America's Funk Ignores Its Strengths

04/05/2011 5:29 pm EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

It’s hard to see how the country’s mood could get any more negative, despite a two-year bull market and signs of job growth. But even if the many prophets of doom are right, where else would you want to be when armageddon comes?

We’re living through a depression of epic proportions.

I don’t mean an economic depression, of course—the world seems to have dodged that bullet for the moment.

But we’re now a decade into a steep downturn in the national mood, which shows no sign of improvement despite a two-year bull market in stocks and months of notable employment growth.

Some measures of the funk we’re in:

  • In the most recent AP-GfK Poll, “things in this country were headed in the right direction” for 35% of respondents, and the number is actually on the high side among similar surveys. AP-GfK, however, hasn’t registered a lower percentage of positive responses since December 2008, when the nation was staring into an economic abyss. “Wrong direction” scored 62%, by contrast.
  • In January, while some polls saw a fleeting pickup in sentiment, the respected Gallup survey found a dismal 19% “satisfied…with the way things are going in the United States,” vs. 78% dissatisfied.
  • What’s more, satisfaction with “our system of government and how well it works” and “the size and power of the federal government” fell to decade lows, and Gallup noted that the pace of the decline has accelerated over the last three years.
  • Another long-running series, from the Pew Research Center, puts the percentage of those satisfied in mid-March at 22%. That’s down from 59% in early 1998. The only readings as high as 50% in the last decade came in the flush of patriotism after the 9/11 attacks, and again in April 2003 as US tanks rolled into Baghdad, inducing temporary satisfaction in exactly half of the respondents. Since then, all through the housing boom, the credit binge, and two bull markets, the mood has steadily grown grimmer.

It might have something to do with the fact that real household income has stagnated for more than a decade, while economic inequality has increased sharply, with the top 1% of the households hogging 58% of all gains seen over a recent 32-year stretch.

Is This a Pessimism Bubble?
Now, factor in the recent financial collapse, and the resulting pursuit of unconventional monetary policies.

Federal Reserve Chairman Ben Bernanke may be right, as he said today in Atlanta, that the recent pick-up in inflation will prove transitory in the medium term. But the market’s response today was to bid gold prices sharply higher to a new record.

Traders appear to be listening less to the man with the monetary powers and the Princeton pedigree than to the charlatans selling the “end of America” and the threat of hyperinflation.

The gulf between economic performance and the direction of asset prices on one hand, and popular political perceptions on the other, is just about as wide as it can get. Either the sour sentiment dooms the uneven growth now under way, or stronger and broader growth will perk up sentiment.

The latter is the likelier outcome. Pessimism is at a historical extreme, and growth is not—so it could get considerably better.

We’ve seen rapid turnarounds in the past. Between January 1997 and February 1998, the proportion of respondents who told Pew they were satisfied with the national trend rose from 38% to the aforementioned 59%.

How did that happen? All it took was for unemployment to hit longtime lows, while incomes rose nicely and inflation remained tame.  

We’re not likely to revisit that nirvana in the near term, of course. But don’t we need to feel at least a little better?

Perhaps we already do. When Gallup asked people about their overall quality of life, rather than the perceived direction of the country, 77% pronounced themselves “satisfied” in January, down just five percentage points in three years.

NEXT: It Should Only Get Better from Here

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It Should Only Get Better from Here
So—while government and big corporations are increasingly viewed by Americans as a threat to their well-being— for those not foreclosed on, unemployed, or otherwise dispossessed, the view from the porch still looks pretty swell.

Given America’s privileged status after victories in World War II and again in the Cold War, a steep letdown in relative wealth and power was all but inevitable. And now it has largely taken place. Our fertile heartland, leafy suburbs, world-class universities, and well-run companies (however unevenly their ownership may be distributed) are considerable long-term advantages that are already reasserting themselves.

US homes sell for a fraction of the price of comparable properties in Canada and Australia. The US dollar is also at historic lows against those currencies. But our economy is much more diversified, and at the first hint of a global slowdown, the fast money now abandoning the greenback would gladly earn next to nothing in Treasuries once again.

In fact, it’s hard to see how interest rates could spike in the manner the doomsayers like to imagine, unless the economy was strong enough to sustain them. Otherwise, we’ve seen this movie before—and have every reason to expect yields to cave at the first sign that the economic expansion is faltering.

So, no, the US isn’t a Zimbabwe. It’s not even Portugal or Spain. It remains an economic powerhouse struggling to find answers to progress that seems to have left behind about half the population.

Slashing public services again and again eventually ruins the still pretty nice view from all those front porches, so that's unlikely to succeed as a long-term strategy. A cheaper dollar that helps the have-nots compete more effectively with Asian workers may be part of a solution, and a more reasonable system for rationing costly health care would certainly help as well.

And the Rest of the World Knows It
We’re going to get there eventually and confound all the naysayers. And if not, well, North America is still a pretty nice place to hide.

In the comments section of a January Barron’s roundtable, one reader offered some unsolicited advice for investment guru Marc Faber, who has been comparing the US to Zimbabwe (and who, two years earlier, suggested the magazine's readers short stocks as a trading strategy.).

“If he really believes his doom scenario, move to the United States now. Why? Food, water, and energy in abundance plus we are armed to teeth. Maybe we do not have oil, but we do have abundant coal, gas, and sunshine. If the doom scenario happens, the resource and manufacturing-based economies collapse....

“We could straighten out our deficit quite quick if forced. I'll take the good ole USA over Hong Kong, Singapore (they do run their place right), China, and India any day. No disrespect to those places intended.”

Exactly.

This is still a country that millions of people from other nations—many of them far from miserable—try to move to every year.

They know something Americans seem to have forgotten: the grass is not greener elsewhere. Not in the long run.

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