While everyone is obsessed with the financial crisis in Europe, and occasionally China, the real story is in America. The global market may seem to be on thin ice, but the U.S. recovery is on a solid footing.
I argued vehemently early in 2009 to anyone who would listen (and some did), that even though the U.S. stock market might have been on thin ice, the water was so shallow (valuations and sentiment so negative) that the risk of falling through was far from life-threatening. If anything, it made sense then to buy in and wait for a rally. And rally it did – faster than justified due to the frenzy to get into precious metals, energy and resource stocks.
I wrote the following about a year later:
Quote: “For those with the nerve to venture out, things went well until April of this year – optimism and rising valuations had made the water much deeper, and the risk of falling through had grown as too many folks had all of a sudden ventured out on the ice at the same time. My blog at that time (i.e. April 2011) warned about a mini-bubble ….Today (writing on August 23rd), the water under the ice is once again quite shallow in my opinion.”
Despite the volatility since August, especially in September, the U.S. Stock Market has rewarded those (see graph of index since August) who bravely ventured ‘onto the ice’ once again. What’s different today? Based on the data we’ve seen concerning the North American economy, the ice isn’t nearly as thin…and in fact it has hardened considerably and getting stronger.
- The Bottom Line, Up Top: Good economic news coming out of the U.S. and Canada…..jobless claims improved, trade gaps narrowed or, in Canada’s case, narrowed a lot to become a surplus. All supporting the view that growth continued, but there are still those frigid winds blowing from across the Atlantic.
- U.S. retail sales jumped 0.5% in October (or 7.3% y/y), which nearly doubled expectations of a 0.3% climb and the fifth consecutive gain.
- U.S. consumer prices unexpectedly slipped 0.1% in October, the first drop since June. A 2% decline in energy prices was the biggest drag on the index, but it was not the only one. Car prices, airline fares and recreation costs also decreased last month. Food prices continued to climb but the pace was very modest at +0.1%, the smallest increase in one year. Excluding food & energy, prices were also extremely tame, rising 0.1%, the second smallest gain since March.
- Building permits, which are a good leading indicator for housing starts (one needs a permit before the bulldozer can break ground), surged a more-than-expected 10.9%, the largest monthly gain since December 2010 (which is when permits were quickly made before changes to a few state building codes took effect). Granted, most of the permits were the multi-family variety but singles also rose 5.1%, erasing the prior month’s decline.
Source: Jennifer Lee Senior Economist, Vice President BMO Capital Markets
Is the global market still on thin ice? Perhaps it is, but then you don’t have to invest in Europe. Why not focus on America – to carry the analogy further – based on the data coming out weekly ‘the ice’ is getting to be as thick as it is up in Nunavut. This solid foundation can support a community of ice-fisherman (investors), but those who get there first will catch the biggest fish.
Malvin, with all due respect the “thin ice” concern is not necessarily the directionality of the US economy, rather it stems from the US debt and deficit situation. The White House’s Budget forecasts that the current deficit will be reduced to $900+ Billion by the end of 2012 and decidedly smaller in subsequent years. While we all would welcome a lower deficit in the near future, the devil is in the details. The $500 Billion question is – where is the money coming from? The Administration’s Budget shows that the decrease is primarily based on an increase in (tax) revenues from individuals and corporations to the tune of $580 Billion over the next two years. To achieve that magnitude of tax revenue increase requires GDP growth well above the anemic .4% and 1% growth seen in the 1st and 2nd quarters of 2011 respectively; additionally there has to be significant reduction in the (current ~9.1%) unemployment rate for this math to work. In an economic recessionary environment having substantial GDP growth with a considerable decrease in unemployment without some catalyst is unrealistic. Some believed that September’s Fed action would be that catalyst for the growth that you cite but the methods thus far i.e., a third round of Quantitative Easing or a “TWIST” – the recent process whereby the Fed sold short term treasury securities and bought longer term treasuries – has not address the underlying problem; reviving a recessionary economy requires individuals and companies to spend and invest with banks lending the necessary funds. The Fed’s actions so far have not and do not encourage spending, investment or lending. Essentially we are out of the traditional bullets used to get the country growing to fix the fiscal problem.
An excellent summary Michael. I believe (perhaps naively) that growth (real business, real people) “is” the catalyst – it is a cause and not an effect – and government initiatives purporting to stimulate real economic activity are pretty much impotent – they are primarily vehicles to redistribute wealth however inefficiently to those in need during times of economic duress. Like you wisely suggest, individuals and companies need to spend and invest….there is evidence this is beginning in the United States. Government may borrow from other governments, but at the end of the day all governments borrow from us. Once we all accept the fact that we will never receive back most of the money governments have borrowed from us….we get on with business. We can tolerated cooking of the books (carry the debt forever like Japan, even thought it’s worthless because there’s a government doesn’t have a conventional lifespan like a human or even a company), or we can write it off (what Europe is doing, because they really don’t have a ‘central’ bank at all). Either way works…but it is just bookeeping…not economics in my flawed opinion.