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Reecnt Economic News

Our economy created 117,000 jobs in July however this is within the 129,000 statistical confidence interval which means that the jobs that were "created” are indistinguishable from a decline. Still we have no meaningful and statistically significant increase in jobs creation. Meanwhile the unemployment rate dropped to 9.1% which is simply reflecting additional people not being counted because they have given up looking for work which is indicated by workforce participation rate falling from 64.1% to 63.9%; the lowest level since 1984. Even if the jobs number were accurate, it is not enough jobs to keep up with current labor force growth let along decrease unemployment. Expect jobs numbers to continue to be weak. As the economy weakens further, we will likely see the unemployment rate increase.

The US debt rating was downgraded from AAA, the highest by S&P to AA+ the next level down. This doesn't come as much of a surprise considering the state of our country's finances including massive deficits and debt. There is no doubt that the US will be able to pay back its debt; the issue centers more on our willingness to pay (politicians arguing over the debt ceiling) and the likelihood that US Debt is paid back in less valuable Dollars due to weakening of the Dollar through printing. The credibility of the major ratings agencies is being called into question because they were all part of missing the credit crisis in 2008 and were part of the problem in putting "AAA” status to junk mortgage derivatives.

In the wake of this downgrade, the markets have continued to slide rapidly however interestingly enough, Treasury bond rates did not rise which would typically be expected under a downgrade situation. Since the other two major rating agencies have not downgraded US debt this may be why Treasuries yields have not spiked (prices going down) or it could simply be the markets are work reaffirming their faith in the US Government to pay its bills. Ratings agencies and analysts do not set prices; markets do.

The US Dollar has maintained value relative to the S&P 500 and Gold has shot to new highs. I would caution current holders of Gold as well as would be Gold investors that prices will not go up forever and while Gold is considered a safe haven, it can drop faster than it has risen which is what we saw in the 2008 crisis. Those who have profited from Gold should consider significantly reducing exposure to Gold. Those who are considering purchasing should probably avoid doing so as risk is very high.

The selling that is occurring in the market now is mostly fear based on the recent downgrade of US debt and the continued and intensifying crisis in Europe. Investors are selling their mutual funds indiscriminately which causes the funds themselves to be forces to sell good assets to meet redemptions which is what we saw in the 2008 meltdown. This is a good reason not to buy Gold; as funds/institutions/hedge funds have to sell good assets such as Gold holdings just to meet redemptions causes the prices of those good holdings to drop. This is a negative feedback cycle which continues until some good news comes out. There is no doubt, as I have been stating for some time now, that I believe the markets are have been artificially inflated and should come down, however I would not expect this kind of meltdown so quickly. Usually the beginnings of a decline are more moderate and then begin to accelerate as the slide progresses. The trend will likely be down however I'm sure we'll see plenty of large bounces following declines. It's going to be a bumpy ride, so hold on; we'll get through this.

Recently, Dan Gross, economist for Yahoo Daily ticker made a remark about housing and demographics. He referred to a "impending housing boom simply as a matter of demographics” under the assumption that a number of homes are demolished each year, people have babies, people get older, young people form their own families and as this occurs it will lead to a shortage in housing down the line. I was quite surprised to hear an economist talk about demographics because it is rare. Economists tend to extrapolate current figures into the future as well as being overly optimistic instead of using tools such as demographics to attempt to look around the corner. While it is true that there is a demographic wave of young people who are beginning to form their own households, there is still way too much housing supply and it will take years to use up the excess supply until we see supply pressure that would drive prices up. To watch the video, click on http://tinyurl.com/3hnapqd.

Many market Pundits and economists alike seem think it is uncertainty that is preventing businesses from growing/hiring. Business is always uncertain. Taxes are always uncertain. A business never knows when the next downturn is lurking around the corner. I think the reason that businesses are not growing and hiring is lack of demand for their products and services. Then I hear some of these same pundits discuss how to create demand. While demand can be created to some small degree at the margins, aggregate demand is more a function of total available income to spend. A new and better product can come out that entices people to buy it, but that only means those consumers will spend less on something else. Incomes have not rise in over the last 10 years and the baby boomers are passing their peak spending years.

We will not be able to all of a sudden get a generation to start spending more money when they are focusing on paying down debt and saving for retirement after their children leave the nest. It is a natural process that will just take time to come back. The good news is that it will come back and come back strong unlike many other demographically plagued countries in the world.

Meanwhile with the recent rash of sour economic news, the discussion of QE3 (Quantitative Easing) has been increasing. While The Fed may be force to do some type of QE3, more stimulus will be less effective than the previous due to law of diminishing returns. It is powerful at first, but each round has less and less effect. We are better off in the long run to deal with the pain of contraction so that we can emerge healthier sooner rather than continually stimulating which has less effect anyways yet will weigh us down with the excess debt in the future.

Fed stimulus has not led to economic recovery, rather it has cause asset inflation which was certainly part of their plan; re-inflate the housing market and stock market in hopes people would spend again. The stimulus did not re-inflate the housing market however it did re-inflate the financial markets to a large degree. What happens if the markets tank again? Then we would have stimulated for nothing. Simply piled on more debt, lowered the value of the Dollar, and received nothing for it. Perhaps the economy would have been worse off without this stimulus, but we will never know.

I also find it laughable when economist and other market pundits say that the chances of recession are unlikely. How can anyone say that a recession is unlikely? The recent GDP numbers are a hairsbreadth away from tipping into contraction. In fact it is very possible we are already in recession and we just don't know it yet because it takes about 6 months or so for the official call that we're in recession to come out.

President Obama recently stated that he thinks it will take a year to 18 months before the housing market picks up; convenient that this time frame is right around his re-election. Also along these lines, The Fed has indicated intent to leave rates at this level until mid 2013. This is also convenient in that it would be after the election.

On a positive note, Jobless claims fell below $400,000 for the first time since April. Although this is a small positive signal in a sea of negative data. It is important to remain cautious and not get caught up in fear and bubbles.

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