Russ:
How is this for a crazy bull call by a respected market forecaster after a big advance?
Another sign of a major top forming IMHO.
Clear Sailing, Good times roll: BCA Research
Martin Baines, managing editor of the Bank Credit Analyst, is featured in an interview for this week's edition of Barron's.
It's a low-inflation and low-return world according to BCA Research, and the US economy seems poised to keep moving at a decent clip for the foreseeable future. "Down the road, there is a U.S. consumer recession lurking, and a big housing downturn", but it could be as much as five years away (four-to-five year cycles have worked well over the last few decades).
"If we continue with that pattern, you would expect another recession in 2009-10".
View on Inflation
Looking around the world, Baines says he sees no evidence of inflation at all. I take this to mean he either sees the run-up in the cost of living as purely the function of a global demand phenomena, and/or that such pressures in the past have now in fact receded.
Looking at the fundamentals for inflation, Baines cites China as a case in point: "Here is a country that has been growing at 9% to 10% and effectively adopted U.S. monetary policy by pegging its currency to the dollar. Yet there is no inflation in China at all. In fact, there is deflation, and that tells you there is something very powerful going on there in terms of a supply-side boom".
Baines thinks that inflation is going to be low for the foreseeable future because a surplus global savings & investment backdrop will be in place for some time. As such, there will be no push up in yields.
There is tremendous excess savings globally, not just in Asia, but in OPEC countries as well. All this comes at a time when there is a weak demand for credit in most countries. That such savings was going to find its way into the bond market doesn't change a whole lot, in his opinion, even with the Chinese revaluation.
The Fed has run a very stimulative monetary policy, run big budget deficits, driven the dollar down and, to top it off, all this comes at a time when oil prices are up. This, he says, has been the perfect inflationary mix, and yet we haven't had any inflation, despite that.
In the U.S. there are tough competitive conditions and the Internet (and technology in general) is still a very powerful force for disinflation. Pockets of inflation do exist, but the overall picture isn't all that bad.
While the Fed's view is that there still is a problem, i.e., labor costs going up, a lot of Baines' inflation indicators are rolling over and producer prices are easing. Only "If the economy was to continue growing at a 4% clip for the next year, of course, there would be pressure on resources and the unemployment rate would fall and wages go up". But, he says that's not likely to happen and, while the economy is doing OK, he doesn't see it growing above trend over the next year.
Business Fixed Investment
Corporate sector is still recovering from tech boom and scandals. Executives are worried also about bubbles, in particular housing, as well as the trade deficits and protectionism. That's not the kind of environment that would encourage expansion plans.
Instead, they're investing in becoming more efficient and not expanding capacity. It's all about balance sheet repair and otherwise getting their financial house in order. The markets are rewarding them more for stronger finances than for the case of being expansionist.
Although this could change with the passage of time, it'll be gradual so long as the economy stays OK. Instead of growth in capital-spending accelerating, Baines implies that it'll probably weaken first. Such circumstances add further credence to his belief that future economic growth will only be decent, nothing like at an inflationary pace.
The Current Account
While he concedes that there are huge imbalances "out there", and this is what most people focus on in terms of being unsustainable, Baines thinks they can in fact be sustained for years. "As long as people are prepared to buy dollars, for whatever motive or reason, then this situation goes on.
OPEC, Asia, central banks and private investors have been willing buyers of dollars, and so the show goes on". All this will be sustainable so long as the Fed keeps tightening and the U.S. economy is perceived to be strong.
It'll only change when people reverse their expectations about the economy which, in his opinion, will come when the Fed stops raising rates and interest spreads begin to look less dollar friendly.
But that might not be until next year, thus the dollar should remain relatively firm, barring any unexpected shocks. And even though the dollar has fallen a lot, it still hasn't fallen enough to have any meaningful impact. Also, currency moves alone won't do it.
Housing
Looking at the overall picture for consumers, they've got higher energy bills, but employment and incomes are rising, albeit not as fast as one would like. Home appreciation and low interest rates give a bigger boost in terms of wealth than is the take away from rising oil bills. "Add it together, and consumers are better off. Its therefore hard to detect any pain from oil.
The savings rate is extraordinarily low, but the increase in home equity last year was worth 16% of income. Consumers, as a result, probably tend to see their savings, from the standpoint of the change in their net worth, as "very, very high".
As to the question of whether or not that "savings" from rising asset prices just as suddenly evaporate, Baines doesn't see it happening any time soon, despite "gravity taking hold in some markets". Folk buying a home to live in should be OK, as opposed to those buying a house for investment purposes. |
