Phil Sees His Shadow --- Groundhog Day for the Economy

PUNXSUTAWNEY, PA – In an annual pageant that is equal parts pomp and absurd theater, America’s number one underground prognosticator Punxsutawney Phil pronounced a continued downturn in the U.S. economy. Despite low clouds, fog and a freezing drizzle, a record crowd of 30,000 devotees gathered at Gobbler’s Knob to witness Phil see his shadow and issue his prediction of economic gloom. Phil is the direct descendent of a long line of gnostic groundhogs whose forecasts since 1887 have had an uncanny accuracy rate of nearly 80%. In a rare interview, our crack staff at Globevest caught up with this uncommon rodent to get his views on the state of the American economy.

GV: Before we get started, could you tell our readers a little about your background?

PP: Sure. After graduating cum laude from Wharton---I was classmates with Hank Paulson [Treasury Secretary] --- I took an entry level analysts’ position with the Philadelphia Fed. My folks, of course, were a little upset that I didn’t go into the family business. Dad worried that I might get buried in a mid-level cubicle … I digress. Anyway, after my twin brother Paul was implicated in the Duke Brothers’ [Randall and Mortimer] foiled attempt to corner the frozen orange juice market through bogus projections of an extended winter freeze, I was forced to abandon my career with the Fed and return to Gobbler's Knob.

GV: For years, your predecessors stuck to predicting the length of winter, what made you shift your focus to the economy?

PP: As you know, the only discipline less accurate than meteorology is economics. I thought, why not, predicting the economic climate could be a real growth industry. Besides, it’s tough to compete with the Farmer’s Almanac.

GV: In your view, is there any one factor that is casting the longest shadow over our economy?

PP: I would say that there are a number of alarming factors, but the recent ISM (Institute of Supply Management) figures showing a sharp decrease in non-manufacturing service sector business activity is particularly troubling. As you may know, an ISM reading below 50% is a strong indicator that that sector of the economy is contracting. January’s fall to a reading of 41.9% was a dramatic drop-off from December’s 54.4%, and the projected 53% figures expected by most economists. As you know, the majority of Americans are now employed in some aspect of the service economy, and this is a disturbing sign that this sector has reached the end of a long period of growth.

GV: Are there other major indicators that propelled you prediction of economic gloom?

PP: Although crude oil prices have pulled back from their record highs, inflated commodity prices are still putting a damper on the prospects for economic growth. In spite of lower energy prices, consumers have not seen much relief at the pump or in their grocery aisles. Moreover, if the frigid winter conditions persist throughout the mid-west and east, it is likely that we’ll see another spike in retail energy prices. Even with the promise of cash rebate from the federal government, consumers appear to be holding back.

GV: Do you see any bright spots on the horizon for our economy?

PP: So far Fed Chair Ben Bernanke has acted decisively and is ahead of the rate cut curve. But he must be judicious because he only has limited ammunition. A declining U.S. Dollar should help jumpstart our export market. A weaker Dollar has the added ancillary advantage of narrowing our foreign trade accounts deficit, at least on paper. It will also keep pressure on the Chinese to finally let their currency be marked to a true global market rate. Theoretically, if the Dollar continues to fall and the Chinese don’t uncouple the Yuan, they risk seriously eroding the buying power that has been built-up through their burgeoning export machine.

GV: Before you retreat for another year, are there any recommendations you would give our readers.

PP: First of all, you can’t bury your head in the sand! That’s easy for me to say, because I’ll be tucked away in my burrow safe from the twists and turns of the economy. All things being equal, however, I would encourage investors to lighten up on U.S. backed equities for the time being. By the same measure, I am not particularly sanguine about the gusto of foreign stocks. It may be a wiser to use this opportunity to diversify your portfolio into other asset classes, namely, commodities, currencies or even precious metals. Even with its recent correction below the $900 mark, I believe that by the time I emerge in search of my shadow next year, gold will have topped $1000. If you are going to remain in the equities market, use mechanisms that allow you to benefit in both bull and bear conditions. With the reduction in interest rates, this also may be good last chance to refinance. I’m not sure I would recommend buying additional properties, because I believe that real estate values have yet to find a bottom.

GV: Thank you taking the time to talk with us. I know you’re pretty busy getting ready to hibernate.

PP: My pleasure. Hopefully, by the time we meet next year, the economy will be on better footing.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.