TimingCube - The U.S. fiscal black hole - United States National debt history, current account deficit, U.S. deficit spending, index momentum ranking

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500

Market Update

Another strong week for the stock market as all indexes continued their march upward, including the Dow Jones Industrials finishing at a new all-time high. Unlike last week which saw a dearth of economic news, there was abundance this time around with key numbers released for most major industries and the all important wholesale and consumer price data. Most sectors fared well with nice advances in manufacturing and retail sales, and even semiconductors joined the parade to help the Nasdaq 100 continue its string of gains on higher volume. The only weak spots continued to be auto-related manufacturing and housing with October numbers showing new family home and apartment construction plummeting to their lowest levels in more than six years. The Producer Price Index (PPI) fell a larger than expected 1.6% from September to October and the Consumer Price Index (CPI) dropped by 0.5% for a second month in a row. Both indicator readings increase the likelihood that the Federal Open Market Committee (FOMC) will stand pat when they meet next month and leave the interest rates unchanged at 5.25%. Markets were also helped by U.S. Airways' offer to acquire Delta which spurred airline stocks ahead on Wednesday, and crude oil futures which plunged below $56 on Friday, its lowest level since June 2005.

With all the positive news the indexes advanced for the week led by the Nasdaq 100 and the Russell 2000 finishing 2.83% and 2.51% higher respectively, followed by the S&P 500 with a 1.47% gain. All three indexes rest well above their respective 50-day and 200-day exponential moving averages (EMAs), and our Buy signal remains active.

Trend Timing School

The U.S. fiscal black hole

Do not assume for a minute that we came up with the "fiscal black hole" heading to be alarmists; in fact we are simply quoting the nation's accountant-in-chief David M. Walker. Mr. Walker is the head of the Government Accountability Office (GAO) in Washington and he has been warning anyone who wants to listen that we are headed straight for financial ruin. In addition to the fiscal black hole he speaks of the "demographic tsunami" represented by the baby boomers headed for retirement over the next 20 years, and of the recklessness of borrowing money from foreign lenders to bankroll continued operations of the U.S. government.

As comptroller general of the United States Walker feels it is his duty and responsibility to spread the word of this impending catastrophe, and to do so he intends to take to the road as much as possible over the next couple of years. Walker and his traveling road show of economists and budget analysts recently stopped in Austin, Texas, TimingCube's home base, to deliver his sobering message. For a more detailed account of their presentation read Wake-up tour warns of U.S.'s fiscal "black hole".

David Walker is by no means a lone voice on this subject. Paul Volcker, the renowned former Federal Reserve Board Chairman, has been warning that, unless our federal government reverses the deficits produced by overspending and the imbalance of imports over exports, we face a return to the 1970s, when our country experienced soaring inflation and unemployment, or worse.

Americans have been taught bad financial behavior for at least a generation, and after years of borrowing and spending like there is no tomorrow, it comes as no surprise that we have one of the lowest savings rates of any industrialized nation and that personal debt has been on the rise with personal bankruptcies at unprecedented levels. As a society we believe indebtedness is not only OK but it is cool and patriotic. No wonder that having the world's most indebted government comes as no surprise.

The GAO places our current national debt at about $8.5 trillion and projects that it could reach $46 trillion or more by 2030, adjusted for inflation (see Chart 1 below). The main culprit for this coming explosion is the forecasted growth in Social Security, Medicaid and especially Medicare. The cost of health care is expected to continue outpacing inflation and the nation's economic growth.

Chart 1: United States National debt history

Source: U.S. Government

According to the CIA's World Factbook, in 2005, the U.S. was ranked dead last (163^rd of 163 countries listed) with a calendar year current account balance of $-829.1 billion (yes, that is a minus), almost twice the deficit of all other debtor nations combined. The current account balance is a country's net trade in goods and services, plus net earnings from rents, interest, profits, and dividends, and net transfer payments to and from the rest of the world during the period specified. In contrast, countries such as Japan, China, and Germany topped the list with positive current account balances of well over $100 billion each. Find the complete list at CIA World Factbook - Current account balances. Note that the CIA World Factbook is a treasure-trove of facts and statistics on the United States and more than 250 other countries. And it does not require a security clearance to be accessed!

So if the facts are so well known and the consequences clear, why isn't anyone talking about it or better, doing something about it? After months of campaigning for the midterm elections you would expect at least some of the candidates to include this major issue in their platform. The sad truth is that politicians, regardless of party affiliation, do not like to discuss big problems such as looming economic disasters because there are no easy solutions.

Those expecting things to change soon in Washington are in for a major letdown: Democrats are well known for supporting expensive entitlement programs and Republicans, who pride themselves of being fiscally responsible, have during the last six years overseen the largest increase in government deficit spending in U.S. history.

Government intervention is needed to stop and reverse the negative economic spiral, with policies that have a historic ability to change deficits into surpluses. There are currently no such policies considered, let alone implemented. The only obvious solutions to this problem involve a combination of tax increases and benefit cuts. These are by definition unpopular measures and for an elected official they amount to political suicide. While most everyone today views the problem as impossible to solve, we have to remember, for the sake of our children and grandchildren that in the 1990's President Clinton, assisted by a hostile Republican Congress and legislative spending limits actually produced a budget surplus. Also, the fact that 65 out of 163 countries on the CIA list (including Argentina, Bangladesh, and Uzbekistan to name a few) manage to operate with surpluses is also proof that it is possible to get ones fiscal house in order.

Some economists predict the government, instead of making the hard choices, will resort to printing money to pay off its debt, a risky strategy that could lead to runaway inflation.

The reason all of this is critical for our wealth building activities is that sooner or later the fiscal excesses will take their toll on the economy and the stock market will go into a severe bear phase. Stay ready to follow the trend and in the mean time, make sure you do not keep all your eggs in the U.S. Dollar basket.

FAQ of the Week

Question: How can the best performing U.S. index (Nasdaq 100) be ranked last?

Some observing subscribers have noticed that the Nasdaq 100 has been the best performing U.S. index since our August 16, 2006 Buy signal with a return of 15.06%, yet it has consistently lingered at or near the bottom of the World Index Ranking.

The simple reason for this seeming contradiction is that the World Index Ranking system measures longer term momentum strength, not short term spurts.

Table 1 below shows how our three primary U.S. indexes have fared versus the Ranking's high flyers during the two months since we launched the World Index Ranking service, and over one year. Over two months the Nasdaq 100 has the best return of the U.S. indexes (just) but it has the worst average Strength and Rank. The Strength and Rank becomes more understandable when looking at the one year return where the Nasdaq 100 is dead last. Note that the Strength indicator from which the rankings are derived uses our proprietary formula which measures momentum strength over various periods of time.

Table 1: Best and worst index momentum

Country	Index Name	Index Symbol	2-Month Average Strength	2-Month Average Rank	2-Month Return	1-Year Return
India	BSE 30	^BSESN	37.08	1	12.16%	62.60%
Mexico	IPC	^MXX	33.24	2	12.84%	57.60%
USA	Russell 2000	^RUT	9.86	18	8.57%	19.02%
USA	S&P 500	^GSPC	9.34	19	5.83%	13.75%
USA	Nasdaq 100	^NDX	5.15	27	9.89%	12.92%

Warm wishes and until next week.

The TimingCube Staff

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