Not much has changed since a month ago. The economy remains sluggish with the most glaring problems residing in the housing, auto, and labor markets. New home and auto sales are running at levels roughly 30% below a year ago. The unemployment rate remains at 9.6% with few new jobs being created. Meanwhile the average duration of unemployment is currently at 34 weeks versus 25 weeks a year ago. Nevertheless, economic growth in the U.S. is continuing, albeit, at a slower pace than we would like. The bright spots in the economic landscape primarily are in the heavy industrial and manufacturing sectors. From year ago levels, steel production is up 27%, oil rig pumping rates are up 66%, factory orders are up 16%, and wholesale sales are up 13%.

More good news lies within the balance sheets of consumers and businesses. Debt levels are being reduced and cash is being raised. From 12-months ago, personal income has grown by 5%, while the personal savings rate has jumped from 4% to 6%. Both individuals and businesses are acting responsibly by de-leveraging and learning to live within their means. They have become reacquainted with the wisdom of having a little extra cash on hand to provide a cushion when things don't go exactly as planned.

Unfortunately, this idea of "living within your means" is not appreciated by our public servants in government. Over the last 12-months, the gross public debt of the United States has grown by 14% - from $11.8 trillion to $13.4 trillion. OK, you may say, that is old news. Everyone knows that the feds are irresponsible and are spending more money than they have. If this were the end of their mischief, we could drop the discussion here. However, when one looks at the economic policies put in place by the federal government, it is clear that they don't want individuals or businesses to live within their means either.

For example, let's take a quick look at the historical roots of the most recent credit crisis from 2007 to 2009. Prior to 1970, banks required down payments of 20% from home buyers. This provided a safety cushion for banks should an economic downturn temporarily drive down home prices. With a 20% cushion on new loans, it was highly unlikely that a bank would ever be forced into bankruptcy due to a rise in foreclosures during a recession. Things ran relatively smoothly - both banks and individuals had cash on hand to provide a safety cushion. But in the late 1960's, the federal government created two Government Sponsored Enterprises (GSE's): the Federal National Mortgage Association (Fannie Mae), and the Federal Home Mortgage Corporation

(Freddie Mac). These two GSE's provided low cost funds to banks which in turn financed home mortgages. While the liabilities of the GSE's were backed by the U.S. government, they were operated with little oversight compared to banks. Consequently, the GSE's grew quickly and eventually controlled over 90% of the nation's secondary mortgage market. Over the years, politicians used the leverage of the GSE's to drive down the requirements for down payments on homes - from 20%, to 10%, to 5%, to 1%, and eventually to nothing. These were the so-called "sub-prime mortgages". Is it any wonder that even a mild economic downturn started a domino effect of bankruptcies, forcing the government to bail-out the GSE's, banks, and the mortgage-backed investment community on Wall Street?

Two other examples of the government using bad economic policy to undermine responsible consumer behavior was last year's "cash-for-clunker" program and the "$8,000 Home Buyer Tax Credit" program. Both were designed to goose consumer's spending on cars and homes before they were otherwise prepared to do so. In other words, whereas a responsible person would have waited to save up enough money to comfortably afford the down payments, they were coerced by federal socio-economic policy to make the purchase before they were ready in order to obtain free money from the government - taxpayer money. These programs were a waste of taxpayer dollars. It is now apparent that all they did was cannibalize from future sales. As soon as the programs expired, home and auto sales plummeted (as we mentioned earlier, 30% below year ago levels).

Our AI Models

Our AI Models made definitive moves into the consumer discretionary spending arena this month. The AI Stock Portfolio and the AI Fund Portfolio took four new positions in restaurants and casinos. These companies will do well as "responsible" consumers begin to think about what leisure activities they would like to spend their saved up cash on.