Mr Market feeling glum today
Keynes talked about "animal spirits" and Ben Graham apparently liked to talk about a manic-depressive called Mr Market. Some days Mr Market focuses on good news, some days on bad. Today, for instance, he focused on the bad. Today he was worried about an increase in inflation and its corollary, interest rates. He's also concerned that corporate profit growth is slowing down. So he bid the 10-yr Treasury rate up to 4.5%, the highest level it's been for a while, and took the Dow down 100 points or so.
Worry about inflation isn't new. The money supply has been growing at a solid clip (check out the Federal Reserve Board website for the numbers). Interest rates, both short and long, have been on the floor for a long time. Then there's that ever-growing budget deficit. By the old wisdom, these are all likely ultimately to cause inflation. The mystery, really, is why it hasn't reared its ugly head sooner. You can see it in commodity prices all right: oil into the mid 50s, copper at a 16-year high, aluminum at a 10-year high, steel through the roof for quite a while now, just for a couple of examples; but it hasn't really been evident in retail prices. (Not officially, anyway, though you've got to wonder whether they aren't cooking the numbers.)
As for corporate profits, you would certainly expect growth to start slowing there. They're at a pretty high level relative to GDP historically, you wouldn't expect them to continue growing forever. (You can check this out at the Bureau of Economic Analysis website, http://www.bea.gov/). This goes along with the rapid growth of productivity we've seen since the latest recovery: GDP may be up, but job growth lagged way behind, with increased productivity making up the difference.
It all makes a certain amount of sense. A lot of the tax cuts since the UCS took office have gone to the rich. When you give a tax cut to some poor wage slave, he pretty much spends it all, but if you give it to someone who's already consuming everything he wants then it goes into investments. Not surprisingly, you see asset price inflation first -- increased house prices and stock and bond markets. Commodity prices? Well, they've been saying for a while that hedge funds have been wagging the dog at least in the oil markets, why not in other natural resources too? Hedge funds is where, increasingly, these rich guys put their money. On top of that, of course, is the rapid growth of manufacturing in China, whose economic ebullience (so far, anyway) has been widely credited with strength in raw materials markets (China is now the second largest importer of oil, for example, after the US). The asset inflation goes along with a recovery that doesn't make a lot of new jobs: if the tax cuts go to people who don't spend it, you don't get a lot of "demand pull". Ultimately, unfortunately, if the economy doesn't catch up with the markets, asset prices will suffer, at least in real (inflation-adjusted) terms.
Worry about inflation isn't new. The money supply has been growing at a solid clip (check out the Federal Reserve Board website for the numbers). Interest rates, both short and long, have been on the floor for a long time. Then there's that ever-growing budget deficit. By the old wisdom, these are all likely ultimately to cause inflation. The mystery, really, is why it hasn't reared its ugly head sooner. You can see it in commodity prices all right: oil into the mid 50s, copper at a 16-year high, aluminum at a 10-year high, steel through the roof for quite a while now, just for a couple of examples; but it hasn't really been evident in retail prices. (Not officially, anyway, though you've got to wonder whether they aren't cooking the numbers.)
As for corporate profits, you would certainly expect growth to start slowing there. They're at a pretty high level relative to GDP historically, you wouldn't expect them to continue growing forever. (You can check this out at the Bureau of Economic Analysis website, http://www.bea.gov/). This goes along with the rapid growth of productivity we've seen since the latest recovery: GDP may be up, but job growth lagged way behind, with increased productivity making up the difference.
It all makes a certain amount of sense. A lot of the tax cuts since the UCS took office have gone to the rich. When you give a tax cut to some poor wage slave, he pretty much spends it all, but if you give it to someone who's already consuming everything he wants then it goes into investments. Not surprisingly, you see asset price inflation first -- increased house prices and stock and bond markets. Commodity prices? Well, they've been saying for a while that hedge funds have been wagging the dog at least in the oil markets, why not in other natural resources too? Hedge funds is where, increasingly, these rich guys put their money. On top of that, of course, is the rapid growth of manufacturing in China, whose economic ebullience (so far, anyway) has been widely credited with strength in raw materials markets (China is now the second largest importer of oil, for example, after the US). The asset inflation goes along with a recovery that doesn't make a lot of new jobs: if the tax cuts go to people who don't spend it, you don't get a lot of "demand pull". Ultimately, unfortunately, if the economy doesn't catch up with the markets, asset prices will suffer, at least in real (inflation-adjusted) terms.
posted by econoclast at 2:32 PM
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