"Inflation, the Economy and the Stock Market - What, Me Worry!"
Sydney M. Williams
According to the National Bureau of Economic Research, the agency which determines the timing of recessions and recoveries, the current recovery began in the third quarter of 2009. At the time, unemployment stood at 9.8% and gasoline prices at $2.45. Today, eighteen months later, unemployment has declined to 8.8%, but with part time and marginally attached workers included, the total number swells to 24.3 million people, or 15.8% of a workforce of a 153.4 million. Today, gasoline prices average $3.65 a gallon, 49% above where they were eighteen months ago. Corn and soybean prices, over the same period, have risen 54% and 64% respectively. And cotton has risen 225% since the recession ended. Yet we are told by Washington there is no inflation. Equities, as measured by the S&P 500, are higher by 28% since the recession ended.
The American economy is a colossus, two and a half times that of China, the world’s second largest economy, and roughly equal to the combined economies of China, Japan and Germany. Ours, however, is a service economy, with the consumer representing about 70% of economic output; yet our very size means that manufacturing (about 12.5% of GDP) continues to place us as the world’s largest manufacturer with close to 21% of all global manufacturing output in terms of constant dollars, according to the National Association of Manufacturers.
Our manufacturing might is being threatened from within and without. As Stephen Moore pointed out in last Friday’s Wall Street Journal, we have become a nation of takers, not makers, with double the number of employees in government (22.5 million) versus those in manufacturing (11.5 million) – a trend that has been worsening. China, the world’s second largest manufacturer – and some claim the leader – is able to compete on wages and, as our largest creditor, will have a say in the interest rates we pay. A weak dollar has thus far benefitted exports, though nothing beats innovation. (A corollary of a weak dollar, it must be remembered, is higher prices for imported goods.) However, continuing holdups by the Administration and Congress on three pending trade agreements with Colombia, Panama and South Korea are not bolstering the case for exports. Also, rising interest rates – an inevitability it seems to me – may attract dollar buyers. In fact, rates have already risen. The Wall Street Journal reported yesterday that last week U.S. Treasuries “endured the longest losing streak in more than two decades.” (The end of quantitative easing means the Fed steps away from the market for Treasuries, so natural buyers – of which there have been a deficit – will determine prices and yields.)
The economy is chugging along, but at a relatively feeble pace. The lead editorial in yesterday’s New York Times (in reference to last week’s job gains of 216,000) pointed out: “At a comparable point in the recovery from other severe recessions, the economy was adding about 400,000 jobs a month.” Left unsaid was that our workforce is larger today, so true comparables would require higher employment numbers. The reluctance to commit to the recovery can be seen in persistent shuttered stores. Walking home last evening up Third Avenue, I counted seventeen blocked up stores along the sixteen blocks before turning west on 64th Street – better than two years ago, but worse than usual at this point in recovery. The willingness to commit to long term leases is just not there.
Despite rising prices of necessary goods – food, energy and clothing – official government statistics show inflation to be about 2%, dramatically below the 14% rates in 1980 when food and energy were included in the calculation for inflation. In his most recent “Investment Outlook”, Bill Gross of PIMCO writes of the dilemma of entitlement costs on government coffers. He suggests that a depreciated dollar (and higher inflation) may be their answer – a practice perhaps already begun.
Yet, through this maze consisting of an economy struggling to stay upright, a depreciating dollar and the rising costs of essentials, the stock market moves blissfully along, now approaching its recovery highs attained in mid-February. From its low on March 9, 2009, the S&P 500 has doubled, but, as important, the Index has risen 28% since Fed Chairman Ben Bernanke gave a speech introducing quantitative easing on August 27, 2010; that rise has been accompanied by a dramatic lowering of daily volatility – until last month.
It is not that stocks seem overvalued. They are not. But neither are they excessively inexpensive. As Laszlo Birinyi wrote in a Strategy Bulletin yesterday, “old fashioned stock picking” should be the choice for investors. Of course, that makes life more difficult for those who prefer surfing (buying or shorting ETFs, baskets or indices) to the hard work of analyzing an individual company. Extended markets place a premium on stock selection, as the low hanging fruit has been picked. If not a time to be worried, this is a time to proceed with caution.
