Economic OutlookEconomic Conditions
I am completely amazed at the barrage of negative news over the last 2 weeks:
the midst of all of this news, it seems to be business as usual in the stock markets, bond markets, and major commodity markets.
I have been a student of markets for over 40 years. In fact one may say that I have paid more "tuition" during the early stages of my learning process than most would pay in a lifetime. I like to think that those experiences have more than paid for themselves over the last years.
Some Observations Based on Current Events
The interest rate markets have remained very calm during these recent weeks; it is an uneasy calm. A "flight to quality" accounts for US Treasuries remaining constant over this period, although the term "quality" may be suspect.
The stock market indexes, while having fallen sharply from the levels just over 12,000 basis the DJIA, have remained at the high end of what I have frequently called a trading range, and have even recovered in the face of better understanding of the Japan crisis.
My opinion is that "the average investor" has reached the point of desperation regarding the return on his capital. There is huge dissatisfaction with returns on cash of a few basis points! People are starting to feel they have "missed the boat" by remaining in cash.
Unfortunately, they should have gotten that feeling when the DJIA was 8500, and not after it climbed to 12,000.
Most people, other than several outspoken regional Federal Reserve Bank presidents, have been completely silent on INFLATION.
This is a dangerous omission, as with wages remaining almost constant and food and energy prices alone rising dramatically, the perennial squeeze is falling upon the consumer very quickly. With unemployment still very high, it is unlikely that wages can rise sufficiently to match prices.
Honestly, I think the government policy makers are praying that the food and energy prices are an aberration and that we will return to a better matching of consumer's income and expenditures more quickly than I believe possible.
I see the continued strength in the stock markets as a near term negative, as the longer we remain at relatively high prices the harder the drop will be in order to get us back to reasonable valuations. Many argue that we are at historically LOW valuations for stocks, and that is why we are poised for still higher prices. My response is that the historical perspective may no longer be accurate; like driving your car and only using the rear view mirror.
Interest rates will continue to inch upward as they have done for months; there is simply too much US Treasury debt. The Treasury debt picture has been distorted by the FED's QE 2 (quantitative easing part 2) program, wherein they will have purchased $600 billion in government bonds from banks and other institutions by June 2011.
This action has artificially supported treasury debt and kept a lid on interest rates. CAUTION: interest rates could change abruptly in the coming months, moving up more quickly than I had originally thought.
The dollar has been successfully pummeled by FED action; this has kept our exports attractive and allowed some enterprises to flourish.
The upcoming default by Portugal may give the dollar a small boost, yet we have sufficient problems of our own to keep the dollar under pressure for the near term.
It remains very difficult to select individual investment choices (particularly in equities), yet I believe we need to maintain that very selective approach near term.
©Patrick J. Catania 2010
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