Well, we all woke up July 1,
and the world was still there. We keep promising ourselves
that we will quit reading the media pundits, who continually
bash the United States and the rest of the free world. Prior
to June 30, one would have thought a 1/4 percent rise in interest
rates would topple the stock market and the housing market.
One would also imagine that Iraq would implode and turn into
utter chaos. Surprise, surprise - neither happened. Not that
there will not be more violence in Iraq. Some people just
cannot accept prosperity. As for interest rates, of course
they will move higher as the economy continues to improve.
New job creation was only 112,000 last month (most expected
150,000). This is a one-month number, and this data will tend
to be somewhat erratic. The housing market should continue
strong over the near term as buyers rush to take advantage
of mortgage rates before they move higher.
As for the stock market, we continue to caution that this
is not a repeat of the 1990s. Investors will have to lower
their return expectations from that heady time period. The
economic recovery will be more gradual, and the stock market
will move forward in fits and starts trying everyone’s
patience. The initial positive effects of the tax cut and
mortgage refinancing is behind us now and will have to be
replaced by growth in the manufacturing sector. Cool weather
and higher gasoline prices have temporarily stalled retail
sales, especially sales of high-tech gear. We should see a
pickup in this area later this summer. We believe we are setting
the table for the next economic boom, which will begin in
earnest next year.
China has apparently become tougher on lending practices
at the state owned banks. There is more emphasis on solid
business credentials and much less on cronyism. Their economy
has definitely cooled off, but it is still growing at a double
digit rate. According to sociologists, China is facing a more
serious problem. In their effort to curb population growth,
they have run into a surprising dilemma. It seems that currently
for every one hundred girls being born in China, there are
118 male births. Sociologists are concerned that this buildup
in testosterone levels could result in more civil strife in
the future. Remember, as Homer said in the Iliad, as long
as there are men there will be war. China recently passed
the tenth anniversary of Tianamen Square. With more and more
people leaving the farms for a better life, China will be
hard pressed to provide adequate jobs and benefits. As a result,
wages will rise creating a more competitive field, not only
for the US, but for the southeastern Asian countries as well.
Globalization at work.
Does the economy care who is president or vice president?
Not in the long term scheme of things. The markets are smarter
than presidents or even economists. Presidents and the Federal
Reserve can exert short term influence on the markets, but
the markets themselves will continue to ebb and flow like
the tides. Leaders tend to get too much credit when things
go right and too much blame when things go wrong. This is
just another reason we are optimistic going forward. We have
paid for the excesses of the 1990s, and we will come out of
the chaos and once again move forward.
The consumer price index is due to be released at the end
of this week (after we go to press), and the consensus sees
a rise of 0.2% for June. That works out to 2.4% if you care
to annualize (and we do not recommend that). Nevertheless,
we do not see inflation as a major problem. It’s the
money supply. If the Fed will hold back the growth in the
money supply, slowly rising interest rates and economic growth
will hold back inflation.
The Tour de France is in full swing, and the Olympics are
fast approaching. International competition fosters good will,
and our condolences to any terrorist groups that try to disrupt
these events. They will bring on the wrath of the entire free
world.
Random thought for July 2004:
What a great country when one can produce a documentary criticizing
the very system that is making him wealthy.
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