An article today titled ‘Wall Street sees shoppers as key to rally’s future’ says that “On Wall Street, the average shopper can trump a Federal Reserve policy maker”, and that “With other parts of the economy showing signs of improvement, the question of when a recovery will occur and how strong it will be lies with consumers”.

Frankly, this having been my constant refrain on this Blog for many months now, the only interesting thing I see in this is why so little has been written in since the beginning of the year on the importance of U.S. consumer spending to U.S. economic growth and health.  The article says “reports last week showing weaker-than-expected retail sales and flagging consumer confidence overshadowed an upbeat view of the economy from the Federal Reserve” and “This (coming) week, the consumer is in focus again as a stream of retailers report second-quarter earnings. Wall Street will want to know if retail companies, like businesses in other industries, made money primarily because of cost-cutting rather than from improved revenue or sales”.  This suggests Wall Street focuses on the consumer only when news is about to be released.  I simply can’t believe that.  My guess is that it is the article writers and reporters who think from a myopic 100 foot level and not from a 10,000 foot level when reporting on news just released or about to be released.  The economists and smart Wall and Bay Streeters have to know the importance of the U.S. consumer to U.S. economic health – just as the U.S. Administration must know that in spades.  Collectively, they just may not want to emphasize it by talking frequently about it.  That said, the referenced article also says “Friday’s consumer sentiment report was a jolt for traders about exactly how uncomfortable consumers still are with their finances and the state of the economy”, so perhaps I am wrong in my assumption as to Wall Street and Bay Street focusing on the importance of the U.S. Consumer to recovery.  If I am wrong in my Wall/Bay Streeter assumption I don’t think that augers well either for investors who rely solely on their investment advisors and don’t ‘think for themselves’.

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An article yesterday titled ‘The Quick Buck Just Got Quicker’ reports James F. Reda & Associates recently conducted a study of changes in pay packages by 191 of the U.S. largest companies which says “changes in these companies’ plans made short-term incentive pay a bigger part of the compensation pie” – this in the face of a statement made in the article (by its author) that “With outsized and corrupting corporate pay packages under scrutiny, you might think that companies would be rushing to tamp down their compensation plans. Making sure that pay actually rewards long-term performance, for example, seems a fairly obvious way to allay shareholder fears that managers are lining their pockets rather than safeguarding their companies”.

So what does one take from this.  At least two things:

•    first, as Mr. Reda is reported as saying, shorter-term compensation incentives invite higher risk behavior on the part of executives;

•    second, and in my view far more importantly, the logical reason Boards of Companies might approve compensation plans that pay more incentive for near-term results is because they think that will motivate executives to produce better short-term results.  The question is, at what long-term cost to the company’s economic well-being.  For example, an obvious way to improve near –term results (both in earnings and cash flow) is to postpone capital spending.  What effects does this and other ‘rob Peter to pay Paul’ management strategies have in the longer term context of a company’s economic well-being – nothing but negative ones.

To me, to the extent near-term incentives are replacing long-term incentives is simply one more reason to despair over the ‘short-term gain’ for ‘long term pain’ attitudes that seems to have prevailed in America (particularly) after the year 2000.

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An article on August 12 titled ‘Deflation looms in the post-crisis world’ says “Deflation one. Inflation nil. While the U.S. Federal Reserve, moved gingerly towards a more optimistic view of the U.S. economy Wednesday, saying “activity is leveling out,” it is clear that deflation rather than inflation remains the primary threat in a post-crisis world.  Evidence from all quarters of the globe Wednesday showed that as yet, rampant stimulus-driven inflation has not emerged and deflationary forces continue to have the upper hand as economies struggle to recover from recession – a process that is expected to be slow and painful”.  The article goes on to quote Brian Bethune, Chief U.S. Financial Economist at Global Insight as saying: “The bottom line here is that the Fed is sticking to its guns and maintaining a relatively aggressive posture on policy in a situation where the economy is at a critical turning point and inflation is running below the Fed’s desired target”.  If, as a result of things such as current oil prices, spare manufacturing capacity, and reduced consumer spending, inflation runs for the foreseeable future in the U.S. and Canada at less than the typically targeted 2% – 3% per year I see at least the following implications:

•    GDP growth, which clearly in a fiat currency environment or otherwise has an inflation component will have to be less than those now calling the ‘end to the recession’ likely are hoping for;

•    Government revenues will be less than governments likely are forecasting, resulting in budget deficits being higher than are being forecast;

•    China’s store of U.S.$ are not going to suffer from a fate of hyper-inflation, resulting in China being ever more powerful on the world stage as a result of continuing to use its large store of U.S.$ to make strategic (read ‘resource oriented’) acquisitions; and,

•    importantly, new job creation will be slow – particularly in the U.S. where I think many of the manufacturing jobs that have been lost are unlikely to return, and where I think manufacturing jobs will continue to be lost to both further automation and off-shore sourcing.

If I am right in these observations, for me it follows that the U.S. dollar must drop over time as it weakens against strengthening fiat currencies of those countries that have and will continue to supplant U.S. manufacturing jobs, U.S. monthly net trade deficits continue for the foreseeable future, and the U.S. Federal Government continues to run large annual deficits.  Going forward, I see none of this as a pretty picture from the point of view of the standard of living of the average American.  Rightly or wrongly, I do see gold as a ‘purchasing power’ hedge in what I see to be the likely economic ‘times ahead’ for both the U.S. and Canada – and I believe this will be the case in circumstances of either inflation or deflation.

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An article today titled ‘U.S. home foreclosures set another record in July’ says RealtyTrac has reported that U.S. home forecloures jumped 7% over June numbers and 32% year/year – having escalated with escalated U.S. unemployment.  RealtyTrac says that in June one in 355 U.S. households (being more than 360,000 households) with a mortgage received a foreclosure filing in July.  While hardly unexpected given the U.S. unemployment rate (reported last week at 9.4% and expected to exceed 10% in the near term) I think this is just ‘more of the same’ in the context of ‘green shoots and meaningful economic recovery’.  Note I continuously use the phrase ‘meaningful economic recovery’.  I simply don’t think any statistic that shows a small increase in month/month GDP signifies much of anything, and certainly in my view does not signal or demonstrate ‘meaningful economic recovery’.  To me, unless economic recovery is meaningful it makes little sense to talk about it – and for me ‘meaningful economic recovery’ means several continuous months of GDP growth with an ongoing prospect of further continuous economic growth beyond those months.  I just don’t see that happening in the U.S. unless U.S. Job Losses reverse, the U.S. consumer gains confidence, U.S. house prices start to rise, and U.S. house foreclosures return to levels experienced in the first few years after 2000.

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