Thought of the Day
“Inflation, the Economy and the Stock Market – What, Me Worry!”
April 5, 2011According to the National Bureau of Economic Research, the agency which determines the timing of recessions and recoveries, the current recovery began in the third quarter of 2009. At the time, unemployment stood at 9.8% and gasoline prices at $2.45. Today, eighteen months later, unemployment has declined to 8.8%, but with part time and marginally attached workers included, the total number swells to 24.3 million people, or 15.8% of a workforce of a 153.4 million. Today, gasoline prices average $3.65 a gallon, 49% above where they were eighteen months ago. Corn and soybean prices, over the same period, have risen 54% and 64% respectively. And cotton has risen 225% since the recession ended. Yet we are told by Washington there is no inflation. Equities, as measured by the S&P 500, are higher by 28% since the recession ended.
The American economy is a colossus, two and a half times that of China, the world’s second largest economy, and roughly equal to the combined economies of China, Japan and Germany. Ours, however, is a service economy, with the consumer representing about 70% of economic output; yet our very size means that manufacturing (about 12.5% of GDP) continues to place us as the world’s largest manufacturer with close to 21% of all global manufacturing output in terms of constant dollars, according to the National Association of Manufacturers.
Our manufacturing might is being threatened from within and without. As Stephen Moore pointed out in last Friday’s Wall Street Journal, we have become a nation of takers, not makers, with double the number of employees in government (22.5 million) versus those in manufacturing (11.5 million) – a trend that has been worsening. China, the world’s second largest manufacturer – and some claim the leader – is able to compete on wages and, as our largest creditor, will have a say in the interest rates we pay. A weak dollar has thus far benefitted exports, though nothing beats innovation. (A corollary of a weak dollar, it must be remembered, is higher prices for imported goods.) However, continuing holdups by the Administration and Congress on three pending trade agreements with Colombia, Panama and South Korea are not bolstering the case for exports. Also, rising interest rates – an inevitability it seems to me – may attract dollar buyers. In fact, rates have already risen. The Wall Street Journal reported yesterday that last week U.S. Treasuries “endured the longest losing streak in more than two decades.” (The end of quantitative easing means the Fed steps away from the market for Treasuries, so natural buyers – of which there have been a deficit – will determine prices and yields.)
The economy is chugging along, but at a relatively feeble pace. The lead editorial in yesterday’s New York Times (in reference to last week’s job gains of 216,000) pointed out: “At a comparable point in the recovery from other severe recessions, the economy was adding about 400,000 jobs a month.” Left unsaid was that our workforce is larger today, so true comparables would require higher employment numbers. The reluctance to commit to the recovery can be seen in persistent shuttered stores. Walking home last evening up Third Avenue, I counted seventeen blocked up stores along the sixteen blocks before turning west on 64th Street – better than two years ago, but worse than usual at this point in recovery. The willingness to commit to long term leases is just not there.
Despite rising prices of necessary goods – food, energy and clothing – official government statistics show inflation to be about 2%, dramatically below the 14% rates in 1980 when food and energy were included in the calculation for inflation. In his most recent “Investment Outlook”, Bill Gross of PIMCO writes of the dilemma of entitlement costs on government coffers. He suggests that a depreciated dollar (and higher inflation) may be their answer – a practice perhaps already begun.
Yet, through this maze consisting of an economy struggling to stay upright, a depreciating dollar and the rising costs of essentials, the stock market moves blissfully along, now approaching its recovery highs attained in mid-February. From its low on March 9, 2009, the S&P 500 has doubled, but, as important, the Index has risen 28% since Fed Chairman Ben Bernanke gave a speech introducing quantitative easing on August 27, 2010; that rise has been accompanied by a dramatic lowering of daily volatility – until last month.
It is not that stocks seem overvalued. They are not. But neither are they excessively inexpensive. As Laszlo Birinyi wrote in a Strategy Bulletin yesterday, “old fashioned stock picking” should be the choice for investors. Of course, that makes life more difficult for those who prefer surfing (buying or shorting ETFs, baskets or indices) to the hard work of analyzing an individual company. Extended markets place a premium on stock selection, as the low hanging fruit has been picked. If not a time to be worried, this is a time to proceed with caution.
Labels: TOTD
posted by Thought of the Day @ 6:04 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home