Wednesday , 24 July 2024

Two Major Risks Suggest Its Time To Protect Your Wealth!

The current economic rebound [in the U.S.] is not a healthy and sustainable one. It is the result of the largest monetary and fiscal stimulus program ever [and, in spite of that,] neither housing nor employment are participating in the current rebound [while] budget deficits and transfer payments are at record highs! [As such, now is the time] to take action to protect your wealth from a potential economic setback and market decline. [Let me explain.] Words: 863

So says Claus Voigt ( in an article* which Lorimer Wilson, editor of,  has reformatted and edited […]  further for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Voigt goes on to say: 

The deficit could hit a record $1.6 trillion this year, or 10.7 percent of GDP and, as shown in the chart below, it has been heading skyward since 2002.

US Federal Deficit

The extremely high deficit as a % of GDP has put the housing and labor markets in dire straits. According to the Case-Shiller Home Price Index home prices are still in a freefall with December marking the fifth consecutive monthly drop – and the declines were not insignificant: 11 percent in December alone.

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As far as the labor market is concerned, a disturbing weak picture emerges…there are 7.5 million fewer jobs than in 2007 plus the employment-to-population ratio has dropped to a new low for the cycle — lower than at the depths of the recession! The chart below shows the percentage changes in that ratio so you can compare today’s labor market with what occurred during and after previous recessions. As you can see, the current period is indeed bleak.

Labor Statistics

The above pictures paint a crystal clear picture of a dangerously unbalanced and vulnerable economy that is exposed to …

 Two Major Risks

1. Soaring Oil Prices

With parts of the Middle East in turmoil, crude oil prices have risen considerably and every $10 increase per barrel translates into gasoline prices sucking an additional $30 billion out of consumers’ pockets. As shown in the following chart, the most recent price increase — some $20 per barrel since November — comes on top of an uptrend that started March 2009.

Oil Monthly 2 year change

During this surge prices have increased to a degree that has historically triggered — or at least coincided with — recessions. As such, since the economy is now so unbalanced and fragile, risks are high that the recent oil price shock could set off another recession.

In the unlikely event that the economy as a whole can escape unscathed, profit margins cannot because they are already at levels not seen since 2007. Therefore, even without rising energy prices, profits are due to turn lower – and higher oil prices will accelerate and aggravate this process. [With] analysts’ earnings estimates for 2011 [so] very ambitious there is absolutely no room for either of these two events [to happen] without major earnings disappointments taking place.

2. Lower Money Supply Growth

China, India, Brazil, and many more emerging markets, have started to implement restrictive monetary policy measures, such as interest rate hikes and higher reserve requirements, which are having some effect in that most emerging stock markets have not joined the S&P 500 in making new cyclical highs during the past weeks. [On the other hand, however,] the Fed and the ECB have not followed suit and especially in the U.S. the QE2 has dominated the monetary policy discussion — and worked its way into the stock market.

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It seems now, [though,] that an important change has taken place behind the scene. In July, 2010 the 3-month annualized growth rate of MZM declined 1.5 percent. Then in August Fed chairman Ben Bernanke stepped up and announced QE2. Money supply growth quickly responded. The 3-month annualized growth rate of MZM jumped to 9.2 percent in October, more than 11 percent in November, and more than 11 percent in December. In January it was back to 6.8 percent, and now it’s down to 1.9 percent.

Bernanke has bragged how QE2 caused the recent stock market rally [and] I have no doubts that QE2 did, indeed, play a major role in rescuing the economy from double-dipping and the stock market from another severe slump. If so, however, the above described considerable slow down in money supply growth should be seen as another major risk for the economy and the stock market. The NASDAQ-100 index, for example, with a price/earnings ratio of 24 and a dividend yield of a miniscule 0.4 percent, looks massively overvalued.


[Now is the time] to protect your wealth from a potential economic setback and market decline.


Editor’s Note:

  • The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
  • Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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