Technology Stock Advisor Issues Investor Alert

Time To Follow the Evacuation Routes To Safer Investment Ground. End Quote

(1888PressRelease) May 07, 2011 - The recent economic analysis of the U. S. economy by the Council On Foreign Relations explains much about what is fundamentally wrong with the economy of the United States, what is broken with America's political system, and a great insight into what to do about safeguarding your investments.

In their working paper, "The Evolving Structure of the American Economy and the Employment Challenge," Michael Spence and Sandile Hlatshwayo (Council on Foreign Relations®, Inc, March 2011), note that of the 27 million total new jobs created in America between 1990 and 2008, 26.7 million were created by government and health care.

Very few net new jobs during that 18-year period, less than 1 million, were created by the private industrial sectors of America.

Their focus on net new jobs created is the most accurate and legitimate economic indicator to use in order to understand what is wrong with the U. S. economy. The more widely used unemployment rate is subject to both political manipulation and media distortion that masks the underlying fundamental economic problems of the Nation.

Disastrous U. S. Trade Policies

The term "disastrous" depends on whose ox is being gored. The trade policies enacted by the U. S. Congress, beginning around 1985, have been wildly profitable for about 1500 large multinational corporations domiciled in America.

One of the key insights into protecting your investments is to understand that the trade policies had the economic effect of bifurcating, or splitting the American economy, into two parts, a part that benefits from global integration, and a part that suffers.

Stock investments in those 1500 companies have been very profitable, which explains the phenomena of very high corporate earnings in an era of wide-spread economic recession.

As Spence and Hlatshwayo politely explain, "We call it outsourcing when the function is performed by another company and off-shoring when the function is performed in another country."

What got outsourced and off-shored was the American initial factor endowments of individual creativity and technological innovation. This willful political killing of the goose that laid the Golden American economic egg is not supported by international economic trade theory.

As Spence and Hlatshwayo politely explain, "Parts of the value-added chain in these industries are moving to other countries, prominently the emerging economies. The parts that are moving are those with lower value added per person. As the emerging economies grow and mature, competition will move up the value-added chain. This has been going on for some time."

More accurately, they could have noted that it has been going on since around 1985, and is the deliberate political outcome of decisions made by the President and U. S. Congress that benefited a small segment of the U. S. population.

Economists call the parts of the value chain that got shipped overseas the intermediate industrial sectors that produce all of the value-added, and concomitantly, all of the technological innovation. The intermediate production sectors used to provide about 80% of the jobs in America.

Another term to describe this part of the American economic structure that got shipped overseas is "small manufacturing businesses." It is economically impossible to have job creation and economic recovery until this part of the American economy is brought back home.

The explanation why the private industrial sectors did not create any jobs in America in the past 20 years (and why the Obama Keynesian stimulus failed) is that that part of the economy that creates jobs in America does not exist anymore, as a result of the trade policies.

The part of the U. S. economy that is suffering is the great broad middle income classes, those that, borrowing from the Obama administration, make less than $100,000 per year.

Spence and Hlatshwayo invoke social contract theory to delicately explain the negative economic effects of trade policies on the middle income classes of America. "The absence of rewarding employment opportunities," they note, "in the lower- and middle-income ranges breaks an important part of the social contract in America, which holds that you are largely on your own but that if you work hard the opportunities will be there. The second part of that contract is now in question."

More accurately, they could have said that the second part of the American social contract that is completely terminated. Referring to the parts of the American innovation economy that have been sent overseas, they note, "Once these institutions are gone, it is difficult to get them back."

As they observed, "Many of the middle-income group, however, are seeing employment options narrow and incomes stagnate."

Still employing the social contract theory, which suggests that the winners of trade policies should compensate the losers, Spence and Hlatshwayo politely explain that the economic changes caused by the trade policies are structural and fundamental. "However much one might wish otherwise," they note, "it is impossible to fully compensate those whose employment opportunities or incomes are adversely affected."

They conclude their analysis with an odd metro-sexual policy suggestion, which is neither fully fish nor fowl.

They write, "If we want to use the market system in the context of an open global economy, distributional implications are inevitable, but we have to accept them." In other words, sure the economy is bad, and yes, the economic system is not working for the great majority of citizens, but get over it.

Bad stuff happens they note, but "a preferable approach is to accept globalization but to look for domestic policies that will reduce the distributional impact at home."

In other words, life is hard and the political system is unfair, and "Addressing inequality (caused by the trade policies) is a complex challenge."

Trade Policies Made Even Worse By Bad Monetary Policies

Spence and Hlatshwayo did not address another structural change that occurred during that period of time contributing mightily to the Nation's economic weakness.

Sometime, during the Russian financial crisis of 1997, or so, the U. S. Federal Reserve Bank became banker for the world. Their management of monetary policy since that time is primarily focused on obtaining global stability, not creating domestic economic prosperity, and certainly not on achieving full national employment.

During the financial crisis of September 2008, the Federal Reserve made about as many loans to foreign entities as it did to domestic financial entities, a fact only recently revealed by forcing the Federal Reserve to release data and documents.

At the same time that the Federal Reserve was trying to stabilize the global financial system, it was also pumping huge amounts of dollars and liquidity into the domestic economy. The effect was to create a great asset and commodity bubble.

This commodity bubble is just like the housing bubble they created, which was just like the frothy IPO bubble they created before that.

Too much money is chasing too few fixed assets and commodities, including the stocks of the 1500 multinational corporations that benefit from global integration.

In 2009, the year the Fed policies took effect, the S&P 500 index was up over 20%, way above its historical average return of around 10%. In 2010, the S&P 500 index was up over 12%, and so far in 2011, it is up over 6%.

The Fed's disastrous management of the domestic and global financial system is causing radical price distortions and disrupting the job prospects of ordinary American citizens, but the most crucial part of the story is the immediate threat to investment portfolios of U. S. citizens.

Follow The Disaster Evacuation Routes to Safer Investment Ground

The Fed's most recent bubble is now just beginning to pop and the storm is coming. That giant sucking sound is not air that is being blown into the balloon, it is the hurricane of investment asset values being sucked out of your account.

A prudent investor needs to immediately follow the disaster evacuation routes to safer investment grounds.

The best advice I can give is to reduce the asset allocation in stocks and pump up the asset allocations in investment grade corporate bonds, and international global bonds, which go under the title of multi-sector closed end funds at the Nuveen Investment website called CEF Connect (http://www.etfconnect.com/).

The right asset allocation for the coming storm for most middle income investors would be about 35% common stocks, about 35% investment grade corporate bonds, including preferreds and convertibles, and about 30% multi-sector bonds, bought primarily in the closed end funds that are covered by Nuveen Investments.

The other prudent act an investor can take is to pray that the next crop of American political and financial leaders do not undermine and betray the economic interests of the vast majority of American citizens by continuing the disastrous trade and monetary policies of the previous administrations.

There is a clear and compelling economic program that will fix the American economic weakness, but it does not include more global integration, as suggested by the Council of Foreign Affairs, or more government spending, as proposed by President Obama.

The new economic policy is to bring home the Nation's initial factor endowments of individual initiative and technological innovation that were thrown away by the previous leaders of the country.

About Thomas Vass: Vass is a professional portfolio manager located in Raleigh, N. C. See his LinkedIn profile at http://www.linkedin.com/in/tomvass and view his economic research publications on the SSRN Author page: http://ssrn.com/author=831853

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