak.

Our federal debt is $14.3 Trillion and has grown to 70% of our GDP. The last time our borrowing exceeded our GDP was during World War II when we fought an anti-capitalist, anti-Semitic enemy who rejected Western values.
The intangible value of the global economy justifies some bail outs because living in the modern world beats living in a tent, but when the money runs out, the spending must stop.

The US government will not default on its debt obligations if the credit card limit is not raised. All interest, principal, and pensions will be paid from the cash flow the treasury receives. What will be cut, automatically, will be many government programs, and that would be bullish.

Capitalism is the only system capable of producing the wealth needed to underwrite the social safety nets wanted by the general public while financing the agenda of the governing class.

Bankruptcy is what ultimately stop’s socialism.

AFTER THE GOLD RUSH

A study of three global contractions and 15 country specific financial crises showed that GDP growth, unemployment and housing prices all suffered for a decade or more after the events. Included in the study were the 1973 oil shock, the late ‘80s Savings & Loan crisis, and the bursting of the Japan stock and property bubbles.

The finding showed that median GDP grew 1% less annually over the next decade, unemployment averaged five points higher over the pre crises decade and housing prices were down 15% to 20% ten years after the crises.

ROCKIN IN THE FREE WORLD

Free prices set by willing buyers and seller’s creates efficiencies in the marketplace that send signals on what to produce, when, where, and at what price. Bureaucrats can never set prices, allocate goods or decide what should be made as well as millions of people who act in their own interest through a free and open market.

Milton Friedman wrote “economic freedom was essential for political freedom” and “production under the auspices of government makes it nearly impossible for any dissent or the exchange of ideas.” When Chile abandoned socialism in 1973, they used a privatized pension system to create a capital market and serve as an investment pool. Today they are the wealthiest country in Latin America.

True government stimulus comes from low debt, low taxes, reduced regulation, spending restraint, and a free economy. When Big Brother is making the financial decisions for people, they will never know where money comes from or connect what they earn, and save, to what they can spend.

Outside of the NFL where outcomes are never predetermined, socialism has NEVER worked.

HEY HEY, MY MY … (INTO THE BLACK)

Financial problems have financial solutions. If restoring economic health and prosperity is the goal:

July 15, 2011 THIRD QUARTER COMMENTS

LIKE A HURRICANE

EVERYONE KNOWS THIS IS NOWHERE