HELLO STAGFLATION

The U.S. economy shrank from October through December for the first time since the recession ended.We are looking at the net effect of Obama’s Voodo-Economics. Yes, the US economy was hit by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The decline occurred despite faster growth in consumer spending and business investment. Government still has not figured out that in the real world, people respond in anticipation.

All our indicators have been pointing to STAGFLATION as the COSTS rise but the DEMAND is reduced. Raising taxes as drastic as has taken place with payroll (including Obamacare) has increased the cost of labor in the USA by about 10% at one clip. It would be nice if they made real world economics MANDATORY to get a law degree, for way too many lawyers take up office and they may know how to write laws, but are clueless about how people react economically.

The Commerce Department said today that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That’s a sharp slowdown from the 3.1 percent growth rate in the July-September quarter and the first contraction since the second quarter of 2009. When everyone knew the Bush Tax Cuts were expiring in December and Obamacare was kicking-in come January with a 2% payroll tax increase, WHY would anyone hire people or expand a business until the dust settled? Of course socialists just do not get that. They think they can enact a law and everyone must comply or go to jail.

Why this seems to be a surprise decrease in the nation’s gross domestic product to the vast majority of economists is because they always forecast whatever trend is in motion will stay in motion. Many now claim that this weakness is primarily the result of one-time factors whereby Government spending cuts and slower inventory growth subtracted from a total of 2.6 percentage points in growth that will not happen again.

That is not the point. The issue is taxes are rising and they are excluded from the government view of your cost of living – it is your obligation. This is stagflation where the real costs keep rising and demand is reduced accordingly, squeezing everyone in between.

It is a global economy and one cannot forecast the US economy in total isolation. We have been warning that the economic growth in Europe is turning negative. US Exports fell by the most in nearly four years thanks to the European economic Depression. There has also been a mild recession with slower growth in China. This is also being caused by the decline in Europe. That is the real crisis point. It is where the entire world economy is dancing on the head of a pin. Multinationals are cutting back inventories in response to the economic recession outside the USA and will not replenish them until they see a change in trend. Caterpillar, Inc., the heavy equipment maker, announced this week that it reduced its inventories by $2 billion in the fourth quarter as global sales declined from a year earlier.

The economy will remain weak at the start of the year because Americans are coming to grips with an increase in Social Security taxes and Obamacare that has left them with less take-home pay. The Republican Congress and the White House allowed the temporary tax cut to expire in January regarding payroll taxes, but reached a deal to keep income taxes from rising on most Americans. The tax increase will lower take home pay this year by about 2 percent for the Social Security tax. That means a household earning $50,000 a year will have about $1,000 less to spend. A household with two high-paid workers will have up to $4,500 less. Then there is the Obamacare tax.

Meanwhile, the US economy has been creating about 150,000 jobs a month, on average, for the past two years and the tax increases are likely to worsen that trend. Even if it remained the same, that many jobs is not enough to actually reduce the unemployment rate, which has been 7.8 percent for the past two months. On top of that, the arrogance of state and local governments is hitting home. We will see more layoffs from the public sector than from the private.

Corporations have been sneaking around letting people go a few years before they become eligible for retirement to cut costs. But government is doing the same. Given them an excuse, and you are gone. First hand sources confirm this is even taking place in the Military.

It appears the computer was correct again. January looks like a turning point. The Dow will not elect a Monthly Bullish Reversal and a daily closing BELOW 13677 will signal a pause in trend. Meanwhile, gold has to close on a daily basis above 1702 to add a little bounce to its step.