Economy is worse than you think

The global slowdown infecting Europe and China has hit the US. But there's good news: Investors now have a beautiful opportunity to profit from the chaos.

By Anthony Mirhaydari Jun 1, 2012 12:22PM

It has begun. After months of warning that a warmer-than-normal winter was skewing the economic data to the upside, seasonal factors are reversing. What's being revealed is an American economy suffering from the same ailment that's already affected Europe and China. The May payroll report came in well under expectations as cyclical, goods-producing payrolls fell for the first time in nine months. Factory activity is slowing. Home sales are cooling just as more distressed properties hit the market.

 

It's an ugly picture. But Wall Street is already looking ahead to new stimulus measures from the Federal Reserve at its June 19 meeting and the inflation that another round of money printing will create. That's boosting the fortunes of precious metals and related mining stocks, as expected. But it also sets the stage for another bout of confidence-crushing inflation.

 

To summarize, things are getting worse now. They are likely to get better, at least for stocks, once the Fed and the European Central Bank yield to the inevitable and unleash another flood of cheap cash. But the tailwind should last only for a few months before deep-rooted inflationary pressures (from a drop in labor productivity and an increasing in rental housing demand) and speculative fever (hitting food and fuel prices) damage consumer confidence again.

 

 

This was the dynamic that has helped short-circuit growth over the past few months -- a repeat of the dynamic that played out in mid-2011 -- keeping real, inflation-adjusted disposable income down at 2010 levels via higher prices on things like gasoline. With work-based pay declining (down 0.2% last month, down two of the past three months) people have been drawing on savings and using credit cards again to maintain spending.

 

This can't last.

 

Wall Street expects that a round of quantitative easing -- which is simply printing money and using it to buy long-term bonds in the open market to push down interest rates -- will ignite a big rally in risky assets as traders pull cash out of bonds and into stocks. The Fed hopes this will encourage fresh economic growth via the wealth effect from higher stock prices and lower borrowing costs.

 

While this strategy worked great in late 2008 and early 2009, it's not working so well anymore, because circumstances have changed. Fear over the eurozone crisis has already pushed interest rates very low, with the 10-year Treasury yield dropping into the 1.5% range. In early 2011, the 10-year yield hit a high of 3.8%. Credit is already cheap enough.

 

 

Also, inflation continues to creep higher. Each iteration of the Fed's policy easing pushes inflation to new post-recession highs before consumers fall away, and inflation drops as the economy slows again. Rinse and repeat.

 

The risk is that the Fed will lose control and encourage a round of nasty stagflation as inflation pops, the economy slows and the Fed is left powerless. That's because its actions are cumulative. The money supply (the M2 measure) has increased 33% to nearly $10 trillion since the recession started in late 2007. Yet the economy, in inflation-adjusted terms, has only now expanded over its pre-recession peak.

 

To summarize, since 2007 we have nearly 8 million fewer full-time workers and the economy is only 1.2% larger, yet we have trillions of dollars in extra cash floating around and the lowest interest rates in human history.

 

Without even getting to the problems in Europe (structurally flawed monetary union, banking woes, uncompetitive economies) or China (overdependence on exports, bad real-estate loans), the situation is scary. It's scary because after all that's been done via stimulus measures, we have so little to show for it.

 

Eventually, the economy will seize and policymakers will be out of options. We're not quite there yet, since overall inflation has cooled over the past few months, giving the Fed and ECB room to maneuver. They might not be so lucky next time.

 

 

For now, investors have a beautiful opportunity to profit from the chaos with precious metals as the dollar drops on the weak data and the expectation of Fed action later this month. I discussed why the dollar is overbought, and gold oversold, in my last column and blog post.


Trading update

The Edge Letter Sample Portfolio benefited from Friday's rebound in precious metals in a big way. The Velocity Shares 3x Gold (UGLD) and Velocity Shares 3x Silver (USLV) were both up about 10%.

 

I want to expand my exposure to the area with two new individual names: Great Basin Gold (GBG) and Agnico Eagle Mines (AEM).

 

I found both GBG and AEM with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.) 

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 


 

417Comments
Jun 1, 2012 2:03PM
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Infation has cooled...I think not. Mirhaydari obviously hasn't been living in the real world.  Just last night I went to the grocery store and for 10 items it cost a whopping $50.00.  I was flabbergasted. It it has cooled as he suggests God forbid what it will look like when it raises its ugly head again after all this incredulous money printing sheme the Fed used to allegedly prop up the economy.  To be honest the Fed doesn't know diddily squat!!!  We are not far behind Europe and the Fed and our worthless leaders have spent us into oblivion.
Jun 1, 2012 6:41PM
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Our economic problems can be solved but not by our current Congress.  Unless America can vote in some decent people into Congress, we'll keep heading downward regardless of who wins the next Presidential election.
Jun 1, 2012 1:35PM
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The amazing experts keep bringing out the "ghost" or inflation when the real problem is going to be stagnation/deflation as the consumers are all tapped out.

 

Just my 2cnts.

Jun 1, 2012 3:56PM
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  Both graphs show, "The Recession" ending in mid 2009. Who decided that's when it ended? Things don't look different today, than they did before mid 2009. We've got to find that idiot and set them straight.

