The United States is facing a lot of problems, but one U.S. industry remains strong. It has access to capital and has increased in size every single year since 2000. Should you invest in this industry? Don't bother -- you already have.
This mystery industry is the U.S. government, and its unbridled growth remains a reason to be bearish on the U.S. economy.
Don’t be fooled into thinking the Great Recession is over because of the 3.5% gain in third-quarter GDP. The only reason for the uptick was the government’s contribution, as seen in the chart (courtesy of the Cato Institute):
As you can see, private U.S. investment peaked in 2006 and it has now fallen substantially below 2001’s recessionary low. Without the government’s largesse, the U.S. GDP would hardly be growing at all. Government spending is part of the reason we’ve seen one positive GDP quarter in every recession in the past 40 years. In fact, it’s the mistaken belief that GDP measures “economic growth” that has resulted in the U.S.’s substantial national debt. Here's why.
GDP is a crude instrument that measures only money spent and not the source of the spending. Think of it as the revenue line on an income statement. Costs and profits on that statement, as well as the balance sheet (assets vs. debt), are more important than the revenue line. (Placing too much attention on revenue and not enough on profit is why many dot com companies went bankrupt.) The focus on GDP leads to misguided policies (like "Cash for Clunkers" and tax credits for homebuyers) that attempt to prop up GDP. These programs actually encourage debt and consumption at the expense of a healthy balance sheet.
Why does this false GDP growth matter to you and me? Because it means that the U.S.’s economic performance is worse now than it was in 1966 and 2000. In Elliott wave terms, those were important years that marked tops of major degrees of trend: Cycle-degree wave III in 1966 and Cycle V in 2000.
Back in 1966, federal debt to GDP ratio was 44%; in 2000, 59%. Now it's at 83%. One way to think about this growing ratio is that the government has written checks that will have to be paid for by future production. As such, it fits well with what EWI's president Bob Prechter forecasts for the stock market and economy: further weakness, as money gets siphoned off to pay the bills.
Because the government’s size has increased so dramatically since 2000, the U.S. is now closer to socialism than capitalism. A February Newsweek cover hit on that sentiment with its title, “We’re All Socialists Now.” A socialist economy is inherently inefficient. Resources are taken from the private sector and redistributed to a wider group of citizens, which is costly, and those costs lead to a smaller economic pie for everyone.
The increased government share of our economy means one of three things: higher taxes, more government borrowing, or both. You can’t spend you way to prosperity. So each new government bailout scheme is another reason to become bearish on the U.S. economy.
A chance reading of a book on technical analysis and the Austrian school of economics led Jason Farkas, CMT, to EWI. Prior to joining the firm, Jason worked for 14 years as a futures, options and equity trader. He has been tutored by some of the best investment minds, including legendary trader Dick Diamond. You can read Jason's Weekly Insights every Friday in EWI's intensive Currency and Interest Rates Specialty Services.