Yoshikami: Santa, Scrooge and the American Economy

Thank you Ben Bernanke. Thank you lame duck Congress and President Obama. Because of you we have a holiday gift fit for a king in the form of quantitative easing and massive tax cuts.

If this doesn't get the economy going, nothing will. In the end, it's a huge bet that's been placed on jump-starting the American economy. And we as investors want to believe in Santa; we really do. And the Santa rally has proved that we as investors are capable of clinging to hope despite very apparent economic problems.

While one might be tempted to revel in the free money cast our way from every possible source, perhaps it's wise to consider saying "Bah Humbug" to the dramatic economic efforts exploding all around us.

True, there’s nothing better than free money but eventually that money needs to be paid back and it seems to me that we are merely kicking the proverbial deficit can down the road. We are not addressing the real issues for the American economy; too much debt, too much exuberance, and not enough rational thought and self-control.

In a recent CNBC survey of investment strategists, I painted a fairly rosy picture for 2011. I stand by those projections. Still despite my outward optimism, I still harbor great concern about the long-term problems facing the United States' economy. Deficits simply will not go away and must eventually be dealt with. Inflation waits in the wings as the US government's solvency is called into question and the printing press works overtime. Entitlement costs continue to soar despite healthcare reform. And the United States still seeks its next business rebirth to compete and win in the 21st century.

Will it be Apple leading the United States to global leadership? I doubt it. Yes, we will own iPads but that won't remake the whole economy.

Don't get me wrong; I'm a big believer in America. There is no country that has the depth of talent and creativity that the United States enjoys. Resources, technology, a currently strong currency, and a resilient population provide huge competitive advantages for America. But we should not assume that these strengths alone can overcome the structural problems mentioned earlier in this column. Sometime down the road we must exercise self control; spending must be reigned in.

While banks and companies are criticized for not spending freely to expand and hire, perhaps there is a lesson to be learned from these institutions.

There's a reason Citigroup and Wells Fargo are conservative in their lending practices. These institutions see the risks in the economy, want to maintain high capital levels, and are living off huge interest margins as the Fed nurses banks back to health. Throughout corporate America, CFOs remain pessimistic about the trajectory of US GDP growth and it's rooted in a belief that, in the end, America will need to pay the price for excess. "Bah Humbug."


Still, despite the underlying economic gloom, the Santa rally continues. Market movements up can be perplexing given the dysfunction in the American economy. But when one pauses for a moment to reflect, it's easy to understand the divergence. Free money and cash from helicopters above certainly does create enthusiasm (dare I say euphoria) and, for that reason, the public and the market celebrate new found temporary wealth.

Of course, this does not negate the long term impact of the trillions of debt but there is no rule that says economies and markets must always move together. Very often they do not. Think Ford and GM five years ago. Lots of sold SUVS but a ticking time bomb of debt that unraveled in 2008. Long-term problems and current euphoria can coexist; for a while.

So do not confuse market exuberance as an indicator that the economy is healthy. It's my sober view that the US economy is struggling under structural problems that will take years to cure. The moment of truth is moving closer for America and one day must be addressed. But, in the meantime, the world is awash in cash and for a short period of time (maybe 12 to 18 months) we will bathe in rediscovered wealth. And most of us (regrettably so) will be blind to the simple truth that today's free cash is merely a loan from tomorrow's growth.

So yes; Santa and Scrooge can coexist. Markets can rally despite underlying problems with economies......for while. Puzzling as it may seem, optimism and pessimism can coexist for while until cold hard facts are unavoidable. That day is not here yet but it will arrive soon enough. Let's hope leaders, and all of us, have the courage to face this reality before its too late.

Ho Ho Ho. And "Bah Humbug" as well. Happy Holidays everyone.



Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.