The US economy continues to recover, but remains fragile. I am concerned about three factors.
1. When seen in the aggregate, or collectively, US business continues to behave stupidly. Yes,
corporate profits have recovered dramatically, with earnings moving into new high ground. But,
managements are not rewarding most employees for a substantial improvement in productivity.
Handing out wage increases of 1-2% adds to profit margins, but with inflation topping 2%, the
real wage remains negative, forcing most householders to dip into savings to boost consumption.
Retail sales have improved very nicely, but should consumers take a few months off to boost
the now low savings cushion, the economy will become vulnerable in a hurry. It is my belief
that corporate greed re: profit margins is a major reason why the market's p/e ratio is well
below normal for a low inflation environment with rising net per share.
2. The media has spotted a trend among US manufacturers to bring more production home and
is also smitten with the new growth of US hydrocarbons production . All well and good.
However, over the first years of recovery through mid - 2011, US export sales increased by
roughly 25% per annum, and contributed very substantially to economic recovery. Over the past
year through Apr., such sales increased by only 3.5%. So, there has been a dramatic deceleration
of export sales growth owing to sharply lower global growth.
3. When banker behavoir is viewed collectively, they are behaving as stupidly as they were
over 2003 - 2007, when they threw money at folks coming in for home loans in an overheated
housing market. Now, bankers are freezing out even well qualified borrowers because of a
preoccupation with collateral value. Naturally, if lenders remain dumbly conservative, the
collateral values have little chance to recover much. Since the wealth of most Americans is
tied up in residential real estate, super conservative bankers are contributing to the pressure
on household wealth and are greatly inhibiting prospects for a recovery of housing and
consumer confidence. As well, Tea party adherents who freaked out over the prospect of
US Gov't aid to the distressed real estate market now see the fruits of such behavoir : deeply
depressed home values, including their own. Vibrant real estate activity contributes to the
liquidity in the financial system and in that regard is a positive for the stock market.
The fragility of the US economic recovery and the slowing of growth momentum of the global
economy suppress the capitalization of earnings (p/e ratio). But there is another important
reason why stocks have only drifted modestly higher over the past two years. There is not an
abundance of liquidity in the system. Money market fund cash reserves have been drawn down
sharply over the past two years, and my measure of broad based, credit - driven financial
liquidity is up but 3% over the past year, far less than total US business sales. There is
precious little loose change around for stocks. Now, there is a very large trove of money in
the US Treasury market. Viewed long term, Trasury notes and bonds are hyper- inflated. But,
to shake that excess money out of Treasuries for more than a trade is going to require a
far more balanced US economic recovery / expansion than what we have seen to date.
And this brings us to the Fed. Should inflation continue to decelerate and veer toward deflation,
the Fed would have an eminently justifiable pretext to step in with a sizable new QE program.
Inflation which goes south of 2% and an unemployment rate of over 8% would leave the Fed
Fiscal policy? It has been too conservative in my view, and it is too early in this election
year to tell whether official Wash. DC will make things worse.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 40 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 !!!
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