Wishing Upon a Star Today the markets rallied strongly. No one knows why. The financial press attributed today’s gains to optimism that rising interest rates and record oil prices won’t have a major impact on the economy. Housing is weakening, but home sales are still at high enough levels to keep the markets going. Existing home sales were up 2.5% last month. When it comes to housing, investors remain optimistic as if it is a “can’t lose“ proposition. Rising interest rates--no problem. Simply switch to an adjustable rate mortgage. Your payments will be much lower than a fixed rate mortgage. You can now buy an even bigger home. At the very least, it’ll be years before your adjustable rate mortgage will catch up to today’s higher fixed rates. Homeowners are taking their cue from the maestro, Mr. Greenspan. The Fed chairman more than a month ago urged homeowners to switch to variable rate loans at the peak of the bond market. Great timing, Mr. G!
That is one of the main reasons why confidence is down and why it doesn’t feel like a recovery. Yes, the stock market came back last year and housing prices have soared. However, so has the cost of living. The average grocery bill has more than doubled over the last three years. The cost to fill up the tank has gone up over 70% in the last two years. Federal taxes are down, but rising state income, sales, and property taxes have more than made up for the difference. Healthcare premiums are up double digits and more and more employers are asking working and retired employees to pay a portion of the escalating costs. We just went through a disruptive grocery store strike that centered on employee contributions to healthcare premiums. Asset bubbles have reinflated, but unless you have assets, you feel left out. Even then rising asset prices need to be monetized through cash out financings or margin debt, or when necessary, liquidated. Commodity prices are still at near record levels and the price of energy has remained stubbornly strong. Natural gas prices are now at levels normally not seen until winter sets in. Oil is still hovering over $1 a barrel despite promises by Saudi Arabia to raise output. That increase in production won’t be felt until this fall. Saudi output next month won’t arrive in the U.S. until late August. That is too late for this summer's driving season. In California we are now looking at $3 gas if not eventual shortages. In the meantime on Wall Street and in Washington, they talk about the output gap, productivity, and benign inflation levels. If your grocery bill has risen $20-$30 a week, the cost of filling your tank is up $10 and if your utility charges another $15 more a month, that is money taken away from other discretionary spending. So what does the average person do? Well, they can change their shopping habits. Hey, go to a discount store such as Costco or Wal-Mart. People buy store brands instead of name brands. They buy their groceries with credit cards, hopefully to be paid down through another round of refinancing, while hoping housing prices continue to climb or hold. My mortgage broker friend tells me he has been working Saturdays, a follow through from the lower interest rates from March and early April. Interest rates have gone up, but there is still equity left in the average home so it is still being tapped. Nobody seems to find anything wrong with this picture. On Wall Street only a few are cautious. The bull still runs wild on Wall Street and optimism runs rampant in Washington. On Main Street confidence is falling for the average Joe whose mind is full of cognitive dissonance. The disparity arises from what he is told and what he reads, a reality apart from the actual bills he has to pay each month. Back in the markets, stock prices rose but that rise is characterized by a change in leadership. Higher raw material prices and rising energy prices gave impetus to rising energy, metals and coal stocks. Yes, stocks are rising, but change is in the wind. I’m not sure most on Wall Street see it. The money supply is rising again with M3 up by almost $400 billion since December. The Greenspan money machine is hoping to turn that green money into a green economy and green markets. It is no surprise that with money pumping into the economy again stock prices are rising. The bubbles must be kept inflated if the economy is to remain firmly in positive territory. What we now have is stagflation, anemic and spotty economic growth, accompanied by rising prices. Rising prices is hard to avoid in an economy that runs on credit. However, this time around some of that money is going into goods inflation instead of just asset inflation. To say that investors are optimistic that rising interest rates and rising energy prices won’t impact the economy remains to be seen. It becomes a question of whether asset bubbles can rise faster than consumer debts and bills. If the band of magicians at the Fed can continue to work that magic, then indeed we are witnessing a new age. If paper money and inflated assets replace savings, investment, and rising production, that would be a miracle for all to see and behold. Then the most valuable asset a nation can behold is central bank with a proclivity for expanding credit with access to plenty of printing presses and virgin forests. Today's Market The Dow Industrials added 159.19 points to close out the session at 10,117.62. The Dow is still in the red this year by 3.22 percent. Every stock in the benchmark index rose with the exception of SBC. The S&P 500 rose 17.64, or 1.6 percent to 1113.05. The S&P managed to erase all of its losses for the year. The Nasdaq gained 41.67, or 2.2 percent, to 1964.65 . It is down by 1.93 percent for the year. Big Board volume rose to more than 1.5 billion shares. Breath was positive by 28-6. Jim Puplava © 2004 Jim
Puplava |
If
investors were optimistic that higher energy prices and higher interest
rates wouldn’t affect the economy or mute investors' appetite from
bidding up bubbles, as consumers, the attitude was just the opposite.
Consumer confidence remains muted or is in fact falling. Personal
bankruptcies rose 2.8% in the year ending in March. The rise in
bankruptcies continues the present trend of recent years of higher and
higher bankruptcy rates. New personal bankruptcy filings rose to
1,618,062 from 1,573,720 the year before. The trend continues to
accelerate despite improving economic conditions. In order to live these
days, consumers must take on ever-increasing amounts of debt. Their cost
of living continues to rise due to inflationary trends. With the rise in
the cost of everything they need going up from gas, utilities, food,
services and taxes to entertainment, increases in personal income have
remained stagnant. The result is that the two wage-earner couple, heads
of households and singles must supplement wages with debt.