What kind of Recovery is this? 9/10/11

The Recession ended 26 months ago. What kind of Recovery is this? No. This is not meant to be a political statement. My blog is all about investing and although I remain a technical investor, the fundamentals are the backdrop to what creates the technicals.

Recently I attended another excellent presentation. This time by John M Simms, Ph.D., CFA and Chief Investment Officer for a company in North Carolina... John had made a similar presentation last year and had suggested buying GLD, Gold and more gold. Since then GLD is up 50%.

”Too much debt. Price to be paid. Run for the hills”. That just about summarizes his sentiments. We are already in the beginnings of the double dip recession as GDP growth is <2% last quarter. Each time it dropped to below 2% we have had recessions that followed. Reducing unemployment from the current 9.1% to 7% will require a job growth of 208,250 per month for the next 3 years. That is unlikely. We have a long slog ahead. Consumer confidence is dropping but it can drop steeper. Higher debt means slower growth. Is the US same as Japan? Yes and no. The Japanese have been great savers and own most of their debt. We don’t.

John makes excellent points with his charts and data to show that US growth has been replaced with US Government transfer payments as we have got more and more indebted.

He uses Tobin’s Q and other charts to show that profit margins are at historical highs and profit projections are being based out of these highs, and are likely to disappoint in the future. Feds will probably have a QE3 that will be called something else. The Feds can “goose” the financial system but after QE1 and QE2, the Feds have a real exit problem. If the Fed cannot control the release of reserves, we are likely to have a real inflation problem, although John feels we are likely to have deflation or low inflation first before high inflation.

Is Gold in a bubble? John did a quick test of who owned GLD in the group and how much. Seeing the low numbers, he added, you don’t have a bubble till everyone owns GLD. John expects GLD to get up to much higher numbers based on the failure of Europe and the debt laden US. He did not hesitate to use numbers as high as $4000 - $5000 per ounce. That is a lot higher than the current $1800 per ounce. He sees the US dollar as the likely choice versus the Euro, just as US treasuries is a safer haven than equities. Europe banks are likely to continue to go down as they are weighed down by Greek debt. Then there is Spain, Italy, Portugal and Ireland. Did you know that pricing of credit default swaps show that it costs more to insure France against default than Chile or Columbia? And it is not because of Columbian coffee.

After listening to all the gloom and doom from John, I must say that I am glad my technicals are in line with what he was saying. I will take a closer look at opportunities to buy GLD on dips as well as pick up some inverse funds on bounces. Watch out. There is trouble ahead.