Economy Getting Better
This morning the National Association of Purchasing Managers in Chicago released their factory report which moved from 47.6 in April to 52.2 for May. Readings below 50 indicate contraction, while anything above 50 means that business is improving. Investors and analysts are looking at the manufacturing index as confirmation that the economy is improving and the results should lead to stronger corporate earnings in the second half of the year. The good news from Chicago sent stocks higher again today with the Dow adding 139 points and the NASDAQ running another 21 points. Overall for the week the Dow Jones Industrial Average added 249 or 2.9% to close at 8,850 and the S&P 500 gained 30 points or 3.2% to close at 963. The NASDAQ was the BIG WINNER for the week by adding 85 points to close at 1,595. The NASDAQ climbed 5.6% in a four-day trading week. It sure feels like investors are fanning the flames of the high flying technology stocks. We will just have to see how far they can run and if earnings can catch up any time soon.
On the flip side, U.S. Treasury Bonds and Notes saw some profit taking this week as the market sees signs of economic improvement. The 30-year bond fell 2.31 from 121.28 to close at 118.97, which increased the yield to 4.36%. When we get weak economic reports stocks fall and bonds rise. With economic reports that imply strength, stocks go up and bonds fall. Now throw into the formula inflation versus deflation and strong dollar versus weak dollar. It gets more complicated. As the dollar was falling rapidly over the last couple of weeks, both stocks and bonds were going up. The key we learn from that is that when the dollar falls, asset prices go higher. They can’t let the dollar, stocks and bonds all fall at the same time. If they do, foreign investors will run for the exits in a hurry.
During the time when the dollar was falling fast, numerous officials from the Federal Reserve were out in force describing the pitfalls of deflation and the need for easy money. The bond market took the cue of implied lower interest rates, so bonds went up. The stock market also went up with the prospects of a Fed rate cut. Over the last two months stocks have risen because the Fed said they would lower rates and buy debt off the market if it became necessary. Today stocks are rising because the economy is looking stronger, and therefore the Fed will not have to cut rates. So which is it?
Spin of the Week
Here is another classic example of Fed double-speak. Robert Parry, President of the Federal Reserve Bank of San Francisco said in a speech to the Chapman University Economic Forum, “If it seemed appropriate, we would have room to give a boost to the economy, even though it’s possible the economy could pick up vigorously later in the year.” He went on to say, “The economy’s growth in the second half of the year is likely to be modest and won’t be strong enough to absorb the excess productive capacity that is weighing on business investment.”
Please re-read the quote from Mr. Parry and ask yourself if his statements tell you to put your money in the stock market or into bonds. Think it through a few times and it’s still foggy at best. Does anyone else out there get the impression that they are trying to confuse us? Stock prices, bond prices, U.S. dollar strength, precious metals prices, and commodity prices all seem to be contingent on the next press release as to the strength of the economy. Lately it seems that economists are all wrong, since the numbers are usually reported in terms of “better than expected” or “worse than expected.”
Delude the People
Now please go back to last year and remember Mr. Paul O’Neill. He is the FORMER Treasury Secretary under President Bush. Around the time of his departure from Washington he came out with this doosie! “It’s all about sound bites, deluding the people, pandering to the lowest common denominator. I didn’t adjust (in Washington) and I’m not going to start now.” That is the kind of guy I respect and wish I could hear a lot more from. These are not my words. These words belong to one of our top government officials who was not willing to stick to the “message discipline,” so he’s out the door! To reiterate, “deluding the people” seems to be the intent of the message discipline from Washington. Here’s the definition: Delude – “To deceive the mind or judgment. To elude or evade.” Now go back and read Mr. Parry’s quote for a third time. Does the quote inspire you to buy stocks or bonds?
Here’s another quick one on the double messages we continue to receive. A few weeks ago the current Treasury Secretary, Mr. Snow, was saying that a weaker dollar would be good for our export businesses and work to turn around a struggling economy. President Bush is now on his way to Evian, France for the G-8 Economic Summit, and just prior to his departure was quoted as saying, “I will reiterate our strong dollar policy.”
Good News – Bad News
Since stocks, bonds, and the dollar are reacting to every shred of new evidence on the economy, let’s just list some of the recent economic news releases and see if we can glean some kind of clue as to where we should invest.
Good Economic News:
Chicago manufacturing comes in stronger than expected
Consumer confidence improved in May
Stocks have rallied
Bad Economic News:
Retail sales have been weak
Personal spending declined in May
Personal income growth is at its slowest pace in a year
Weak employment numbers, 3.8 million Americans
without jobs, and rising
Initial claims for unemployment 15 straight weeks
above 400,000
The party line seems to be that the buildup to war pushed up energy costs, reduced consumer sentiment and caused manufacturing to contract. Now the thinking goes something like this: The rise in May manufacturing reflected increased orders and production. A sustained rise in sentiment, along with lower energy costs and an increase in home refinancing, may help spur consumer purchases, boosting production and the economy.
The economy is still contingent on the consumer going deeper into debt and spending the money from refi’s rather than using the proceeds to improve personal balance sheets by paying off higher cost debt. The consumer needs to get his job back. In my mind it’s that simple. The recovery can’t depend on business spending, because it just isn’t there. As Fed Governor Parry stated above, there is too much excess capacity in the U.S. and not enough growth to absorb the capacity. Business spending will remain low until capacity utilization improves significantly.
The Long Story, Short
The biggest thing you can count on over the next few years is that the dollar will go lower. It must go lower to correct our current account deficit which is getting way out of control. Bond prices should remain high (low interest rates), as the recovery is 100% dependant on easy money to re-liquefy the system (or re-inflate the bubbles). I expect stocks to go sideways to down. The Dow could stay in a range of 7,500 to 8,900 for the balance of this year. Paper instruments will only be held up by way of inflating the supply of money. Governments around the globe are now looking at aggressive measures for competitive currency devaluations. When all paper money begins to lose value and people lose confidence in paper representing wealth, they will go to the safe haven of last resort. Investors are confused with government delusions. When the smoke has finally lifted, paper assets will give way to hard money, commodities, tangibles and collectibles. History has shown us this cycle many times over.
Please go back to the graph at the top and look at the enormous ascending triangle on the HUI chart. When the HUI breaks through the 155 mark it should be an explosive event. I hope you will be joining me for the ride of a lifetime. What we are headed for should make the inflation of the seventies look like a walk in the park…in the meantime, best of luck to you in all of your investment decisions.
Copyright © 2003 Mike Hartman
May 30, 2003
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