  The unemployment figures are incorrect too. They don't count people who have exhausted their benefits and are still unemployed. Stir those number in and the real number is closer to 10%

  Still going strong after all these years, it's not a recession, it's a DEPRESSION.

Jun 1, 2012 7:44PM
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The "recovery" was non-existent. It was smoke and mirrors created by inflated prices, and a cash-happy administration in your Federal Government. Just what part of "I'm out of work, with no leads" do they not understand?

 

Recovery never comes through the Federal Government. It comes through the business sector. And Americans will recognize any recovery when they see it. Not before.

Jun 1, 2012 5:49PM
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Not worse than "I" think ,I'm a small business owner I know how bad it is!  "Worse than you ****z in the media are reporting" is more like it. It is an election year, the lefty press is gonna make things all sunshine and roses.. to show what a good job the arseclown in office is doing. LIES, ALL LIES
Jun 1, 2012 5:27PM
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More Stimulus !! Are you f***ing kidding me ??? Anthony profit from who ?? Did you go to College in JERKWATER village? Print Money and steal !! Print money and steal !!  This is not an economy, this is a major league screwing that our govt is orchestrating !  Stimulus.. WAKE THE F**K UP !!! Bahh...........................
Jun 1, 2012 3:38PM
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The economy is not worse than we think, it is exactly what we know, you guys keep trying to tell us it is better than it actually is. We are not STUPID.
Jun 1, 2012 4:01PM
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The American people KNOW how bad it is...

Its the NEWS Media and Government Crooks that think everything

is hunky dory....

The general public is feeling the pain of the FED printing funny

money 7/24..and Oil companies driving up all other (food) prices...

Jun 1, 2012 1:20PM
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Money from debt has been the fall of every government who tries to use it for power.
Jun 1, 2012 6:12PM
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The excuse that Bush was bad is no excuse.  
Jun 1, 2012 6:46PM
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And the band played on.

I wonder how long it will take this economy to recover. I know the government is making mistakes, I know the people are making mistakes, and I know more mistakes will not fix this problem. I think I know what will work.

1. We need to get our military out of other countries and our bases too.. Letthese nations pay their own way.

2. All foreign aid must stop and now to Pakistan and others like that country. These people simply hate us, so why give them money.

3. The government needs to concern itself with America's problems and stop all the party bull.

4.Republicans must stop opposing new coporate taxes.

5. The rich need to pay more taxes too, so the republicans need to stop opposing this too.

6. We the people need to stop all this **** on our butts and not caring to force change in a peaceful way.

Numbers 3 and 6 is perhaps the most important one of these thing I think simply becuase a divided nation can not stand.

Jun 1, 2012 7:50PM
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The economy is worse than we think?? LOL ..... not worse than "we the people" think ..... we already knew it was worse than what the media and government keep trying to tell us. Perhaps "they" are just starting to realize it?
Jun 1, 2012 5:33PM
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"Economy is worse than most brainwashed sheeple think"....duh.
Jun 1, 2012 8:09PM
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when Reagan was elected he inherited a worse economy from carter, not once in all his 8 years did he blame carter or the democrat congress unlike odumbo who continues to play the blame game.Reagan rolled up his sleeves and went to work, didnt take expensive vacations every month, play golf or baskeball everyday he worked unlike the the current idiot in the whitehouse, and if obama care isnt overturned this month,we are leaving the country cause the next step is the government telling which  cars I need to buy or when /what to eat. cause its either that or get ready for the next revolution
Jun 1, 2012 4:59PM
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I most enjoy these articles, but what struck me most is the statement that inflation has cooled.  I can tell you that as someone who travels and eats in restaurants, inflation has not cooled.  Inflation outside the measurement categories of the Bureau of Labor Statistics is rampant, let me repeat, rampant!  The 50 dollar bill is the new 20 and so on.  Prices on many food commodities has skyrocketed and generally have not subsided.  Also, QE 3 will further tax and destroy more savers wealth....inflation is a quiet means to confiscate the wealth of workers and savers.  If you work you actually make less, if you save it is stolen secretly by deflating its value.  The present monetary managers have no other choice but to inflate, put off the day of reckoning for another 6 months or so.  Meanwhile if you have a job you work for less, if you save you lose.   
Jun 1, 2012 2:27PM
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They really ought to not do any more QE. Growth is slow but it is still growth; after the nasty recession who could realistically expect otherwise ? Negative factors in the economy need time to unravel themselves, as painful as that might get at times, the end result will be a more level playing field for a real recovery. The worst thing that could be done right now is creating more money out of thin air, money which has no real value. You would think the 'master-minds' at the Fed and elsewhere would realize this and opt for the lesser of 2 evils.   
Jun 1, 2012 7:17PM
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So Obamanomics isn't working?  Go figure.
Jun 3, 2012 12:17PM
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Economy is worse than you think

No sh&%$t.

Jun 1, 2012 5:43PM
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People - it is the federal reserve that is killing this nation and the IMF that is destroying the world - They are drug dealers peddling super cheap money and causing governments to spend way beyond their means - soon interest rates will rise they will have too - a 3 point gain in interest rates will put the interest only payment on our debt at over $1 trillion a year.  Why do interest rates need to increase - lenders and inflation will demand it
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