If you have watched or read any business news network or financial newspaper in the last 3 months then you will be well aware of the environment of vastly differing opinions surrounding the US economic recovery. Some of these opinions offered are made by intelligent economists such as Simon Johnson of MIT, Mark Zandi of Moody’s, Joseph Stiglitz of Columbia and Nouriel Roubini of NYU, however some are made by politicians that seem to ignore evidential facts and figures and point blame at each other’s parties. The fundamental rule for analyzing data is to set politics aside as politics hinder one’s objective ability to discover conclusions and make sound forward-looking decisions.

It is without question now that the Troubled-Asset Relief Program (TARP) and the American Recovery and Reinvestment Act (ARRA) helped save the US economy from falling off a cliff and reversed the downward trend. TARP allowed for the largest banks in the US—also the largest backbone of the American economy (unfortunately), not to go bankrupt, which would have caused severe paralysis. ARRA first lessened the impact of the unemployed by aiding states already struggling to pay unemployment benefits, kept hundreds of thousands of teachers, firemen and policemen from losing their jobs due to a substantial shortage in tax revenue and is currently funding construction projects in 48 states around the country. The majority of the ARRA funds will be spent this year, which will further accelerate the US economic recovery.

In February we learned that GDP increased 5.7% in the fourth quarter of 2009, which was a high follow-up quarter to the 2.2% increase the US saw in the third quarter of 2009. More recently, we were given some positive figures by the Commerce Department, which reported that February retail sales increased a seasonally adjusted 0.3% from a month earlier and excluding auto sales that figure was 0.8%. In perspective, this change represents a 4% increase over the same period last year. Manufacturing has also increased as companies have focused spending on re-stocking their depleted inventories. However, despite these positive signs there is still real weakness in the economy, especially in the real estate market and unemployment rate. Housing starts are still low and the unemployment rate remains at half-century highs. These issues are serious concerns but unemployment usually lags general growth indicators, which means that companies start to hire when they see results and determine that their businesses need to expand. The residential real estate market lags unemployment figures as the industry is dependent on a population’s reoccurring income.

In my previous postings we have devoted considerable attention to investment opportunities relating to the economy turning south again and I want to present some investment areas that will provide returns if the economy further accelerates. As I mentioned earlier, GDP, retail sales and manufacturing figures have shown strong growth, which is good news for the logistics and shipping industries. American exporters and importers are experiencing positive growth and this fuels the demand for transportation. The general consensus in the logistics industry, which includes all forms of trucking, rail and airfreight, is that the bottom has been hit and shipment counts are improving. If these trends continue then 2010 will be the year of the rebound for these companies. In regards to the shipping industry, rates are significantly off their peaks (which was basically a bubble), but the companies present themselves as good investment opportunities as international trade growth will heavily rely on their capacity, and if the Administration can make good on its goal to double American exports in five years, this industry will see a return to historical highs. It is fundamentally important to follow the facts and figures regarding investment opportunities because that is the only way that an investor can be sure of a positive return.

Last week I blogged about what Greece meant to the European Union (and thus the world) and I believe it is necessary to provide an update to what is happening before continuing on to another topic. As a result of Greece’s necessary steps to reduce it’s budget deficit by €4.8 billion through increasing taxes and reducing government spending, the market has begun to stabilize in Europe with the expectation that Greece will not fail. On Thursday, one day before Greece’s Prime Minister George Papandreou is scheduled to meet Germany’s Chancellor Angela Merkel, Greece was able to raise a 10-year €5 billion bond offering that was three times over-subscribed. The capital raise is a good sign that confidence is returning to Greece. However, Greece still has a lot of ground to cover and it will only be able to do so with a blessing of the European Union. It is a tragedy that Greece and other European countries (with the help of Goldman Sachs) had to hide their large debt burdens in order to be a member of the Euro currency community, but that’s a separate issue.

The looming multi-trillion dollar question here is one that carries significant impact around the globe. And that is the question of what to do with unfunded entitlements? Countries and companies are facing extremely large unfunded liabilities, especially in the current economic climate. Lower revenues and increasing pension and healthcare costs are placing significant stress on the current system and on future generations. Fundamentally, if pension plans cannot pay for themselves, they could potentially fail if there is a shortfall in expected revenue. Private pensions are largely linked to the stock market and can be heavily weighted in an employer’s stock and thus more at risk of a downturn when the economy enters into a recession. In many larger corporations, the company matches or contributes to your retirement plan. Typically, a contract is entered into where the company has an obligation to meet a specific financial contribution. Pre-bankruptcy General Motors’ pension scheme cost the company an average of $3,000 more per vehicle built than that of their competitors, which in the end, is essentially what drove General Motors to bankruptcy. Over the previous two decades companies have had relatively easy access to credit markets, which allowed them to borrow in order meet their pension obligations. But, times are changing and even US states and countries, especially developed countries, face similar crises with increasing pension obligations and a declining tax base.

