Analytics, Economics, Financial Services, Investments, USA

The week of Monday, October the 5^th started with a strong gain of 112 points for the index triggered by substantial gain for Alcoa and JP Morgan. Tuesday was also very good for the market with Dow up another 132 points due to increased optimism about quarterly earnings mostly exceeding expectations. After smaller advances on Thursday and Friday the market closed with a weekly gain of 4% almost erasing the decline of previous 2 weeks.

The next week started with a small gain on Monday, October the 12^th followed by a small loss on Tuesday and then a massive gain of 145 points on Wednesday catapulted by way above expectations earnings of 2 Dow components – JP Morgan and Intel. After mostly uneventful next 2 trading sessions the index closed with a gain of 1.3% for the week.

Bond prices dropped, the US$ sank and the price of Oil, Gold and other commodities continued to rise with the dollar weakness. I think the falling dollar, continued high unemployment and out-of control government spending is a threat to the markets. Let’s start with unemployment. Since the start of this recession the economy has lost 7.2 million jobs and the trend is continuing however at a slower pace. During the best times for the economy during nineties it was generating at best 2.15 million jobs a year. On top of it there is almost 100000 new people entering the job market monthly due to immigration and population growth. It’s going to take an enormous growth in the US economy to create millions of new jobs and bring the unemployment rate back to 5%.

They way things are going it seems unlikely. This government is much more concerned about implementing their grandiose plans by borrowing enormous amounts of money. As of September 30^th 2009 US national debt stood at $12 trillion and annual interest of $ 383 billion to service it .This year deficit will hit $1.4 trillion or 10% of GDP. It is projected that by 2019 it will hit $21 trillion or close to 100% of GDP. But the biggest danger for the market is a continuous weakness in US$ which is down over 12% since Obama inauguration. It is a major concern prompting many prominent economists and market observes offer their opinion on the subject.

Zachary Karabell compares the current situation in the US with Great Britain in 1946 after the Second World War when they have asked US to bail them out otherwise Britain will default on their debt. Then British Empire was spread all over the world and was the largest economic and military power. To their shock US refused and only later had agreed to loan them much lesser sum in exchange for among other things US dollar becoming a world reserve currency. Within 2 years Britain left India and many other colonies in Asia and Africa, its military shrank and commerce contracted. It quickly receded from dominant economic position and entered several decades of economic malaise. Using this as an example let’s look at relationship between US and China. Right now China is the biggest holder of US debt, somewhere close to $1 trillion and its economy is growing at much faster pace than in US. According to some projections it will overcome America by 2030 by the size of its economy. Right now the relationship between 2 countries is mutually beneficial however this might change. The Americans have not had to deal with a true economic rival since a demise of Britain. In order to be able to compete the only way is through invigorating the economy building on global success of many leading US companies , focusing on new ideas, new products rather than defending rusty industries of yesterday. I completely agree with the author unfortunately current administration is much more interested in imposing new mandates and taxes on American taxpayers and businesses. It may lead to a collapse of the dollar and bond market choking the economy. The danger is perhaps not immediate but very real.