Frank...(Chuzz, Lee, BRG and others...would love to get your thoughts)
It is assumed by many that we have low inflation now because world growth is slow...ie., when world growth picks up..inflation will soar....the Fed will raise rates...and kill the bull...
I don't know if that is necessarily the case....Let me borrow John Ryding (sp?) at Bear Stearns song..(with which I agree)...First of all, go back to 1996...there was very good worldwide growth, yet no inflation...it is possible for strong worldwide growth, and low inflation..
(Remember, we are seeing a major bursting of the Phillips curve here...the "old" logic was, at these unemployment rates...we had to have inflation (due to higher labor costs.....now, even Greenspan sees, knows that this model is no longer valid today...) Additionally, economists and others are seeing, to some (undefined) extent, a new era...
Why?
Several big factors:
(1) Commodities are dead....the price of gold has done nothing here....until gold rises, it is hard to worry about "real" inflation being here....additionally, othercommodity prices are dead...no forecaster, I've seen, sees any end in sight here....way to much oversupply in most every area....Asia demand not going to pick up anytime soon...No one sees oil going (permanently) near $15....better chance it will go again to $9....too much supply, too much in stock, demand remains low....Venezuela, Iraq, Saudis all ready to glut the market...their agreements are worth less than one unit of Napelese currency..
(2) Productivity is outstripping labor cost gains....The 4.6% number is the highest since December 1992 (when we were coming out of a recession/growth slowdown)...Labor costs CAN go up if labor productivity gains go up....IMO, labor productivity has gone up because of the massive acceptance of technology in corporations (large and small) in world economies...
(3) The internet. The internet is going to be the greatest dis-inflation factor in our lifetime, IMO...We have only just recently begun to implement it on a business-business, business-consumer, and consumer-to-consumer level...but look what it is doing (and going to do...)...it is taking enormous ineffeciencies out of these relationships by providing quicker, more complete information to participants....these cost savings are being passed on all the way down the line....
Business-to-Business: Improved information flows, interlinking of supplier/customer in virtual relationships in a powerful deflationary factor in business relationships going forward...Most firms are only beginning to adopt this....
On the consumer end: "ineffecient" brands are getting crushed, consumers are moving towards receiving perfect pricing information....my goodness, there are firms that are selling goods at negative gross margins!! (granted, this won't last forever, negative gross margins, but the trend towards lower consumer costs is there....retailers have much lower pricing power than ever below...the lowest cost producers will survive and thrive...with higher cost guys getting crushed)...Even consumer-consumer (EBAY) models are popping up....making on-line auctions much more effecient for buyers/sellers than former alternatives..
A lot of fat is getting taken out of the system(s) here...This is going to continue for some time to come...
(4) The Fed is not going to raise rates given the malaise in Brazil and Asia....the bond market is predicting a rate hike in September...I'm not so sure....Japan is a mess...and demand will have to pick up there (big-time) to really move the world economy towards (overall) increased demand...Europe is trending downward here...barely holding off recession...
(5) Western-style business (managment) principals (ROI, ROE, TQM, constant/critical observation of business costs, "total" customer service, etc..) have "won" the war as far as management of companies...There is a much more common language concerning business goals and objectives around the world....(Now, obviously, this moves in fits and starts...but, my point is...in comparison to other eras,
these concepts rule much more than ever before)..More than 1/2 of the world's population has access to products that they never did before (Look at Dell in China) and vice-versa, producers now have the ability to sell their goods in a much larger world marketplace....
Assuming in 6-9 months, Japan & Europe would recover....Because of 2& 3...I still don't think we are going to higher rates (5.75 max) or inflation....At the current 30 year (5.75), and inflation at 1.5%....real rates are still too high here...
Historically, the stock market has flourished during low rates of inflation...I would think that the short and long-term forecast for U.S. inflation is as great now then it has ever been....
Tremendous amounts of capital continue to pour into U.S. markets (equity, bond, and money market)....Demographic trends show that baby boomers are going to be pumping money into these funds at a rapid rate until 2004....Stocks have won a big psychological war with many investors.....More individuals feel comfortable holding stocks today than ever before...so I do not expect money currently sitting in money market money funds is going to sit there forever...
So, needless to say, I am bullish (longer than just 6-9 months)..but, to me, the real key is U.S. inflation...and increased productivity gains (due to successful implementation of technology) and the internet will keep inflation low EVEN if world demand returns.....(potentially, there could be a slight shaky period when the "old guard" pushes thru higher rates..and maybe a Fed rate hike..when world demand picks up....but, as it becomes clear that inflation is not (in any large way) picking up, the market(s) will rally again, and if you hit the bottom, a great buying op. will result...
Oh...I think the dollar will remain strong for a while..simply because the yen and Euro will be so weak....
Trade balance is a problem...that I give you...and puts pressure on the dollar...but on a relative basis, we should see improvement in '99....and other factors (flight to safety, etc) will compensate for its negligible effects..Hard to see trade balance alone tipping the dollar, and, subsequently inflation.... |
