The UCLA/Ceridien Pulse of Commerce Index has registered a 3-mo. slump through October. While this confirms other signs of a pause in the economy's recovery process (they called it a "recovery time out"), it doesn't correlate with other signs of continued growth (e.g., rising industrial metals prices, strong corporate profits, growth in air travel, growth in money supply). Regardless, this is one of the few signs I've seen that would suggest another quarter of weak GDP growth. My sense is that the index is wrong this time, but it is a cautionary note that bears watching.
Scott,
ReplyDeleteGold is going ballistic. At what point should we start to worry?
I personally do not think it is a bubble. The global dynamics at play could not be any more different than in the 70's/80's.
We are now globally saturated in debt and the printing presses have run unabated for 3 decades around the world.
Benji,
ReplyDeletePlease read this quote and absorb.
"Indeed, tight credit during uncertain economic periods is usually a positive signal that failed economic concepts are being starved of capital so that they're no longer able to destroy it.
High rates of interest aren't scary as much they're a symptom of previous mistakes, and they're essential for drawing savers back into the marketplace to fund productive ideas quite unlike the ones that caused the financial panic to begin with."
Gold is not a bubble? But oh, the anti-QE'ers say that QE will lead to an asset bubble--such as in gold.
ReplyDeleteBut magic gold is different?
Maybe so. After all, gold is still only about 2/3rds of highs it reached in the late 1980s. That translates into 20+ years of being a money-losing investment.
And Chinese and Indians (2.5 billion people) are buying gold for jewelery, thanks to rising incomes. It may also be a sensible way for a modest-income person in China and India to store wealth.
Personally, I think gold is a poor investment. My grandfather used to say, "All gold is fool's gold."
Does gold generate income? Gold is worth what the next guy will pay for it. So are diamonds, palladium (a fantastic recent performer, due to rising demand for gold jewelery), platinum, etc.
All investments to some extent are nly worth what the next guy will pay, but investments which throw off income, directly or indirectly, at least have some utilitarian value.
Such as, if you own a warehouse worth $500k, you can rent it out for $3,000 a month. If you own $500k of gold....you pay some storage costs.
I think gold is in a fever when I hear the radio ad men honk about it, and think about the customers they draw in. This does not strike me as sophsisticated investing.
Scott:
ReplyDeleteThe data is all over the place, which usually means...strong likelihood of growth. This morning's figure for inventories was not good.
After QE2 the market is focusing on other issues -- such as Europe which is not a pretty place right now. The American economy is on the edge of recovery, but external events may cause greater impact on the market.
Today is one of the first days were Gold and the USD are going in the same direction, oil prices are also rising (as the dollar rises).
Difficult trading environment, especially after the market's performance over the past two weeks
PL-
ReplyDeleteMilton Firedman said that low interest rates, contrary to intuition, are a sign that money has been tight for a long time.
Lenders have low inflationary expectations.
When asked for advice by Japan in the late 1990s, when they faced low interest rates and deflation, he told them to print lots more money, and to not stop until they had inflation. They did not listen.
Japan did practice some QE from 2002-2007, when their economy notably improved.
Here is what Milton Friedman wrote in 1998:
"The surest road to a healthy economic recovery is to increase the rate of monetary growth, to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve.
Defenders of the Bank of Japan will say, "How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?"
The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.
There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia."
Google Japan, Friedman and Hoover, and you can read the hwole piece.
I like MF--he put true classic economics before political dogmas.
"US wholesale inventories jumped more than expected in September as demand failed to keep up with production, suggesting output will remain soft as wholesalers try to trim stocks of unsold goods."
ReplyDeleteThis is a weak recovery. Need more juice from the Fed. Yes, I want structural improvement too--lower taxes, regs--but for now what we have is the Fed. They need to gun the presses, print money until the plates melt.
Real estate is in a depression, and need reflation ASAP.
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ReplyDeleteBenji,
ReplyDeleteJust as with any business, throwing money at a problem rarely solves it.
The problem is not with the supply of dollars as Scott and so many others have rightly stated. The problem is not with too little JPY either.
The market has enough money in circulation to conduct transactions at any velocity it so chooses. Choice is the operative word. We do not have a choice when the Fed places money in circulation. It must be absorbed which means the value of the dollar depreciates.
BTW. Yours and your grandfathers analysis of Gold is deeply flawed. The current gold price adjusted for 1970's dollars is $6,300. We may well be in the early innings of a gold bull market.
The dollar has depreciated 80%+ over this same time frame. One or the other will eventually break. If the Fed keeps printing dollars my guess is the USD is toast.
If you have owned gold since the 1970s, perhaps you have made money, and personally, I hope you have.
ReplyDeleteIf you have owned gold since the late 1980s, you are still down.
In either event, you missed out on epic stock market rallies, or great income from bonds and dividend-paying stocks.
Anyone who bought California real estate in the 1970s is wildly rich now and got tax breaks, income and possibly shelter along the way.
Gold may be in a bull market. Depends on jewelry buyers in China and India.
Good luck.
On the dollar, I hope it sinks, but Grannis is long on the dollar. I don't really have an opinion on this one.
Trucking companies themselves are moving more and more long-haul to rail. FedEx is beginning to use more rail in its trucking service. Same with other truckers. Rail is taking share from truckers as the reliability of rail has increased dramatically and producers are using rail more, locating production facilities next to rail lines. That's why the weekly rail numbers have been hitting all time highs on inter modal. I'm not concerned about small weakness in diesel usage, on the margin and would look at transport numbers as a whole.
ReplyDeleteWhat is the mechanism to get more money into the hands of the vast majority of consumers? I don't see any.
ReplyDeleteQE2 hasn't done anything for me besides push up gas prices.