…….must come up.
Or so Alan Greenspan hinted at this week. Not that it was
much of a secret. The bond market has already discounted a
rate hike at the end of June meeting of the Federal Reserve
Board (FRB). It looks to be a ¼ point hike in the Fed
Funds Rate, now at a 46 year low of 1%. Mr. Greenspan indicated
a concern over rising inflation. Government figures show inflation
rising at a 2.3% annual rate, and, yes, leeches can cure leukemia.
Housing which is at near bubble proportions is not included
in the configuration of the Consumer Price Index. Instead,
it has been replaced by some formula using rent. Oil is expected
to level off in the $35-$40 a barrel level. Some are predicting
$50, and a few are even looking at $100 a barrel. Not likely
we think. Oil is the life blood of OPEC countries, and they
cannot afford to choke off the economic growth in the US and
around the rest of the world. Also, considering the fact that
these countries lost 30% of their revenue the last several
years due to the decline in the US dollar (oil is priced in
dollars), it is in their best interest to aid in a strong
US economy and a strong dollar. Traders feel that there is
anywhere from $5-$10 a barrel in oil due to possible terrorist
attacks in the oil fields. However, most OPEC countries have
a very strong security system, and Saudi Arabia spent $5.5
billion to beef up their security last year alone. Yes, a
terrorist attack could occur, but it would be minor and only
cause a temporary price spike.
Another positive factor influencing the price of oil is
the fact that oil consumption as a percent of Gross Domestic
Product (GDP) has dropped from 3.2% in 1980 to 1.7% today.
Consumers and corporations have become much more energy efficient.
We also believe that the gasoline devouring SUVs, although
showing increased sales in May, may be near their peak in
production. We expect consumers to increase the purchase of
hybrid cars on a gradual basis, and although it may be 10-15
years off, there will be alternative sources of fuel being
developed. There are other encouraging signs for the economy.
GDP was recently revised upward to a 4.5% annual rate, and
that should hold for the year. Job growth is coming on strong
with 947,000 new jobs created in the last three months. The
administration should meet their goal of two million jobs
created this year much to the chagrin of those who scoffed
at that goal in January.
Productivity gains remain strong, and corporations should
not have to pass along increased costs to the consumer. The
overheating economy in China will force them to reduce their
manufacturing output, thus making our goods and services more
competitive in world markets. China is suffering from a financial
crisis brought on by bad loans issued by the state run banks.
They will need to correct this situation, as did Japan in
the 1990s before they can resume their economic growth.
Overall, the economies around the world are healthy, and this
benefits everyone as all boats rise with the tide.
As for the equity market, we feel we are in a consolidation
phase as the market absorbs the news of somewhat higher inflation
and interest rates. We anticipate the stock market to resume
its uptrend but do not expect the year to year gains we witnessed
in the 1990s. Value has returned, and speculation will be
somewhat muted going forward. Stock selection will be extremely
important.
R.I.P. President Reagan, the “great communicator”
who restored a sense of pride and optimism in our great country.
Random thought for June 2004:
“Economists are people who see what works in practice,
and then wonder if it will work in theory.”
- Ronald Reagan
|
