Money insider: Debt undermining stocks

This is the first of a three-part series reporting on Wall Street financial analyst Charles K. Ortel's analysis of the strategies for obtaining investment returns given the likelihood of continued U.S. economic weakness in 2012 and beyond, should Barack Obama win re-election in November.

Ortel is a managing partner with Newport Value Partners, LLC in New York City. Newport, established in 2007, provides value-added research to executives and investment firms.

Highly regarded Wall Street financial analyst Charles K. Ortel predicts that unacceptably high levels of debt and a global surplus of cheap labor will result in weak economic growth and disappointing private investment returns in the U.S. economy for the foreseeable future, with gold remaining one of the few real investment opportunities.

What is startling about Ortel's analysis is the impact escalating central government debt has had on investments based on fiat currencies when the value of those investments is calibrated in gold.

The analysis belies claims made by central bankers, including Federal Reserve Chairman Ben Bernanke, that that Federal Reserve "quantitative easing" policies wherein the central bank purchases billions of dollars of the debt issued in Washington could ever be truly stimulating to an economy predicated on private investment returns to generate economic growth.

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The analysis by Ortel, managing partner with Newport Value Partners, LLC, leaves no doubt that in a world in which President Obama has increased the national debt 60 percent over the level he inherited from George W. Bush that the only safe investment strategy is to dump equities in favor of buying gold, even with the Dow Jones Industrial Average topping the 12,500 level.

Dollar erosion vs. gold since 1999

Ortel's analysis begins by showing "that investors who elected to retain their holdings in major fiat currencies have been slaughtered in gold terms going back to year-end 1999."

As shown in Figure 1, the value of all major currencies has eroded dramatically when judged against the value of gold.

Figure 1: Value of $1 million as converted Dec. 31, 1999, and as expressed in gold ounce terms in 1999, 2008, 2009 and 2011

In gold terms, the U.S. dollar is down a cumulative 83 percent; the Euro 77.4 percent, the British Pound 83.6 percent, the Japanese Yen 87.1 percent, the Chinese Yuan 77.9 percent and the Indian Rupee 85.8 percent.

As shown in Figure 2, in gold terms, investors were down a cumulative 82.2 percent in the Dow-Jones index, 80.2 percent in the DAX index, 87 percent in the FTSE index, 90.3 percent in the Nikkei index, 63.3 percent in the Shanghai index and 54.3 percent in the Mumbai index.

Figure 2: Value of $1 million as converted Dec. 31, 1999, and as expressed in gold terms in 1999, 2008, 2009 and 2011

From this, Ortel further concludes: "Investors who were more adventurous and allocated capital to equities on major, global stock market exchanges also suffered grievous erosion in their wealth."

Obama debt levels erode U.S. growth potential

For those needing to be reminded, Ortel presents the historical data showing the unprecedented level of government deficits incurred in the Obama years.

Figure 3 shows Obama federal budget deficits have increased over federal budget deficit levels under George W. Bush by a factor of three.

Figure 3: Expenditures lessrevenues for all U.S. government entities: 1965 to 2010 (in billions of real 2005 dollars)

Obama has pushed the U.S. national debt to over 100 percent of Gross Domestic Product for the first time since the end of World War II.

But, as Ortel argues, the real impact of the apparently out-of-control U.S. debt appreciation is not the outstripping of GDP, but the alarming increase of the national debt total when expressed as a percentage of private labor income.

As seen in Figure 4, in 2009, total U.S. national debt expressed as a percentage of private labor income rose to a high of nearly 1000 percent, up from 400 percent in 1981.

Figure 4: Total debt and household debt as a percentage of private labor income; total debt as a percentage of gross domestic product

Ortel attributes the rise to free trade globalism that has created a structural barrier to increasing U.S. labor opportunities by giving U.S. multi-national corporations a green light to exploit the low cost labor market worldwide.

"The most potent, unheralded reality affecting every nation is a persistent global labor glut of unparalleled historic proportions," he notes.

In the United States, there are an estimated 25.8 million unemployed and under-employed workers, which is 18.6 percent of the 138.8 million employed workers.

Excluding other developed nations, including the EU, in the rest of the world, there are a further 550.2 million unemployed and under-employed workers.

"This figure (unemployed and under-employed workers outside the developed world) is four times the entire pool of employed workers in the U.S. and is likely to remain a significant depressant to demand for relatively high cost U.S. workers for years to come," Ortel cautions.

Ortel's overall conclusion for the U.S. worker is as grim as it is for the U.S. investor:

Measured in nominal terms, but particularly in gold terms, investors in most securities have not been fairly compensated for taking risks they have assumed since 1999. In addition, private sector workers of all skill levels in wealthy, developed nations have been hit hard by unforeseen consequences of globalization that have cut their number and pared their individual and aggregate incomes.

The analysis leaves little hope unemployment levels in the United States will decline significantly or that labor force participation rates will increase significantly in the foreseeable future.

Hope forlorn among Obama youth

Ortel classifies the United States as a "Gray Zone" nation, consisting of an older, slower growth population, where vast sums have been invested in an infrastructure that needs to be "maintained, re-configured, or torn down," while the federal government attempts to engage in re-distribution of income while heavily in debt.

He charges that Obama has compounded the problem by increasing the federal government labor force without appreciating that growth in public sector employment depends upon sufficient growth in private sector employee to produce the private earnings and tax revenue upon which public sector employment depends.

Ortel argues that in the U.S., the full negative impact of the Obama administration economic policies will fall squarely upon the shoulders of the young.

He writes of developed nations in general:

The growing pool of seniors among these [the developed nations] have become accustomed to comfort and expects to be well looked after, somehow, in retirement. Younger residents in developed nations also have experience chiefly with comfort but now bear the heaviest brunt of the continuing assault upon the number and level of private sector jobs and incomes. Many of these young job seekers have piled up debt to finance their expensive, higher education. With total debt already at towering levels, there is simply no way to reconcile competing hopes of older and younger persons.

Recent weeks suggest Obama intends to campaign for re-election on class warfare themes of rich versus poor.

Ortel's analysis would caution Obama to realize class warfare logic in the U.S. inevitably positions the young against the old, not just the classic bogeyman of Marxist literature, the wealthy against the oppressed and impoverished.

"Revolutions, like wars, are fought by the young," he says.

He further warns that the growing burden of U.S. national debt under Obama further diminishes the future economic opportunity for college and non-college graduates alike who will be forced to seek employment in a U.S. economy in which private investment opportunities for new job creation pale in comparison with the yields obtainable simply by putting those investment dollars in gold.