Friends and Colleagues
This week Scott Anderson, Senior Economist at Wells Fargo Economics talks with us about a throwback to the 1970's....that persistent scourge known as Stagflation.
Dr. Anderson is generally an optimist, which makes his current report all the more unsettling, as we can see from some of his quotes cited below:
"I find very few positives that I can point to over the near-term."
"When I predicted back in early December of last year that 2008 was going to have a decidely "stagflationary" feel, I didn’t plan on things being this stagnant or this inflationary."
"Stagnation implies some growth, however, recent data suggests the economy may already be in recession."
"A growing number of sentiment and opinion surveys are already pointing to recession, and not a mild one either, having more in common with the recession of 1990-91 than the recession of 2001."
Dr. Anderson usually finds some light out there in the midst of the madness. So what fundamentals are driving his downbeat comments this week?
The National Federation of Independent Business Small Business Optimism Survey for January and the University of Michigan’s Consumer Sentiment Survey for February both dropped to levels not seen since the depths of the 1990-91 recession.
The ISM Non-manufacturing Index for January, Philly Fed Manufacturing Index for February, and Empire State Manufacturing Index for February are now well into recession territory.
1990-91...as I recall, that was the Mother of all Recessions....and it lasted a long time.......
Dr. Anderson shares that the 1990-91 recession didn’t last long by historical standards – only eight months – but job and income growth didn’t really return until 1994. It was the original jobless recovery.
But Dr. Anderson, won't consumer spending bail us out of this mess?
Not this time he says, as the pressures on real consumer spending continue to intensify.
With oil prices above $100 per barrel, energy prices are up 19.6% over the past year, and they are rising at an annualized rate of 43.6% over the past 3 months!
Consumer price inflation has flared to a 4.3% year-on-year pace through February.
Food prices rose 4.9% over the past twelve months, and forecasts are for it to accelerate toward 8.0% this year.
Consumer medical care, tobacco, and commodities prices are all rising at 5.0% or greater rates.
Even personal computer prices, which always seem to go down, rose 1.0% in January.
There doesn’t appear to be much left over for discretionary spending.
Well, Dr. Anderson, how bad is all of this inflation for the economy and the financial markets?
In a word....Huge!
Inflation crimps real income gains and therefore real spending gains as employers have trouble keeping up with nominal wage increases.
Inflation will lead to rising bond yields, creating further stock and bond market losses and financial wealth destruction.
Finally, inflation will hamper the Fed’s ability to provide relief to the housing market as mortgage rates rise instead of fall, and the ARM resets continue at a punishing pace.
This doesn't sound pretty......and only time will tell where this road will lead.
So in the meantime, as always....stay tuned........
THOUGHT FOR THE WEEK
Good health….
A nasty bout of the flu has taken this country by storm.
After spending all of last week burning off a fever that sapped my strength, my energy and my creativity, I am humbled by how fragile good health can be.
When we were young, good health was a cheap commodity...because it was always there.
But as Joni Mitchell once sang...."Don't it always seem to go that you don't know what you've got till it's gone...."
Good health is a privilege, not a right...it is something that we need to honor when it is there, and nurture to keep it there.
Some random health tips to consider:
Wash our hands more frequently....according to doctors, this is the single most pro-active thing we can do to prevent the flu.
Get a good night's sleep....every night.
Eat well....fresh foods including colorful fruits and vegetables.
Drink more water.
Turn off the Blackberry at night and on the weekends....and read a book to relax.
Breathe deeply.
In the weeks ahead, may we each remember to take better care of ourselves, and may our doing so cause us to be blessed with good health.
Have a good week.
David
David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc.
5959 W. Century Blvd., Suite 1010
Los Angeles, CA 90045
Offices in Los Angeles, San Francisco and Newport Beach
Proudly serving the California Marketplace since 1983
310-215-0482 ext. 225
drosenthal@curtisrosenthal.com
www.curtisrosenthal.com
Friends and Colleagues
The headlines tell us that our economy seems to be in a tailspin.....but is it really?
This week Michael Swanson of Wells Fargo Economics talks with us about what the Fed Funds Futures market seems to be projecting for the economy, and whether this view makes sense.
Recession vs. Inflation
Mr. Swanson shares that without a moderate-to-severe recession, the Fed Funds futures are overly pessimistic about the implied Fed Funds rate going forward.
He notes that the most recent releases indicate that both Q4 2007 and Q12008 will see 1.3% GDP expansion....not contraction.
This sub-par growth rate allows economic slack to build, helping the Federal Reserve in its job of moving price inflation back towards its target.
So Mr. Swanson...What type of recession would generate sufficient slack to justify the current Fed Funds futures rates?
To match the current Fed Funds futures pricing, Swanson projects that GDP would need to enter recession in Q2 2008.
The Q3 and Q4 2008 would need to see that year-over-year contraction accelerate to a -0.5% rate.
This scenario assumes that PCE (Personal Consumption Expenditures) inflation will stay at 2% throughout 2008.
This rate of PCE inflation would not generate any interest rate slack for the Federal Reserve assuming that 2% is the upper end of their inflation target.
This combination of economic contraction with a leveling of inflation would allow the current Fed Futures to match the "appropriate" interest rate response.
Does this sound likely?
Swanson says that it is "wrong to assume that the economy is underperforming as badly as the current gap indicates".
He tells us that the real economic potential of the United States doesn't change very quickly based on quarter-to-quarter events.
In fact he says that the real economic potential of the economy changes with longer term measures of productivity rates, labor and capital growth rates and regulatory impacts.
The only things that change rapidly are "the government's economic estimates that rely on a staggering number of assumptions and imperfect statistical surveys".
Conclusions?
Mr. Swanson cautions us that investors and business people shouldn't place too much emphasis on the short-term numbers.
He contends that "there is certainly more noise than real information in the quarterly variations".
So...maybe we should stop reading the up-to-the-minute news that we get on-line every moment of the day.
If the real trends occur over long periods of time....then how much adrenaline are we wasting by getting upset with every breaking news report?
As always, our saga continues.....so stay tuned.
THOUGHT FOR THE WEEK
Constructive Conflict...
Conflict is present in all of our relationships...at work and at home. It is a natural part of the human condition, when two well intentioned minds disagree.
Conflict can be destructive when it is not managed well.
Blaming...criticising....name calling...these are easy traps that we all fall into at times....but they serve to break down our relationships rather than build them up.
Listening...understanding....empathizing...these are harder to do...but they lead to compromise and resolution of our conflicts. They also help to build up the foundation of our relationships.
In the week ahead, may each of us remember to do the hard work that will make our conflicts constructive and productive. By doing so, may we each be rewarded with stronger and richer relationships in our lives.
Have a good week.
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On a personal note, I am proud to share that my 18 year-old son has started an e-commerce business targeted toward parents of children with attention and focus issues (ADHD, etc.). His company, Got Fidgets? sells fidget toys that are designed to keep the hands busy so the mind can work. If you have fidgeters in your family, please check out his web site at:
www.gotfidgets.com
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David
David Rosenthal, MAI
President & CEO
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