Myth #1: Manufacturing in the
US is declining at a rapid pace. Not so says none other than
Fed Chairman Ben Bernanke. In recent remarks to Congress,
Bernanke said that manufacturing in this country has not declined
as severely as some would have us believe. Instead, productivity
gains have resulted in net decreases in employment in the
manufacturing sector. In addition, most of this loss has come
in light manufacturing – toys, clothes and small electronic
devices. Gains are being made in heavy manufacturing industries
– those that produce machinery for others. China does
not have the skilled labor force necessary to produce this
type of equipment, and Japan keeps building factories here
to take advantage of our skilled labor. Japan’s population
keeps aging and shrinking so look for them to continue to
build plants here.
Myth #2: The sell off in the housing and automobile markets
will lead us into a recession. Yes, we have seen excesses
in both these markets and a cooling-off period is necessary
to work off inventories that have built up over the past several
years. Fortunately, jobs are being created in other industries
to take up the slack. Ten million new jobs have been created
in the last five years, and new industries are opening up,
notably in the alternative energy sector. Some may want to
compare the current economic environment to that of the early
1930s when housing and auto production went into a slump,
dragging the overall economy into a depression. However, unlike
the 1930s when the Fed wrongly put the brakes on the growth
in money supply, “helicopter Bernanke” has stated
he would fly over America dropping massive amounts of money
at the slightest hint of a depression or even recession. Mr.
Bernanke has a helicopter pilot’s license hence the
nickname.
Myth #3: China and the rest of the world are holding us
hostage through the amount of Treasury bonds they hold. Again,
Chairman Ben has told Congress that if foreigners dumped all
their treasury bonds on the market, it could be absorbed by
the Federal Reserve and institutions in a very short period
of time. A side benefit would be an increase in the Yuan against
the dollar which would cut into China’s pricing advantage.
Not to be arrogant, but the rest of the world depends heavily
on the US consumer to keep their economies growing. So it
is doubtful that we will see a dumping of US debt by any nation.
Myth #4: We do not save enough. Many in the media are only
looking at M1 or even M2 which is money in checking accounts,
savings accounts, money market accounts and CDs. Investors
are much savvier than that and today invest in higher-yielding
corporate bonds and treasury securities, not to mention common
stocks. We won’t even mention money invested in the
housing market as that may not be as liquid as other assets.
Older investors are very focused on saving for retirement,
and the investment advisory business is booming as a result
of all the liquidity in the markets.
Currently, sub-prime mortgage lending continues to dominate
the economic news. Mortgage delinquencies and defaults are
increasing, but are actually lower now than they were during
the 2001- 2002 recession. The common stocks of sub-prime lenders
have dropped dramatically. New Century Financial has dropped
94%, Fremont General 65%, and NovaStar Financial 85% to name
just a few. As is typical in any booming industry, the housing
market allowed for excesses in lending practices that are
leading to the current fall out. The markets have their own
self-correcting mechanism, and the worst thing that could
happen now would be for the federal government to step in
with regulations. It’s a little late to close the barn
door as the horses have already left. The banking industry
has established tighter credit standards to stop further issuance
of these types of mortgages. Many investors past and present
jump on these financial trends, hoping to make easy profits,
and they along with many professional investors will be burned.
Dana Investment Advisors has long been an investor in pools
of Ginnie Mae, Fannie Mae and Freddie Mac mortgages, primarily
adjustable rates. These government agencies have been forced
in recent years to tighten their credit standards and increase
their cash reserves. We see no problems for these agencies
as they guarantee full payment of principal and interest.
In fact, prices of these mortgage pools have firmed up in
recent weeks as investors are now seeking higher yield coupled
with safety of principal.
Random thought for March 2007:
China will soon become the largest English speaking country
in the world.
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