10 reasons why US is down

I love my country - the chaos, the hurly burly of democracy, the hard work of quiet people on Main Street, and the great big heart, as shown by our private donations to Haiti at a time of near 20% unemployment and underemployment. We forgive wayward politicians, and athletes, let our children make more decisions than virtually any people on earth and unlike other nations, except Britain and its former colonies (I guess we are one), stand for something. A true city on a hill. But right now, the city itself is in political chaos - and a bit broke.

It is time to short the US - for a couple of years - until our crisis gets so severe Congress commits mass seppuku and replacements arrive who get something done. Perhaps Gandalf will come to us from Middle Earth and lead us to better times. I am betting on Gandalf. Yes, I am letting Obama off the hook - you always let rookies off the hook, don't you - and unless Congress changes dramatically, his rookie mistakes are going to become sophomore and junior year mistakes and the nation will suffer. I am long the US, long term - I am a Buffett kind of guy and laugh when I think of any truly long term problems in the US compared to other developed nations (more on that in a later column). But short term, well, here are ten reasons to short the US, metaphorically and in the market, in the next 1-3 years.

1. Economic Growth: We will see misleading - and therefore worse than meaningless - GDP numbers on Friday due to flawed data and inventory accumulation. In the real world, we are already entering a double dip recession and once this is over unemployment - real unemployment, which means those who have dropped off the work force, those looking for work and those looking for more than part time work - will continue near the 20% level for at least another two years.

2. Private Sector Debt: The Fortune 500 is borrowing - and no one else. Small business cannot get money, directly or via credit cards, and consumers continue to de-leverage. And they will do so for five to ten years - maybe more - as debt levels retreat to those of the early 1990s. De-leveraging drives reductions in consumer spending and asset values. Get used to it. And with this consumer discretionary stocks will stall or take a pounding, including retailers. Look at shorting the XRT.

3. Public Debt: Large and rapidly growing deficits and public debt at the federal and state level will eventually lead to a rise in interest rates and to the crowding out of other spending as government services debt. That will not happen for a while but will start near the end of this year or early in 2011. And please, don't blame the Dems; the party of fiscal rectitude, those red state guys, doubled the debt while they controlled the White House and Congress, financing a war off the balance sheet, led by a cheerleader in chief who told people to go shopping rather than tighten their belts after 9/11. Historically red staters spend more on their key constituents than the Dems, so if they grab power, nothing will change. Plenty of ETFs around to short T-Bills.

4. Housing: Ain't comin' back my friends. The bullishness and optimism on Wall Street about housing is surreal given all the data one needs to forecast housing values, mortgage defaults, foreclosures and new home starts is in the public domain or can be bought with some soft dollars not used for travel and entertainment (excuse me, that would be illegal!). You can find the data somewhere else - or read some older columns - but housing prices are going to fall for another couple of years (nationally) as foreclosures hit 6-7 million in the next 30 months and as the 600,00-800,000 homes foreclosed but not yet listed are added to housing inventory. Not to mention more than one third of Americans would sell their homes tomorrow if the price were right. Add tightened credit standards, no market for jumbo mortgages anywhere in sight, the end of the home buyer tax credit in April, and the slowing down of Fed purchases of agency debt in April. This constitutes a witches' brew that creates headwinds that will last until foreclosures peak and those homes hit the market - late 2011 to mid 2012, and foreclosures will not hit historical norms until a year or two after that date. Avoid or short the homebuilders via an ETF -- the XHB - or an individual company with a weak balance sheet.

5. Consumer Spending: The New Normal is not going to be normal as reduced national income due to unemployment, reduced consumer spending power due to tightened credit, reduced wealth due to falling home and stock market values and reduced confidence due to all of the above create a new culture of a "new Frugal." We have never been good at being a frugal nation, but have been frugal in spurts and we are already seeing the beginnings of one. It would take a thousand words or more plus data to prove the point so just go to the mall and ask people questions (I do), or look at your own spending. What to short? Weak retailers and restaurants, either in overcrowded segments (Saks SKS) or weak balance sheets (Macy's M).

