The latest meeting by the Federal Reserve was quite significant regarding its monetary policy program, and many economists will now need to revise their analyses.
The key sentence in the Fed’s statement was, “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” (Source: Board of Governors of the Federal Reserve System web site, May 1, 2013, last accessed May 2, 2013.)
Why is this so significant? For the past few months, many economists and analysts have been expecting that the Federal Reserve would begin to discuss when it would be appropriate to begin reducing its aggressive monetary policy program, specifically the monthly $85.0 billion bond-buying level.
Many were thinking that at this meeting the Federal Reserve would indicate that at some point in the future it would begin reducing its aggressive monetary policy stance. While the Fed did indicate that it might be prepared to reduce bond buying and lower monetary policy measures, this is the first mention in its press releases that an increase is possible.
In my opinion, this indicates that the Federal Reserve now believes that additional monetary policy might be necessary, whereas we all had been hoping that the U.S. economy would begin to improve. Clearly, the recent data has shown otherwise.
Job creation remains very weak, and various sectors, such as manufacturing, do not indicate that they will increase their level of production anytime soon. Internationally, we are also seeing continued weakness in many countries, which can only put downward pressure on our own economy.
With … Read More
Small business is the backbone of America’s economy. While large multinational companies tend to get all of the attention, it’s the small companies that are critical to the country’s economy.
From your local “mom and pop” shop to the independent watering hole around the corner to the small manufacturing company making widgets, small companies are critical to the economy.
These are the companies that tend to fare better than other companies when coming out of a recession or a slowdown, due to their ability to make quick decisions in response to rapidly changing business variables.
While large companies could take months to adapt to a changing business environment, small companies could take only days or weeks to adjust, which is why their activity should be monitored.
An interesting measure on how well small companies may be doing can be linked to the amount of loans taken out. The thinking is: the higher the loans, the more the business is growing.
The Small Business Lending Index (SBLI), developed by Thomson Reuters and PayNet, is a good benchmark on small business lending. The SBLI is based on the volume of new commercial loan and lease originations from the major lenders in the U.S. given to small companies.
In March, the index fell to 98.5 from 105.4 in February.
The SBLI chart shows the pattern of the loans from 2005. You will notice the dip in loans when the recession surfaced, followed by the steady rise in loans to small companies up until the present time. Also note the recent big dip in loans to small companies.
This recent decline may prove to … Read More
George Soros knows a thing or two about making money from big bets. In 1992, Soros made a $10.00 short wager on the British pound and walked away with a billion dollars in profits.
Soros is now convinced Germany needs to rethink its strategy toward the sustainability of the eurozone and, in a draconian manner, believes the country should leave the euro.
Of course, should this happen, the 17-country eurozone would collapse, triggering a massive economic Armageddon and financial crisis in Europe that would ultimately generate chaos for the global economy.
Now, I doubt Germany or France—the two pillars integral to the eurozone—will exit the euro, but the reality is that the situation in the economic zone remains in a financial crisis with little hope of revival.
The problem is that the eurozone is firmly in a financial crisis and recession, trying to find its way out.
Greece, Portugal, Spain, and Italy are a drag on the ability of the eurozone to get out of its financial crisis. The unemployment rate in Greece and Spain is over 25% and worsening.
Italy just formed a new government, but there’s tons of work left for that debt-ridden country before it can exit its own financial crisis that has been building for years.
With all of this bad news, it’s not surprising to see people in the eurozone feeling the despair. According to the European Commission, economic morale in the eurozone remains weak after declining in March and April. (Source: Emmot, R., “Economic mood in euro zone sours again in April,” Reuters, April 29, 2013.)
And it appears that the solution will again … Read More
With the market hitting all-time highs, many investors are wondering how investor sentiment can be so positive when job creation is still not as strong as it should be. This divergence between the financial markets and the real economy cannot last forever.
Investor sentiment has been propped up by the Federal Reserve, which is trying to prime and ignite the U.S. economy. While job creation is certainly better now than it was a few years ago, there is still much more work that needs to be accomplished.
One very visible sign that the economy is not running at 100% capacity was the recently released retail sales data. For March, retail sales decreased by 0.4%, although this did follow a very strong February that showed a one-percent gain. A survey of 85 economists by Bloomberg had a median forecast of zero (unchanged) from March. (Source: Kowalski, A., “Retail Sales in U.S. Declined by Most in Nine Months,” Bloomberg, April 12, 2013.)
Job creation obviously plays a very important role when it comes to retail sales. And remember that like most developed nations, a vast majority of the U.S. economy is based on consumer spending.
In this case, investor sentiment might have become too bullish on retail-oriented stocks. If job creation does not accelerate, we could see a further impact on discretionary spending, which would break down investor sentiment throughout this year.
However, this recent retail sales data might have been a blip, as the trend is still fairly strong. Remember that one data point does not make a trend. Following stronger-than-expected data earlier in the year, a pullback was expected due … Read More
For many years, people from all over the world have been envious of the economic growth in the Chinese economy. Since leaders of that nation have transformed the Chinese economy from purely state-controlled to more capitalistic, China’s growth has been astounding.
Looking back, it is easy today to think of the Chinese economy in terms of the allocation of funds for long-term investing—hindsight is always 20/20. However, the trick is to look forward over the next decade and determine the most likely scenario for long-term investing possibilities.
A common complaint by outsiders regarding the Chinese economy has been the use of cheap wages to increase its competitiveness. It is true that the Chinese economy has benefited greatly from much lower wages than many other nations around the world. Additionally, the size of the working population is huge.
However, it appears that the demographics and costs are now beginning to shift against the Chinese economy, and those interested in long-term investing might be able to create a portfolio that will benefit from this change.
The Asian Development Bank (ADB) recently noted that wages adjusted for inflation have more than tripled over the past decade in the Chinese economy. Additionally, new labor laws have increased costs for businesses to hire and fire people. (Source: “China surging wages threaten economy’s competitiveness, ADB says,” Bloomberg, April 9, 2013.)
Additionally, ADB reports that wages are being pushed higher, as the pool of working-age people shrinks. Because the one child policy has been in place for so many years, China is entering a troubling demographic scenario, as there will be far less people available to work … Read More