First, before I get to the main subject of this post, let me say that the bulk of my longer lead time
indicators remain strongly positive. These would include critical financial measures such as
monetary liquidity, interest rates and the yield curve. Not only that, but the economy is nowhere
near effective capacity while a key lagging indicator -- my short term credit supply / demand
pressure gauge -- is now just rising to an equilibrium level after several years in the doldrums.
But I am worried about one critical mainstay indicator -- the trends of real hourly earnings and of
real take home pay. Measured yr/yr, the CPI has accelerated over much of 2011while wage growth,
low to begin with, has decelerated. So, even factoring in the payroll tax cut, the real wage has zeroed
out and is trending lower yr/yr. Business has not only not adjusted wages for sharper inflation, it
has been handing out progressively smaller wage increases. I had hoped business would be more
generous as inflation picked up. They may still come to the rescue, but the real wage has reached a
point where without substantial rapid improvement, an economic downturn is likely to develope
either late this year or in 2012.
A downturn is not a lead pipe cinch since a number of factors can intervene. Inflation pressure,
which has been driven by now down trending commodities prices, could fall away rapidly (The
Fed's hope). This could lead to an improvement in confidence and perhaps even faster hiring.
As well, consumers could simply grimly expand borrowing and draw on savings to finance
more of their spending -- things they have done in the past.
But, the burden of proof has now swung from bears on the economy over to the bulls. Moreover,
I think it may well be tough to see a substantially stronger stock market without the deterioration
of the real wage being arrested. Now, note here as well, that there could be subsequent fiscal or
monetary easing tactics which might lead investors to foresee better times for the real wage
down the road. But, here too, I think, the burden of proof is now on the market bull.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!