6. The Banks: Banks are the kink between financial markets and the Main Street economy. They are also the lubricant - when they are lending - of a growing economy. US banks, using time honored but now discarded accounting standards, are, as a group, insolvent. They are hoarding cash because deep in the recesses of little offices, they know they are insolvent if they had to dump toxic assets on the market. They are also looking at reduced activity due to the economy and new taxes and regulations, and therefore lower profits. When interest rates rise - Federal Reserve interest rates - their spreads will contract, also hitting profits. Consumer delinquencies continue to be at historical highs yet this past earnings season the banks managed their earnings and actually reduced their loan loss provisions. And did I mention the rapid rise in defaults in commercial real estate? And Obama is not done with them. What to short? The big money center banks, not the investment banks, and check out some regionals with huge exposure to commercial real estate.

7. Congress: You could probably short Congress - metaphorically - for a century and never lose money. To steal a line from the movie Charlie Wilson's War (very true to the book by the way), "Why does Congress say one thing and do another?" He is asked and he answers "Tradition, I guess." But even by the low standards Congress sets - and should set, we are a democracy which means they are supposed to react to bad and good news, not create it - this Congress is laughable. Polarization between left and right when all the country wants is some practical intelligence residing in the political middle has frozen the indecisive (most of them) and the cowardly (those up for re-election this year). If you want to read a great piece by an acquaintance, Steve Pearlstein, Pulitzer Prize winning columnist for the Washington Post, check out his column Wednesday on the State of the Union address he would deliver. What to short? Nothing, really. It's just damned depressing.

8. Obama: He has done a fair job for a rookie given the pile he was handed - two wars with no end game or plan, a federal deficit and dent, a broken economy, broken financial markets and so on. His mistake? He believed his own campaign promises and some lousy advice from his economic advisors and made the economy a secondary priority after passing a filled stimulus bill that so far has cost us $200,00--$400,000 for every job supposedly saved or created. But he has failed to lead, and will probably do so again. His instinct is to organize and drive, not pull, and we need someone pulling the train right now. What to short? Again, nothing. Or everything.

9. The Market: The market is wildly overvalued given the trajectory of the economy. Profits cannot hold up throughout the year, and are being driven by traders. The trade of the day continues to be dollar/commodities/China but more and more individual stocks are being rewarded or whacked based on fundamentals, a good thing for stock pickers but bad for the vast majority of money managers who know little more than the movement of the indices. What to short? Companies with weak balance sheets; the leaders in this market that will lead the market down, the banks; and over a two year period, the market itself.

10. The Doubters: Long term, the US is in far better shape than almost all developed nations except for some of the small British colonies with commodities and reasonable public policy - Canada, Australia, New Zealand. Our population is growing faster than any OECD country; our debt is not half as bad as Japan or some European nations; our higher education system is several orders of magnitude better than all but Britain and its former colonies (trust me, I have twins going off to college this September, have visited 17 and counting); and we have an economic system and culture that lends itself to growth, not stasis. What to short? Short the doubters - go long the companies that do what the good old US of A does best - go long biotech, go long selective chip stocks, go long the great brands and innovators, i.e. Apple (AAPL).

After the State of the Union address, the blow dried pundits (or the corpulent ones with no real hair) will be screaming at us. Ignore them. Ignore people who doubt our long term future - craven fear mongers like Jim Rogers, who so admires the Chinese for all the honesty, transparency and dignity they show their own people; ratings hawkers like Glenn Beck; xenophobes like Lou Dobbs; cartoon-like ideologues ranging from Robert Reich and Paul Krugman to Rush Limbaugh - ignore them all. The ten and fifteen year plan will work. How? Turn to another movie - Shakespeare in Love - for when crisis seems to overwhelm everything and the producer of the play is confronted with disaster and asked how things will work out, he answers "I don't know, it's a mystery."