Dr Faber's views on 2004 (page 1 of 4)

I remain convinced that the present "strong" recovery phase in the US economy won't last for long, as it is totally artificial.

There are simply too many imbalances in the system, as reflected by a record low national saving rate, record household debts, and record trade and current account deficits, for this recovery to lead to sustainable strong growth that would justify the present stock valuations.

I have quoted Joseph Schumpeter in previous reports, but for the benefit of some of our new readers, I quote him here once again regarding the subject of economic recoveries, that are purely a consequence of fiscal and monetary stimulus.

Schumpeter writes: "Our analysis leads us to believe that recovery is sound only if it does come from itself. For any revival which is merely due to artificial stimulus leaves part of the work of depression undone and adds, to an undigested remnant of maladjustments, new maladjustments of its own" (emphasis added).

A few years ago, I met Peter Bernstein, the author of several best-selling books as well as the excellent economic newsletter entitled (Economics and Portfolio Strategy www.peterlbernsteininc.com).

Peter is a deep thinker, an intellectual, and a realist, but is certainly not a gloom-and-doomster. In fact, I shall always remember that, in the course of a discussion that took place in the late 1990s, he noted that I was "very negative" about the economic outlook.

I am mentioning this because his latest newsletter also sounded "very negative" for someone who has a relatively balanced and moderate view of the world - certainly compared to myself. Peter analyzed in his recent reports the interrelationship of the twin deficits in detail.

According to him, the attitude among US citizens regarding these deficits is "a combination of hope, indifference, or even puzzlement". In his view, "though there may be moments of passing improvement in the data, the evidence and analysis we offer here demonstrates with overwhelming power that neither of these problems is going to disappear any time soon. There is no basis for being light-hearted about these matters: they will continue to haunt our economic vistas indefinitely, casting a shadow over everything the future holds" (emphasis added).

Bernstein correctly points out the complexity of the issues involved: "Private sector saving, private sector investment, household consumption, government spending, government revenues, capital flows, and trade balance all react upon one another - often in surprising fashion.

We live in a complex system: each piece tends to function as both symptom and cause." And while I cannot discuss here Bernstein's entire analysis of economic data, which he himself admits is "confusing", I just want to point out that he is "certain" that "current trends are not sustainable".

"The imbalances are now enormous, far more glaring than at any point in the past. Furthermore, the linkage of the parts are so tightly knit into the whole that reducing any one imbalance to zero, or even compressing them all to a more manageable level, appears to be impossible without a major upheaval. A hitch here or a tuck there has little chance of success. When it hits, and whichever sector takes the first blows, the restoration of balance will be a compelling force roaring through the entire economy globally in all likelihood. The breeze will not be gentle. Hurricane may be the more appropriate metaphor." (Emphasis added.)

In particular Peter is concerned about the long-term decline in the US national saving rate as a percentage of GDP.