Tags: US | growth | economy | bonds

Growth Estimates in US Too Optimistic

Wednesday, 10 Jul 2013 07:47 AM

By Ashish Advani

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Is this a case of rose-colored glasses or is the recovery being touted in the United States real? That seems to be the 64 million dollar question these days. I will let you be the judge.

The first cause of the "recovery" in the United States is the rosy jobs numbers. This month we had 195,000 plus a revision of 70,000 for past two months. For May and June, the numbers were 165,000 and 150,000. So all in all, we have three robust months totaling 580,000 jobs.

Now let's deduct the fake jobs number (in the past I have written to you about the birth death rate model), which for the past three months was 530,000. So we really had jobs growth of 50,000 over three months. Now let's also deduct the fact that we lost 240,000 permanent jobs and gained 360,000 temporary jobs. The jobs leading to recovery does not look so rosy now does it?

The next pillar of growth being touted around is the so-called recovery in the housing markets. I concede that the housing prices nationwide are going up. But that is about the only credible fact in this recovery story. What supports this growth other than pure optimism or hope? The savings rate in America is actually declining and credit/debt per households is increasing again.

The myth that more jobs are being created and will lead to the affordability factor going up has been busted above. Now to put a kiss of death on this recovery story is the fact that the 10-year rate (which is what mortgage companies base their mortgage rates on) has shot up from 1.5 percent to 2.75 percent in the past two months. So 30-year mortgage rates are approaching 4.6 or 4.7 percent. As this number goes past 5 percent, we will see an end to the housing recovery.

Corporate profits continue to climb and the average worker continues to suffer. These are the lucky ones to have a job. The real unemployment rate in the United States is nearer 23 percent rather than the 7.6 percent that is being published. So the average hourly wage rate is not really increasing as well as the jobs (at least the quality of jobs) are not really impressive.

So Wall Street is happy, but no one else is.

As large as the United States is in terms of its economy, it cannot go at the growth story alone. It needs to have growth in tandem with its largest trading partners. So let's look around the world, shall we?

I am in Europe for two weeks. I am seeing nothing but stagnation so far. Poland is barely hanging on. France is in steep decline; PIIGS (Portugal, Ireland, Italy, Greece and Spain) are already very weak. You can add Cyprus to that now. Other than Germany, no country is really growing. Moving around the world, China is decelerating, which questions the growth of Australia, New Zealand and the likes of Singapore and Korea. India is in a dismal state too. Japan is inflating its central bank balance sheet, but not much else.

So if all countries that matter are flat or declining, what hope does the United States have of going it alone and making strides in sustained growth rates? As my mentor says, "The hopes for a sustained U.S. recovery are slim to none, and slim just left town."

I am not sure about you, but I am not buying into this recovery and the trade I would consider is going long on 10-year bonds. The panic will set in late this summer and at that point, Treasury prices will soar, leading to a collapse of the 10-year yields.

Of course this current insanity might continue for some time and so you need a steely resolve to jump in to this contrarian trade now. In my opinion this trade will pay rich dividends by the end of summer.

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