Pure bs speculates with democratic party strategist on 'longish term' U.S economic outlook -- over breakfast. (pure bs picked up the tab)

I had breakfast this morning in Concord, NH as I live less than a mile away. Two democratic party strategists sat down in nearby seats. One of these two gentlemen who wishes to remain anonymous, started pontificating about the general state of the economy, lending lavish attention on the direction of the U.S. stock markets.

His basic arguments were that:

a) major publicly traded companies are relying on cost-cutting measures to bolster their 'earnings growth.' In essence saying that the current quarters numbers as well as those a few quarters out are likely to be inflated not by true earnings growth, but by cost cutting.

b) he further stated that companies have slashed as much as they can from their budgets, and that Wall Street is likely to overlook the inevitable for the time being. He gave 'the street' until 2008 before his version of economic reality set in, and sends the markets into an a slow unrelenting retreat.

c) he stated that Bush's tax cuts whilst increasing spending over his first term will come home to roost, and the U.S. economy will falter due to the massive debt and burdens of deficit spending.

Those are very basically his positions.

My position regarding "c" is identical. The U.S. needs to balance the books and fast. If not, the most likely scenario is that foreign investments will not only slow, but contract. And the dollar will wilt as foreign investor's look for better places to store currency.

Now that may not sound like a big deal, but it is when the federal government is running deficits as far as can be forecast, nad we're not even keeping pace with our interest payments on our ballooning debt.

We need to adopt a realistic spending policy. Not one that is a huge giveaway to defense and oil. Think of it as you would your own budget. Because essentially it is. Can you continue to borrow money without any real plans to pay it back? Of course not. Neither can the U.S. government.

This administration is led by a man that has never had to be financially responsible. But wasn't he the Governor of the state of Texas, you ask? Yes, he was, but it is the Lieutenant Governor that handles the Texas budget. So, no, GWB has never had to worry about money, and although he somehow got an MBA, he's not concerned about it now.

Regarding item "a". It is true that companies have cut out most of the fat of their budgets. And yes, this has lead to earnings growth numbers that are difficult to judge on a year over year basis. But Wall Street looks at other metrics to determine if a company is truly growing or not. Revenue growth the obvious metric here. There are many other things on a company's balance sheet that are equally important, but in the interest of brevity, I'll leave it there.

Now, as far as to how lean these companies can get, that has yet to be determined. Manufacturing and pretty much the entirety of the technology sector is in a period of flux. Companies can still save as much as a third or more of their operational costs by continuing, and/or accelerating the move to the East. China and India are both sucking jobs out of the U.S. at an ever increasing rate. It is not just the U.S. that is losing jobs to there economic engies, it is the entire West, as well as Japan.

So, as far as cost cutting can be realized, we honestly cannot judge what the future will bring. We know the general course, and it doesn't look good for young Americans, but we as of yet do not know the depth.

Item "c". This is an extension of item "b," and the factor that was neglected was that millions of baby boomers will start retiring in 2008. These people are going to move money. If not entirely out of equity markets, then into more sedate 'income' oriented investment equities. You can also count on the housing boom in many parts of the country to come to a bust of epic proportions as boomers move into smaller quarters. I fully expect the housing market to have deflated before then, but if not, it is certain to at that time.

That's the short version of our discussion. I saved you from all the jargon, and other hypotheticals. But these are things that every investor, or career seeker must take into account. That's all for now :)