Robust earnings, slower economic growth, FED benign…what to do?

Biker signal for “Slow Down”

“WASHINGTON, April 28 (Reuters) – U.S. economic growth likely braked sharply in the first quarter as higher food and gasoline prices crimped consumer spending, but the setback will probably be fleeting given a firming jobs market.” (C) Reuters 2011

I’ve been saying this slowdown was coming for awhile now, but now that it’s getting noticed we can ignore it.  The stock market continues to revel in the increasingly robust earnings reports from a variety of sectors (also predicted over the past few weeks), despite the weak US$ which has fueled the frenzy to own gold and commodity stocks.

What is wrong with this picture?  The FED’s announcement yesterday that they foresee no need to change the ‘easy money’ policy (which is consensus thinking) has in my opinion been causing the almost contradictory flows of funds 1) away from the US$ currency but at the same time 2) into US stock markets.

ISM Purchasing Managers Index

 The stock market is right 2/3rds of the time.  Today it’s saying that despite the slowing that occured in the 1st Quarter, the rebound will be resilient.  Earnings reports confirm the optimistic view, but leading indicators at present (I’ve always found the ISM Index to be the most reliable one for me) don’t confirm this.  Interest rates remaining extremely low then is market’s (and investors are believing it’s really there) ‘ace-in-the-hole.”

“It is a relatively slow recovery,” Bernanke said at a news conference, the first after a policy meeting by a Fed chief in the central bank’s 97-year history. “The combination of high unemployment, high gas prices and high foreclosure rates is a terrible combination. A lot of people are having a tough time.”

I’m not a conspiracy theorist type, but those who are might get a kick out of my thinking.  Bernanke is an economist.  I earned (by the skin of my teeth) a Post Graduate degree (M.A) in economics a lifetime ago, and even lectured a 2nd year (only for one semester during the summer months when more qualified people were on holiday) macro-economics course for university students. All economists nowadays know that any change in economic policy is bound to be impotent if broadcasted in advance – rational people will adjust their behaviour quickly thereby nullifying its impact.  On the other hand if it’s a ‘surprise’ then it may well work.

Hmmmm.  The FED has its very first press conference, and broadcasts the economy sucks more than expected so no change in policy is planned for the ‘foreseeable‘ future?  How long is foreseeable anyway?  What he’s really saying in my mind is that more jobs are being created at a modest but fairly steady pace; rising inflation expectations are being reflected in gold and commodity prices (although there’s an effect that is purely exchange rate related); and in the weak US$.  Best solution?  Gradually layoff the Quantitative Easing (QE) of course, but sometime just beyond the foreseeable future introduce a ‘surprise’ interest rate hike to combat rampant inflationary expectations.

Best defense is a good offense!  Montreal Canadiens lost sight of this in last night’s game 7, but not the Tampa Bay Lightning.  Why do you suppose NASDAQ is doing well of late? Many tech related companies couldn’t get a bank loan over the past few years no matter how much they begged.  Rising rates won’t damage businesses with little debt but improving sales.  And the most avoided asset class of all – cash – will become the new “GOLD.”

Are you a maverick?


About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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