Financial Market Commentary

The graph says it all. Ronald Reagan ushered in a low-tax, anti-regulation, big deficit, pro-business philosophy that gradually spilled over to the corporate and household sectors and . . . did not work as advertised. Below I’ve charted the year-over-year change in US GDP since 1948. (Data provided by the Federal Reserve Economic Database. You can download the data by clicking here.)

Economic growth has been slowing in the US for 30 years. Let’s all grasp this simple fact. Furthermore, marginal tax rates have been decreasing over the same 30 year period, which leads to simple fact #2: reducing tax rates did not make the economy grow faster.

Where do we go from here? In the intermediate term, dramatic cutbacks in federal spending, along with further reductions in consumer spending (driven by high unemployment, and well-founded fears of dysfunctional federal government planning to reduce citizen’s Social Security and Medicare benefits), are likely to further slow GDP growth over the next several years — and maybe longer. Beware of purveyors of equities touting the boost the consumer will receive from lower energy prices. (The minute there’s institutional bullishness, oil will surge.)

Ongoing deleveraging will further slow growth, as will limits on money-printing stimulus programs designed to debase the US dollar (a lower dollar makes net exports less negative, which is positive for GDP). Japan’s assertive intervention on behalf of the yen today (August 4) got markets off to a skittish start, and the US has already used up a lot of its currency-debasing arsenal. Japan is ready to race us to the bottom, and a falling US dollar was a significant catalyst for rising US equities in 2010-2011. Many was the day when the trade was “dollar down, stocks up.”

In my humble opinion, it’s risk-off for quite awhile, unless you’re nimble enough to catch falling knives, among other feats of bravery that will be required to wade into equities on Friday, August 5. If you’re a buy-and-hold dividend investor like myself, it won’t be safe to come up for air (significantly increase long-term exposure to US equities) until the market finishes pricing the European crisis du jour and fully grasps the low-growth scenario the US has been slip-sliding into for 30 years — and is likely to remain mired in for as long as the rest of this decade. Given investors’ highly-refined ability to shrug off negative economic news, fully pricing in how close to Japan we’ve become could take some time (remember, on Aug. 4 we learned that Japan perceives that they’re in all-out currency debasement war with us).

Where to hide? I believe that gold is your friend. There are dark days ahead, and eventually everyone shall seek shelter there. Riding the gold bubble might be the new AAPL-GOOG-AMZN-NFLX-BIDU auto-trade for awhile. (But the risks are huge: just remember what the Fed did to silver earlier this summer by arbitrariliy raising margin requirements. The capricious hand of government lurks everywhere.)

Good luck, I’m interested in hearing how everyone did on Thursday. (Disclosure: Long GLD.)