Enter your email address:
Delivered by FeedBurner
It appears the markets are finally waking up to some of the myriad of worries I’ve been scribbling about for the last few months. Commodities have taken a header over the last two weeks on fears about slowing global growth and the impending end of QE II in June. Stocks have held up better, especially in the US, but cracks are starting to appear in the technical foundation. There really never was much of a fundamental story to support commodity or stock prices so a correction here would just be an acknowledgment that the much hoped for improvement in the US economy still hasn’t really arrived.
The list of worries, of course, extends well beyond just a punk US economic recovery. The debt situation in Europe continues to fester with Greece and Ireland inching closer to the day when the ECB and the rest of the European banking system will have to acknowledge that they aren’t going to be able to recover all they’ve lent. The only real question is who will be forced to take the hit. The politicians are finding that forcing taxpayers to bail out spendthrift governments in the periphery is a one way ticket to the minority. I suspect directly bailing out the banks will prove no more popular. I don’t know how long this can go on but the can everyone keeps kicking down the road is already dented beyond recognition.
The other big worry is whether China’s economic central planners have finally run out of ways to keep up the illusion of perpetual 10% growth. They’ve spent the last decade building anything and everything on a kind of Field of Dreams, build it and they will come economic theory but so far all they’ve got to show for it are some really fast but empty bullet trains, some really big but empty shopping malls and cities and an inflation problem. Thomas Friedman may long for the ability to impose the will of the elite on the stupid masses but so far the results don’t look any different than every other experiment in central planning throughout history.
The Chinese do have a large pile of Treasuries to cushion their inevitable fall so the end of double digit economic growth - no matter how artificial - probably isn’t nigh. Or at least the countries that have built their growth on supplying raw materials to build those Chinese political monuments better hope not. Australia, Brazil, Canada and a host of other countries won’t look so smart if their one trick pony pulls up lame. Right now, most of these countries have the enviable problem of excessive capital inflows but anyone who remembers the Asian crisis of the late 90s knows that can end rapidly and badly.
Ironically, it may be the US that benefits if China and the other emerging markets cool off. The US has suffered for the last decade from a lack of productive investment. We spent most of the last decade building more houses than we needed and that covered up the problem for a while but the US could really use some of that capital that has been flowing to the emerging markets. The recent firming of the dollar may be a signal that just that is starting to happen.
It probably won’t happen quickly enough to head off a stock market correction but the conditions for a revival of US investment are starting to emerge. It isn’t a sure thing by a long shot and I’m not willing to bet on it just yet, but if recent market movements continue - falling commodity prices, rising dollar, correcting stocks - my outlook for the US economy and US stocks may improve significantly.
___________________________________________________________________________________
The economic data last week was generally positive on the surface but continued to show a US economy struggling to reach escape velocity. Inflation was obvious in several reports while its effects were no less significant if a little better hidden.
Several reports showed decent growth in retail sales. The Goldman and Redbook reports were a bit contradictory with Goldman showing no week to week growth and just 2.7% year over year. Redbook was much better reporting 4.7% year over year growth. That was down from last week’s reading but still pretty good. The official retail sales report later in the week also showed growth but the effects of inflation were evident beneath the surface. Overall, retail sales rose 0.5% in April about in line with expectations and what we’ve been seeing in the Redbook and Goldman weekly reports. Unfortunately, excluding autos and gasoline yields a more muted 0.2% rise. Even more ominously, excluding gas and food, the rise turned into a decline of 0.1%. Rising gas prices may not figure into the Fed’s inflation fighting equation but it obviously has an effect on buying patterns. Money spent on gas can’t be spent on new blue jeans.
Speaking of inflation, we got several readings on prices last week. Import and export prices continue to spiral higher, up 11.1% and 9.6% year over year. The good news is that the rate fell from last month so maybe we’ve seen the peak. Those prices affected the trade deficit, also reported last week. Both imports and exports rose but the deficit widened, primarily due to rising oil prices. Producer prices rose at a faster pace than last month with the headline up 0.8% and the “core” up 0.3%. Year over year the PPI is now up at a 6.6% pace which can’t be good for corporate profit margins. Consumer prices were more muted up 0.4% and 0.2% for headline and core respectively.
Two reports showed a build in inventories last week. At the wholesale level, inventories rose 1.1% while retail inventories rose 0.9% as reported in the overall business inventories report. The good news is that sales are still rising faster than inventories so the inventory to sales ratio hit an all time low of 1.23. Rising inventories, when voluntary, show confidence in the economy by producers and retailers so let’s hope they are right.
Jobless claims reversed last week’s big gain, falling to 434k. Maybe the reports last week of some special circumstances were accurate but regardless, new claims are still way too high to call the job market healthy. Hopefully, we can get back below 400k and keep falling this time. I still believe we will not see a more robust recovery until claims fall under 350k and stay there for more than a week.
The US economy continues to muddle through with growth that is positive but not enough to call good. The end of QE II I believe is a positive because it holds the promise of lower commodity prices but by itself it won’t be enough to cure what ails the economy. As I said in my weekly RCM column, the US may be on the verge of an investment surge due to the convergence of several factors but that is a cyclical phenomenon. Fiscal policy remains a headwind. Major tax reform and a reduction in the budget deficit is needed to ensure better long term growth. Maybe a nice stock market correction will be enough to get the politicians to the negotiating table.
If you'd like to receive this free weekly commentary by email, Click Here.
Weekly Chart Review, Click Here.
Name (required)
Mail (will not be published) (required)
Website
XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
« Weekly Economic and Market Review Economic Growth and Human Progress »
Contrarian Musings is © 2008 Alhambra Investment Partners LLC. All rights reserved. Please read our Terms of Use and Privacy Policy.
Read Full Article »