Life is a series of trade offs,
which means that the majority of the time, you cannot have
your cake and eat it too. We all must make choices and then
accept the responsibilities of the consequences. So we ask
the Federal Reserve Board, what’s it to be, economic
growth or low inflation? Just last week Ben Bernanke, Chairman
of the Federal Reserve, declared that recent inflation trends
were “unwelcome” and were at or above his measure
of acceptable price increases. His comments sent shockwaves
throughout global stock and bond markets. Suddenly, it seemed
like Mr. Bernanke was willing to risk an economic slowdown
by pushing interest rates higher at the next meeting on June
28. That would be the 17th consecutive increase in interest
rates in the last two years.
The American economy is the engine that has been driving
world growth. So the implications will be bad news for everyone.
As we have said in past market letters, the sole job of the
Fed is to keep the economy growing. They do this by making
enough money available for investing in plants and equipment
or money for new businesses. It is the control over money
supply not interest rates that determines inflation. In 1971
we unofficially went off the gold standard when the government
stopped redeeming gold for dollars. This allowed the Fed to
print money as freely as they wished, and we have been printing
money like crazy ever since. This has been the primary cause
of inflation and can be seen by measuring the purchasing power
of a dollar today vs. thirty years ago.
Inflation took a brief holiday in the early part of this
century as cheap goods from China and the rest of Asia raised
the spectre of deflation. The stock market collapse also took
money (inflation) out of the economy. To thwart this deflationary
threat the Fed printed more money. The economy led by the
housing industry recovered as did the stock market. And now
the Fed wants to halt inflation and cool off a hot economy
by raising interest rates. Manipulating interest rates will
not accomplish either objective. First of all, by all historical
standards interest rates are still somewhat below normal.
Secondly, the economy is flush with cash, and as long as there
is money, the economy will boom, and we will have some inflation
(held down by cheap goods from China). So maybe we are currently
having our cake and eating it too.
Memo to recent graduates! Do not read the media: It may
be injurious to your job prospects. Non farm payrolls came
in at 75,000 for May, well below expectations. The naysayers
in the media jumped all over this as an indication that the
economy is slowing. Don’t you believe it. Through the
year ended this May, 1.9 million jobs were created and over
the past thirty-three months, 5.3 million jobs have been created.
The unemployment rate stands at 4.6%, the lowest in five years.
However, if you look deeper, you will see some more meaningful
numbers. The Labor Department indicates that 288,000 new jobs
were created by self-employed owner operators of new businesses.
Year-to-date, that number swells to 1.2 million. Total employment
in the US is at a record high of 144 million. Average hourly
earnings in the May jobs report is running 3.7% above last
year’s level. Productivity gains also continue to rise,
keeping pace with earnings at 3.7%.
More cake.
China is continuing to struggle with capitalism. It is hard
to find accurate data, but by all accounts their banking system
is a house of cards with a vast majority of loans in default.
Most of their state owned banks would be in default by US
bank regulations. They are being kept afloat by vast quantities
of money being invested by US sources. They also continue
to be plagued by worker revolts for higher wages and benefits.
Meanwhile US companies are getting lean and mean. The playing
field is leveling as we are becoming more competitive and
China less so. This is good for all countries as competition
will keep quality up and prices down.
Even more cake. It seems like every graduating class worries
that everything has been invented, and there are no opportunities.
Look at how many new opportunities have been and are continuing
to be created by the technology boom. The next opportunities
may come from the energy sector as we search for alternative
sources for home and work.
Random thought for June 2006:
There are no guarantees in life, only opportunities.
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