We have much to be thankful
for as we approach the holiday season. Mostly, we can be thankful
that the elections are finished. The psyche can take only
so much of the incessant negative TV ads and e-mails. So now
with the Democrats controlling the House and Senate can we
expect gridlock? Sure, but we always have gridlock, and as
long as we have democracy there will be bifurcation (been
waiting years to use that word). Just as the Republicans were
ecstatic in 1994, it is now the Democrats turn. However, neither
party should get too full of themselves.
Exit polls show President Bush’s favorability rating
at 42% but that of Congress as a whole comes in at 35%. We
now have to hope that Congress as a whole will tackle the
important problems facing us today – keeping the tax
cuts in place, immigration, free trade and Social Security
reform. Everyone is talking nice right now, but that can change
if the new Congress goes off on a witch hunt and wastes two
years and taxpayer money trying to impeach the President.
The stock market is trying to sort out what industries could
be impacted by the Democratic Party, and so far we have seen
slight declines in pharmaceutical and defense stocks. However,
we believe it will be business as usual in the US, and after
some short-term consternation the economy and the stock market
will continue to perform admirably.
Every once in a while someone has the courage to speak the
truth and accept responsibility for actions that have created
problems. Richard Fisher, President of the Federal Reserve
in Dallas, confessed recently that the Fed erred by keeping
monetary policy too easy for too long in 2003 and 2004. In
worrying too much about a possible deflation, they kept interest
rates lower and longer than they should have. He further stated
that they underestimated the rate of inflation, causing excessive
speculation in the housing and other markets. Mr. Fisher also
conceded, “Most economic data are inherently backward
looking, often to a disconcerting degree.” Wall Street
economists didn’t get it either as they were cheering
on the easy money policy. Now the Fed has a real dilemma.
Do they tighten money to restore price stability or do they
cut rates to ensure continued economic growth. It all gets
down to the money supply, and there is plenty of that available.
Corporations are flush with cash, and interest rates on a
historical basis are still low. The Fed also underestimated
the positive effect of the 2003 tax cuts. The Fed needn’t
focus so much on interest rates as on the money supply. A
little tightening there would slow inflation while not endangering
economic growth.
A new bubble on the horizon? The automobile market in Venezuela.
With all the oil money coming in, Hugo Chavez is spending
on projects that filter down to salary gains in Venezuelans’
pockets. Normally people would invest in houses, but with
inflation running at 15.5% (October number) houses are too
expensive. Cars have become the investment of choice. A 1999
Jeep Cherokee in decent condition may sell for $6000 in the
US, but in Venezuela it will bring $15,000. A 1992 Toyota
Camry is worth three times its Kelly Blue Book value. Also,
it doesn’t hurt that gasoline sells for twelve cents
a gallon. GM, Ford and Toyota are capturing the largest share
of this market, and even with their rapid investments, production
is still about 20% behind demand. All this and Chavez is still
in trouble with elections coming up in December. This too
will end badly.
According to Investor’s Business Daily, Since the
tax cuts took effect in 2003, the economy has added $4.26
trillion in real output, $14.4 trillion in net wealth and
5.8 million new jobs, while productivity has grown 10% and
business investment 24%. Since 2000, total consumer spending
has increased $1 trillion, nearly $8,000 per household, after
adjusting for inflation. The Dow Jones Industrial Average
is hitting new all time highs. America passed 300 million
in population. We should celebrate. We breathe cleaner air,
drink cleaner water, earn higher incomes, have more leisure
time and live in less crowded housing. We have much to be
thankful for. Happy Thanksgiving to all!
Random thought for November 2006:
“Politics is not a bad profession. If you succeed
there are many rewards, if you disgrace yourself you can always
write a book.”
- Ronald Reagan
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