The markets were downright giddy this morning following a better-than-expected GDP report. The markets nearly became euphoric when the summary tables revealed that it was consumer spending which was largely responsible for the rise in GDP. However as the day wore on, cracks were beginning to appear in the façade of the first read of third quarter GDP.
Economists and strategists fro around the street expressed doubts that consumers will be able to keep the economy chugging along. Zach Pandl of Nomura Securities told the Wall Street Journal: "We don't think the kind of pillars are there for a strong recovery." A report published by Citi Private Bank Global Fixed Income Strategy state: “The recovery in developed countries, however, is by no means robust, nor is it likely to resemble a “V”-shaped rebound that is typically associated with downturns of this magnitude.
Not all economists are counting on consumers to tow the economic line. Some experts believe that business inventory replenishment and business-to-business commerce will carry the economy to a sustained recovery. Others believe that a weak dollar, which lowers the cost of U.S.-made goods abroad, is the answer. However, a weak dollar causes problems domestically, such as higher food and energy prices. These headwinds can be disastrous for the economy. The truth is that U.S. economic growth hinge on the consumers’ ability to spend. With wage growth expected to be poor and credit availability to be based on prudent lending standards, the economy appears to be heading for peak growth in the 2.5% to 3.5% in the current economic cycle.
Attempts by the administration to reinflate the economy with credits, rebates and by forcing banks to ramp up consumer borrowing will cause serious problems down the road. The sooner the government admits that three percent growth is what is fundamentally sustainable and assets prices, including real estate, must be permitted to reset to reflect supply and demand the better off we will all be.
I have previously discussed how the equity market rally has been due in large part to the weaker dollar and the cheap short-term borrowing which is helping to cause the weaker dollar. The following is a chart which demonstrates the correlation between the weaker dollar (using the strength of the euro vs. the dollar as an example), crude oil and the Dow Jones Industrial Average:
Last year I argued that rising oil prices were not, as many commodities traders insisted, due to increased demand, but due to the weaker dollar. Oil was being used as a dollar hedge. When the financial crisis struck last September, the flight to safety had investors flocking to the dollar. Oil prices plummeted. This year, with the dollar weakening, oil prices are rising. Equity prices are also rising because of the weak dollar. As the dollar weakens it takes more of them to properly represent values of companies this causes equity prices to rise. The above chart bears this out. Therefore, if the Fed begins to tighten before the economy can fly in its own (sans stimulus), a significant correction could ensue. The problem is that the Fed will tighten by late 2010 and growth will be modest. It will be interesting to see if the market can maintain its strength in the face of tighter monetary policy.
Economists and strategists fro around the street expressed doubts that consumers will be able to keep the economy chugging along. Zach Pandl of Nomura Securities told the Wall Street Journal: "We don't think the kind of pillars are there for a strong recovery." A report published by Citi Private Bank Global Fixed Income Strategy state: “The recovery in developed countries, however, is by no means robust, nor is it likely to resemble a “V”-shaped rebound that is typically associated with downturns of this magnitude.
Not all economists are counting on consumers to tow the economic line. Some experts believe that business inventory replenishment and business-to-business commerce will carry the economy to a sustained recovery. Others believe that a weak dollar, which lowers the cost of U.S.-made goods abroad, is the answer. However, a weak dollar causes problems domestically, such as higher food and energy prices. These headwinds can be disastrous for the economy. The truth is that U.S. economic growth hinge on the consumers’ ability to spend. With wage growth expected to be poor and credit availability to be based on prudent lending standards, the economy appears to be heading for peak growth in the 2.5% to 3.5% in the current economic cycle.
Attempts by the administration to reinflate the economy with credits, rebates and by forcing banks to ramp up consumer borrowing will cause serious problems down the road. The sooner the government admits that three percent growth is what is fundamentally sustainable and assets prices, including real estate, must be permitted to reset to reflect supply and demand the better off we will all be.
I have previously discussed how the equity market rally has been due in large part to the weaker dollar and the cheap short-term borrowing which is helping to cause the weaker dollar. The following is a chart which demonstrates the correlation between the weaker dollar (using the strength of the euro vs. the dollar as an example), crude oil and the Dow Jones Industrial Average:
Last year I argued that rising oil prices were not, as many commodities traders insisted, due to increased demand, but due to the weaker dollar. Oil was being used as a dollar hedge. When the financial crisis struck last September, the flight to safety had investors flocking to the dollar. Oil prices plummeted. This year, with the dollar weakening, oil prices are rising. Equity prices are also rising because of the weak dollar. As the dollar weakens it takes more of them to properly represent values of companies this causes equity prices to rise. The above chart bears this out. Therefore, if the Fed begins to tighten before the economy can fly in its own (sans stimulus), a significant correction could ensue. The problem is that the Fed will tighten by late 2010 and growth will be modest. It will be interesting to see if the market can maintain its strength in the face of tighter monetary policy.
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