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Calm Before The Storm?

Jim and Walt Raby            Printer Friendly Version
September 24 2004

After unprecedented growth in Technology during the 1990's, the strength of the economy seems to have ground to a halt. The growing concern of many in the finance industry is that the U.S. economy has stalled and we are facing a potential decline in the coming months.

The U.S. Federal Reserve has approved two quarter-point raises in interest rates since late-June, taking borrowing costs to 1.5% from a 46-year low of 1%. The Fed has said higher rates are needed to pre-empt inflationary pressures, and most forecasters expect further increases before the end of the year. While the FED had hoped that historically low interest rates would give a boost to the faltering economy by putting more money into the hands of individuals and businesses, this boost is yet to be seen. Weak job growth has exacerbated the problem sending wages down. Hiring came to a near standstill last month, with a net gain of only 32,000 jobs, down from 66,000 in June, stunning economists who had expected seven times as many.

With the unemployment rate holding steady at 5.9% and the ongoing outsourcing of US jobs, it seems an economic recovery is not in the near future. The manufacturing of small toys, shoes, and other similar gadgets in China has been going on for some time. But it is important to be aware that the exportation of manufacturing jobs is evolving - rapidly. Go into any major retailer or call almost any customer service center and you'll become aware of the iceberg ahead of us. With call centers being set up in India and virtually everything being made in China, the reality is that the jobs being lost are not just industrial manufacturing jobs.

While it's true that the Information Technology boom of the 1990's fueled our economy and brought about major changes with the Internet and the World Wide Web, the globalization of information may end up backfiring on us. As the world grows "smaller" as a result of the high-speed information highway, it becomes less necessary for people to live near the companies who employ them. Our office is not the first to point out the dangers inherent in outsourcing American jobs and the possible effects it may have on the U.S. economy. For months, Lou Dobbs, an anchorman for Moneyline on CNN, has been ending each of his segments by listing U.S. companies who are outsourcing jobs overseas. Quite a few to say the least. What used to be a side issue is quickly becoming one of the most important economic issues facing the U.S. The McKinsey Global Institute estimates that the volume of offshore outsourcing will increase by 30 to 40 percent a year for the next five years. Some estimate that as many as 3.3 million jobs could be lost overseas by 2015.

According to projections, on top of the industrial manufacturing jobs, the hardest hit sectors will be financial services and information technology. In January testimony before Congress, Hewlett-Packard chief Carly Fiorina warned "there is no job that is America's God given right anymore." This is evident in many of the new more liberal laws China has been passing to protect private ownership and intellectual property. Furthermore, these laws embrace public and private partnerships as well as domestic and foreign partnerships. Making it clear that though China remains a Communist country, the government sees the potential and wants to encourage more foreign companies to invest in China and Chinese workers. Moves like this will ignite the Chinese workers as they slowly but surely get a taste of capitalism and all that it has to offer.

Similar things are occurring in India as well, with the average computer programmers' annual salary in the US at over $60,000.00 and the same job in India paying roughly $5,800.00, it's no wonder why companies are outsourcing jobs there. Rugs are being pulled out from under the U.S. worker left and right. As manufacturing jobs continue to go to China and IT jobs continue to go to India, the U.S. faces much more than just high unemployment rates. A smaller work force equals a smaller tax base and less tax revenue putting more strain on an already weak economy. Also, increased financial obligation via un-employment compensation and welfare. A double whammy for the U.S. treasury. Add to that the estimates that the Iraq war is costing us $5 billion or more per month and we have the additional costs of homeland security, an expense we've never had before, and it becomes clear that we are facing a major crisis.

The budget shortfall is forecast to reach a record $445 billion this year alone. In addition to a smaller tax base, budget shortfalls and the cost of the war in Iraq, USA Today printed an article on August 16 regarding the increase in the trade deficit, saying the U.S. trade deficit increased more than expected in June to nearly $56 billion. The total trade deficit approaching $500 billion annually, and the total national debt is approaching $8 trillion. In 2003 the number of people who filed for bankruptcy exceeded 1.3 million. These figures along with the declining tax revenue and problems balancing the budget make it obvious that the U.S. will have a difficult if not impossible task of paying the bills.

As a result of these problems, the dollar fell 30% against the euro in 2003. It doesn't take a rocket scientist to figure out that when the dollar starts to fall the worldwide interest in gold increases dramatically. However, with a multi-billion dollar short position in gold the international banking community has given the gold, market some real volatility. The stakes are very high and the ride will be anything but smooth because this conflict of interest between the bankers and the gold market will only add to the turmoil. Ultimately, however, the fundamentals of a global industrial shift compounded with excessive spending and debt, should result in a much weaker dollar.

September 25, 2004
Jim Raby


Jim and Walt Raby have over 65 years combined experience in the securities business, 45 of which have been at National Securities Corporation in Seattle Washington. The major portion of Jim and Walt's business is in Natural Resource stocks, mainly trading on the Canadian and U.S. exchanges. Most importantly they are licensed to do business and have clients in all 50 states. If you are interested in working with them or have further questions they can be reached at 1-800-431-4488 or 1-206-343-6225.