The great rock and roll icon, Rod Stewart, is famous for his song, “Every Picture Tells a Story”. Great old tune, but what does that title mean?  Does it imply that pictures always tell the truth or is it a warning to the viewer to always look beyond the obvious?

Before I address that issue, let me tell you a story.

On a recent radio show our first guest was my friend, Dan Pisenti, who is a knowledgeable guy when it comes to economic issues.  Dan is a graduate of the University of California at Berkley, a CPA and the President of Whitehall Parker Securities, a brokerage firm in San Francisco.

In that particular segment we discussed the current state of the U.S. stock market and whether or not now was a good time to invest.  Dan feels that our economy is in pretty good shape and that conventional stocks represent a good investment.

In the very next segment our guest was George Paulus.  George is a student of hard money issues and one of the folks behind “freebuck.com”, a financial website that provides information on “hard-money” issues.

George disagrees with Dan. He thinks that economic indicators are not as strong as people think. As a couple of examples to make his point, he cited the recent downward revisions of the employment statistics and discussed, what he feels is the fallacy of the argument depicting the lack of inflation in our country.

Our third guest, Dan Norcini, a commodity trader from Texas and frequent contributor to Bill Murphy’s website, LeMetropoleCafe, discussed the currency markets.  He pointed out to our listeners that the relationships between the world’s currencies have historically proven to be an excellent barometer of the economic strength or weakness of a country.

When you examine the reasons for one country buying another country’s currency, you begin to realize that these purchases do not necessarily occur because one believes the other’s currency is a stronger and better investment than their own or others.

Let’s use China as an example. The mainland Chinese are currently buying large amounts of the U.S. dollar. Are they doing that because the U.S. dollar is inherently strong or do they have other reasons?

I believe that they have other reasons.

The Chinese have pegged their currency to ours.  They are doing this to attract jobs to their country, which they desperately need.

I would also point out that in spite of the huge amount of buying by the Chinese, the U.S. dollar continues to decline in value relative to other currencies.

So whose argument is correct? 

Is the U.S. economy and the public companies that make it up a good place to invest today or would people be better off taking other avenues?

I think that right now the “other avenues” represent a much safer road.

I say that because I am convinced that conventional stocks are significantly overvalued today. Buying a stock with a price to earnings ratio in excess of 30:1 is ridiculous and that is about the average ratio out there today.

I don’t like the unemployment figures and I don’t like the fact that there are more Americans today below the poverty level than ever before.

I am concerned about the number of jobs that are being exported overseas. It makes me nervous when so many in the high-tech and financial sectors are moving abroad.

I am worried about the high level of personal debt in this country. As I jog through my neighborhood I wonder about the number of young people living there who are driving new BMW’s, Mercedes or Volvo’s and who, I know, are making mortgage payments in excess of $3000 per month. What will happen if one of them gets sick or looses their job?

These are all viable concerns, but here’s the one that scares me the most: our country’s deficit is significantly larger that most people are aware and that is the “picture that does not tell the story.”

Consider this. At the end of the recently completed fiscal year for the U.S., the reported deficit was approximately $400 billion.

The federal deficit is made up of many things and one of them happens to be Social Security. In the latest fiscal year, this component was reported to be a positive $160 billion.

That is an accurate figure if you are doing the accounting on a cash basis. Last year $160 billion was left in the system because there were no current recipients to claim it.

On an accrual basis the number looks very different. (Remember that public companies utilize the accrual accounting method.) Utilizing this system, financial statements are prepared taking into consideration future obligations along with the assets available to pay them.  The assets are not only those currently in hand but also those that current workers will pay over the remainder of their working lives. (The former amounts to $1.4 trillion and the latter is $2.1 trillion.)

The total of these asset categories is offset by the claims against them, which happen to be $14 trillion.

That leaves a shortfall of $10.5 trillion.

So here is what some people looking at the current deficit picture would see: take away the $160 million surplus reported last year and the deficit becomes not $400 billion but $560 billion.

But that is still not the true picture.

Under an accrual system, Social Security would have had to report a loss of about $370 billion and if you add that to the $560 billion, all of a sudden you have a federal deficit of $930 billion.

That is the accurate picture if you are comparing the federal government to the public companies that make up our economy.

Back in the late 1990’s investors lost a lot of money by investing in companies that were fundamentally unsound.   Do they want to make the same mistake again?

I believe in the old adage that you can’t help others until you help yourself. 

Today, people need to be financially and morally sound to help our country.

Moral issues are beyond the scope of this column; however, financial issues are not.  I would suggest that readers listen to the guests on The Korelin Business Report. Many of them are saying that financial soundness today will only result from investing in issues that are related to gold or the other precious metals. 

* * * * *

Alexander B. Korelin has been writing his Northwest Commentary for the past twenty years. Mr. Korelin is the founder and president of A.B. Korelin and Associates, Inc., a business-consulting firm that works with the management of public companies.  Mr. Korelin is also the co-host of “The Korelin/Hartfield Report” a one hour business radio program which has been on the air in Portland, Oregon for the past thirteen years and which airs on Saturdays at 11:00 a.m. on radio station KUIK a.m. 1360. The program is also available for listeners on the radio station’s website which is www.kuik.com/KH/KH.html

  to Home