Inflation, Where Have You Gone?
This week's inflation data (PPI and CPI) indicate that inflation is very tame. In fact, inflation as measured by CPI is nearly non-existent. This led some pundits to call for an inflationless recovery. I agree that inflation is now and will likely to be tame for some time. However, I question the recovery or at least the definition of recovery.
It is true that the markets have recovered. The Fed's easing, both traditional and quantitative, along with the ability of banks not to acknowledge losses (since loans and asset-backed securities can be marked to whatever model an institution chooses to use at a given time they can report profits, but ignore losses) have brought the markets back from the depths of early 2009. Very low borrowing costs is fueling a stock market recovery by encouraging speculation using leverage. A relatively weak dollar is and cheap financing due to investor appetite for yield is improving the prospects for large companies while smaller firms languish. This is why employment continues to be lackluster.
What the Fed has engineered is a markets recovery. Mr. Bernanke is hopeful that fundamentals catch up with the capital markets. How that will happen isn't clear. One thought is that business to business activity and international activity would generate employment and that would start the ball rolling. However, productivity gains is allowing companies to do more with less. I conducted a conference call yesterday with a financial adviser and her client who happened to run a medium-sized business. He stated that although his business has increased, he does not have to hire due to productivity gains. His suppliers and customers tell similar stories. Word is that they all have significant excess capacity even with current staffing levels.
Cramer is right, psychotic, but right.
Earlier this week, CNBC's Jim Cramer advised investors to seek out high-quality, dividend-paying stocks. I think Jim is correct. In fact, swapping out of industrial sector corporate bonds into high-quality dividend-paying stocks may be advantageous for investors for whom equity investing is appropriate.
Jim is concerned with a market correction. So am I, but we are concerned for different reasons. he believes that Obama care and tax increases for capital gains and dividends will drive investors from the equity markets. For sure that will cause some investors to seek shelter elsewhere in the markets, but most market participants have been aware with the Democrat's platform on taxes for a long time now. I believe a correction will come later this year or early next when the Fed finally raises rates. However, money market rates are too low to leave large sums of money in that sector. Buy big, dividend paying stocks, 10-year financial bonds and don't forget the muni market. State G.O.s, various revenue bonds and some taxable Build America bonds may be attractive.
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