This phrase actually did originate
in the pool halls. It referred to a specific game called Kelly
pool in which players must pocket fifteen balls in numerical
order except for the eight ball. The eight ball was considered
unlucky, and if a player touched it with the cue ball, he
or she was penalized. Well, will we be unlucky now that the
Fed has raised interest rates eight consecutive times in the
last year?
Usually this type of action by the Fed leads to a recession.
If we may be so bold, this time it’s different. Economic
data is extremely mixed, and we believe investors are looking
at the trees and not the forest. The media jumped all over
the report of a 3.1% growth in first quarter GDP calling it
anemic. France, Germany and Japan would love to have that
anemic growth. The next moaning could be heard on the inflation
front as rising prices beat back gains in income and consumer
spending. The Fed, however, is more focused on Greenspan’s
favorite indicator the PCE, or personal consumption expenditures.
The PCE deflator that excludes food and energy climbed 2.2%
in the first quarter, up from 1.7% the previous quarter and
the fastest in seven years. This is primarily due to the delayed
impact of a very stimulative monetary policy and the reason
for the eighth increase in rates. The Fed is somewhat behind
the eight ball, trying to keep the economy going while holding
inflation at a reasonable level. The fact that the economy
continues to grow in spite of $50 oil should be considered
very positive, and we still feel inflation is under control.
On another front, the Chinese yuan floated freely for a
brief time last week and rose against the dollar. Speculators
believe the Chinese allowed this to happen just to test the
waters. There is tremendous pressure on China to let the yuan
float free so the rest of the world could be more competitive
with Chinese manufactured goods. This pressure is not just
from us but from Japan and Europe as well. The conundrum here
is if the yuan floats free and strengthens against the dollar
(which is likely), it would require the Chinese to tighten
monetary policy and drain liquidity from its economy which
would severely crimp its growth. China is already behind the
eight ball with its fragile banking system. A collapse of
their banking system would have serious repercussions throughout
the global economy. In addition, $50 oil is driving up costs
for China’s manufacturing sector. This is resulting
in increased inflation, and some of that inflation is being
exported so that our cost of cheap Chinese goods will be increasing.
That alone will help level the playing field and make our
goods and services more competitive.
China is attempting to be the exporter to the world as was
Japan in the 1980s. However, as Japan found out, market share
without profit results in a long stagnant economy as money
borrowed is not easily repaid, and it is estimated that over
50% of loans issued by state owned banks in China are in default.
Much is made of China’s dramatic growth, but after twenty
years of effort, their GDP is at $1.35 trillion. Compare that
with our $12 trillion economy and Japan’s $5 trillion.
California alone equals China’s economy. What is also
going mostly unnoticed is the fact that many foreign companies
are building plants in the U.S. to take advantage of our skilled
labor force and to be closer to our consumers. We should not
be fearful of Chinese manufacturing but should embrace it
as part of a more efficient global economy.
Speaking of efficiency, now with oil prices clinging to
$50, sales of gas guzzling SUVs are dropping as consumers
shift buying patterns to adjust to increased fuel costs.
Another bad idea – the Schumer/Clinton tariff proposal.
This bill would place a 27.5% tariff on all imported Chinese
goods unless China severs its currency link to the dollar.
Been there, done that – the Smoot Hawley tariff of the
1930s. This will do nothing but set off a trade war and sour
international political relations. This has proven to dampen
economic growth on a worldwide basis.
Random thought for May 2005:
40,000 Americans are injured by toilets each year.
How?
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