Where are we now?

This situation has been in place since March of this year when the staring contest, or game of chicken, that I have been discussing here for some time ensued.  If you are new to the blog, here is a summary of the most important issue and center of gravity for the economy right now:

• The U.S. economy is massively consumer spending driven.

• Consumers are not really making much in the way of non-staple purchases right now.  Those incremental, non-essential purchases, have been the mainstay of the economy for a generation.

• Consumers are not spending extra dollars because the high and persistent unemployment rate of between 9.5-10.0% makes them nervous.  So consumers are hanging onto extra income and saving their money.

• Because consumers are not spending, businesses are seeing flat to only slightly up revenues.

• Because revenues are anemic, businesses are refusing to hire new employees.

• So the unemployment rate remains very high.

• High unemployment = low consumer spending.

• Ugh!  We are stuck in a stare down between the U.S. consumer and U.S. business.

The only way to escape a labyrinthine vicious circle is to lift yourself out of the two-dimensional maze, created by opposite walls (weak consumer spending and weak business hires), into a three-dimensional world.  That is, something external to the maze has to reach in and lift folks out of the trap.  I have argued that something, an externality, is the Federal Reserve or the U.S. government.

The problem is that the Federal Reserve already has its chief economic weapon of low-interest rates set to high force velocity.  Interest rates are already near, or at, zero percent.  The fact is that folks are not borrowing money even at very, very low interest rates.  So nix the Federal Reserve from the ranks of the labyrinth breakers.

That leaves the U.S. government.  Unfortunately, we are in the midst of an election year.  Democrats have a strong incentive to come up with ideas that will pique the interest and capture the imagination of voters.  Which, let’s face it, they haven’t done.  Republicans have the incentive to maintain the current economic status quo until early November because a bad economy bodes ill for the incumbent Democrats.  This is a log jam.

So where are we now?  We are stuck.  Where will we be for the next several months?  Probably stuck some more.  Economic data are just not weak enough to worry about, but nor are they strong enough to get excited about and politicians are in gridlock.

All of this likely means financial markets that largely go sideways.  As investors, it behooves us to take this quiet time of indecision to identify truly outstanding businesses whose long-term (5-10 year) prospects are strong.  Valuations of these sorts of businesses are currently low.  So ironically, the lackluster economy is providing a rare opportunity for investors to conduct thorough research and buy great businesses selling at discounts.  That’s where I’m putting my consumer dollars.

Jason