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Retail sales in April rose by more than expected (0.4% vs. 0.2%), and they are up at a 10.7% annualized pace in the past six months. They only have to rise by another 4%, so at the current pace we could see sales regain their previous record high by the end of this year. Sales appear to be leading the way in this recovery, and that's not surprising since the recession was largely provoked by a financial panic which drove people to suddenly hoard cash. Money was stuffed under mattresses as the world's consumers prepared for a prolonged depression. When that failed to materialize, consumers gradually began unhoarding their cash. The turnover of money has risen appreciably since last summer, confirming that the recovery has in large part been driven by spending that is making up for what was postponed in late 2008. This should continue to be the case, since this process is a virtuous cycle: the more that spending and production and employment rise (as it is now), the more consumers will be confident that the world is getting back to normal and the more cash they will pull out from under their mattresses.
Consider also that with sales almost back to their prior highs, but with total employment still very near its recent lows, businesses are seeing a tremendous pickup in productivity and profitability—sales per employee have shot skyward. Profits are the mother's milk of future growth, and this process is not yet over by any stretch. Businesses that have survived will soon have the resources and the desire to expand employment and grow. Again, a virtuous cycle that should last for a long time.
10 comments:
Scott,
Isn't this simply Americans doing what the Fed is telling them to do?
By making it useless to save money at meager rates, the only other option is to spend it like gang busters.
How this bodes well for our future prosperity in your analysis is beyond me. Short term bounce, yes, long-term health, doubt it.
I don't see any sign of excessive spending yet. I think the spending is being driven by money that was hoarded, not by money the Fed is pumping into the economy. I note that most monetary aggregates are growing at extremely slow rates these days, and have been for some time. No, this is not a monetary inflation (yet), simply a rise in money velocity which is very much what you would expect to happen given the nature of the recent recession.
We may well see the day when easy money is "overheating" the economy, but we aren't there yet.
Public,
I don't think there is any question that the fed has put a 'curse on cash' by holding rates so low. However, when facing a deflation that was the policy response to attempt to counter it. The seesaw is now IMO gradually tipping back toward reflation as a result.
I am still unsure how far away inflation is. Gold says 'not far'. Europe and the drag from the coming fiscal cuts there and later here say 'not for quite awhile'. We may very well be fighting these headwinds for years...but we could still have a modestly strong cyclical bull market during that time.
These retail sales are not bad. I know the restaurants here are full (I was in one last evening and there was a line). I certainly am not privy to where the money is coming from but they have some and they are spending it.
The stock market is selling the good news. Pessimism among most investors is high. From my perch that is bullish for later on in the year. When everyone is optimistic it is time to be very careful.
Thank you as always for your point of view. I am always interested.
Scott,
Can you explain how sentiment seems to have changed so fast on the EU bailout? Is there anything that can be done to calm the markets down or will this just go up and down for many months? Do you think the Euro will collapse as Paul Volcker has predicted?
Inflation, my rear end.
I can't think of anybody in the United States, other than maybe a good pitcher in the MLB, who has any pricing leverage right now.
You are lucky to get a job, lucky if you can rent space to tenants, lucky if you can make a sale. For property markets, this was a brief depression, not recession.
Precious metals are going bonkers on fear, almost the opposite of fear of steady, growth-induced inflation. If you are a Bangkok wealthy merchant and Chinese, or a Greek tycoon, you might buy gold even at current prices. A Chinese millionairess consulting with her astrologer might buy gold today too.
BTW, fascinating chart at http://paul.kedrosky.com/archives/2010/05/palladium_pushe.html#idc-container
Some commodities and indexes up, some down.
Palladium is the winner this year.
This is off subject but did anybody
see the inventory to sales ratio but it set its lowest ratio ( just barely) in history...
Bill,
My perspective on the sentiment thing:
Week before last the bonds of what have come to be called 'the club med', especially Greece, were being targeted by short selling speculators on the bet that they could be driven into a default/restructuring situation. Other speculators made the bet that European banks who held the bulk of this paper would be hit and it would throw the Eurozone into a banking crisis similar to the Lehman Bros crisis here. Well, you know what happened in the fall of '08. This led to massive shorting of S&P futures and other stocks. The trade became quite popular.
So now the stage is set with our market in a correction with hedge funds massively short anticipating another crash and the EU in round the clock meetings. Now the guys at the ECB know what's going on, as do the US Fed. This is a speculative attack on the entire eurozone with significant negative implications for the global economy. It has happened before. It is one of the roles of central banks to counter such things. However this crisis involved sovereign bonds and so they needed political agreements from the various EU members in order to use certain tools (which, BTW they were loath to use). When they recieved the political authority, they waited until just before the markets opened in Asia on Monday AM. They had their guns loaded and they shot the speculators right between the eyes. The S&P futures gapped up, as did the 'club med' bonds and the specs were caught. The rise in the market last week was aided by these speculators covering (buying back) their previously sold securities. The ECB squashed the sovereign bond panic but not the correction in our equity markets. That is continuing, but is now, IMO, getting close to the end.
The speculators have been burned pretty good. They are still out there bashing Greece, Spain, etc. and recently they have started on the currency saying it won't survive. This is all noise. The euro will weaken because it needs to. It does not mean it is going to collapse, which is what a lot of the more ridiculous assertions are saying. The short sellers in our markets have siezed on these things and have used them to hype their own versions of gloom. Remember, bad news gets the most attention. Good news is more often ignored.
A patient who has just come through an operation isn't going to hop right up and resume his life. He needs a little time in the recovery room. Our market is similar. We are still in the recovery room and probably will be for several more days. In time, however, Mr. market's overall health will overcome the viruses that have caused this shorter term illness and he will get back to a more normal life...whatever that is.
Scott,
Regarding retail sales, I returned home recently to find in my mailbox full of credit card solicitations. Many different banks were represented. It is totally anecdotal but it appears the banks are getting a little more interested in expanding credit.
The anecdotal evidence of improvement is turning up everywhere I go.
Bill,
Re Paul Volker's 'prediction':
As usual the bear camp has taken something someone important has said and twisted it to reflect their agenda.
What Paul Volker said was the RISK of collapse has increased. There is a big difference in 'predicting a collapse' and saying the 'risks have increased'.
The Euro will be fine....for the forseeable future. It will fluctuate because it is a hard currency that floats. But it will NOT collapse anytime soon.
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