A recent report released by Pew Research, indicates that US states face at least $1 trillion shortfall for their pensions and retirement benefits. These systems need to be dramatically reformed in order to save states from holding themselves financially hostage. The state of California is the best example of the state of affairs that is crippling governments from providing education, security and healthcare funding. And without dramatic legislation, taxes will have to be significantly increased and a dramatic reduction in social services will have to be implemented. Local governments will be forced to embrace pension-reducing policies, which will be a policy that will hurt their own pockets. The longer they wait the larger the problem will become.

On the federal level, the US Government is facing growing Social Security, Medicare and Medicaid costs that are expected to consume 56% of total budget outlays in 2011. If nothing is done to curtail meaningful expenditures or increase the tax base over the long term, the US Government could potentially face a similar problem to that of Europe and governments around the world will be forced to make the decisions that Greece has had to make.

Followers of the financial markets remember what happened to Lehman Brothers during the two weeks leading up to its collapse and sub sequential shock to the global economy. The question is: has the world learned lessons on how to handle this type of crisis?

It seems that in our current market place we are divided into two teams – winners and losers. But instead of competition being held on a balanced playing field, where skill and position decide the outcome of the game, we have a game that is more like American Gladiators, where one team is made up of contestants and the other team is made up of gladiators. Gladiators do not compete against competitors, but instead act as blockers or impediments designed to stop competitors from achieving any type of goal. The American Gladiator arena is basically how the market for Credit Default Swaps (CDS) has been operating. The buyers of CDS, specifically buyers who don’t own the underlying security, are trying to be blockers of Greece achieving its goal of stabilization, as they stand to make a significant winning if Greece is unable to recover and subsequently defaults.

A default by one Euro country could be disastrous for all European countries and this is because of contagion. Contagion is ultimately what led to the currency crisis during the 1990s in emerging economies. The effect on the market occurs because investors begin to treat securities that are similar as identical comparisons, which leads to major sell-offs in indices and underlying securities that are related to the original security. If Greece defaults, investors will look to withdraw from the rest of Europe’s PIIGS (Portugal, Italy, Ireland, Greece and Spain) because they will view these countries as equally susceptible to the risk of default. As a result, the European Union economic zone would risk collapse as after time investors will start to pull away from stronger countries within the European Union. The best recent example of this is what happened to Goldman Sachs during 2008. Goldman Sachs was never at risk of collapsing and they are (and were arguably) the most stable bank within the financial institutions industry and yet their risk of default increased and their stock began to fall simply because weaker financial institutions were beginning to default. Europe has an obligation to itself to rescue Greece and put it on the right track to stability, as it risks its own demise if Greece fails. The European Union, International Monetary Fund and European Central Bank are expected to save Greece if their government makes difficult, but appropriate budgetary choices. If they succeed in staving off a collapse then Europe will be stronger for having done so, as the world would’ve just watched a coordinated effort across the continent to address real concerns, something that many would argue Europe has not done since the birth of the European Union.

The Euro currency has so far been the only real victim in this Greek drama, as it has fallen 3% over the past month. Gyrations in currencies often bring positive effects and negative ones. A falling Euro is good for the European export market as it makes their goods more competitive around the globe, however it is generally bad for the European import and consumer market as cheap discretionary goods become more expensive. The area where this could cause the largest dent to the European consumer is that of energy costs. A significant portion of the natural gas that Europe consumes comes from Russia and the already high fuel prices in Europe could increase further as a result of a weaker currency.

The US has experienced a weakening currency over the last 8 years, which has led to higher energy prices in the domestic market, but it has also benefitted our recovery, as US exports are very competitive in the global market. The relative strengthening that the US dollar has been experiencing is because of a greater global uncertainty (on a relative basis) in other developed countries. If the Greek crisis has shown anything at all from a US perspective, it’s that the US treasury market is still very robust and is considered to be the safe currency. But in saying that, we must remain cautious because if Europe cannot contain the Greek crisis, which ends up causing the Europe crisis, we must be wary that the sentiment does not spread to the US. If there are signs of a collapse, leap into the stable investments such as gold and US treasuries to protect yourself from what could be called the double dip.