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Ortel: Buffett's Optimism Is Fool's Gold

To a limited extent, recent data on companies confirm the suspicion that demand patterns inside the U.S. are quite different than they were during the miracle boom period. Reports I have read so far concerning bellwether companies such as General Motors (GM), General Electric (GE), United Technologies (UTX), Boeing (BA), Caterpillar (CAT), Honeywell (HON), 3M (MMM), DuPont (DFT), and Alcoa (AA) are instructive.

Data in these reports support a cautious view regarding profitable growth inside America during the highly unusual period from March 2009 forward. In this recent period, central bank intervention suppressed benchmark interest rates and governments injected record amounts of fiscal stimulus into the global economy.

Excluding growth fueled by acquisitions, most of these large corporations have not been able to achieve consistent growth in U.S. revenue, U.S. pretax income and U.S. cash flow in their core manufacturing and service businesses (excluding finance).


If these hoary names could not flourish from 2009 through 2012, how will they and others do so in a more normal environment where credit growth is crimped and where benchmark interest rates rise above consumer price inflation?

Growth in Borrowing Has Fueled Recent Economic 'Progress'

Let's face it -- Americans are hooked on debt. The best available statistics show that all sectors in our economy combined (households, businesses, financial institutions, and governments) have piled on borrowings ever since the conclusion of World War II.

During the 68-year period from 1945 through 2012, America's debt load has climbed in 66 years or 97.1% of the time. As of December 2012, our total debt was $53,950.8 billion or 344% of America's economic output for calendar year 2012.


We must not be distracted following trends in government debt as a percentage of economic output. Instead, we must understand that each important sector within the American economy is addicted to borrowing.

TABLE 2: Total Debt Compared to Gross Domestic Product and to Spending on Consumer Nondurable Goods, 1945 to 2012

We believe even these sobering statistics do not tell the complete tale.

Gross domestic product is a deeply flawed jumble of estimates that likely overstates the "contribution" to productive economic behavior made by government. By 2012, total government spending grew to reach 34.4% of GDP -- estimates of the value of such spending are simply not the same as those for spending on consumer nondurable goods where there is fierce price competition.

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