Someone once said about Denver:
If you don’t like the weather, wait an hour. Stock and
bond investors are buffeted daily (almost hourly) by strong
winds blowing out of government and corporate economic offices.
Yesterday (September 6) the Labor Department suggested that
the threat of higher inflation had not diminished and that
it might take more monetary restraint to hold prices down.
The Labor Department found that unit labor costs increased
more sharply in the first half of this year than the government
had anticipated. Traders of course rushed in to sell stocks
and bonds. Just three weeks ago, the government released figures
showing wholesale prices rose less than economists had forecast
in August and that consumer prices were in line with estimates.
At last month’s meeting, the Fed committee said it believed
inflation pressures were “likely to moderate over time.”
Does yesterday’s data suggest the Fed will now raise
rates again? Probably not at the October meeting, but there
is still a chance of a rate increase at the following meeting
if the recent wage increases continue. It’s not over
until the fat lady sings.
What’s happening in China? Well, for one thing, they
just increased interest rates for the second time in four
months to 6.12%. They said investment growth has been too
rapid, credit too abundant and trade surplus too big. Communists,
excuse us, Chinese officials are also concerned about too
many bad loans at state owned banks. Investment in fixed assets
has also been rising too fast. There are just too many empty
sky scrapers. We should just call this the “too much
economy.”
We are not anti-China. In this global economy all nations
should prosper. It’s just that China, as a semi, pseudo,
quasi capitalist nation is and will continue to encounter
growing pains like we did in the 19th century. China claims
that its economy is growing at a 10% annual rate and that
its GDP is now at $1.3 trillion. That is 10% of our GDP and
less than one third that of Japan. Even little Taiwan with
twenty-three million people to China’s 1.3 billion has
an economy half as big as China’s. In sum, China has
a long bumpy road ahead.
We continue to be amazed at how much money American banks
and corporations are throwing at China, and how eager Wall
Street is to peddle the increasing number of IPO’s (Initial
Public Offerings) emanating in China. Some American corporations
are closing their Chinese production facilities and returning
home. Others have stayed home and are upgrading their domestic
facilities. Still others, (Japan and Germany) are building
production sites here to take advantage of our skilled labor
force and reasonable wages. Toyota has even started exporting
cars from America.
Another potential problem for China is our real estate market.
With the housing boom cooling off, we can expect homeowners
to slow refinancings that have been a major stimulus to our
consumer driven economy. This would cause a sudden downturn
in demand for the very products that China exports here. China
could then be forced into a major over supply situation resulting
in layoffs at its factories at a time when workers are demanding
more. This in turn would reduce raw material costs and inflation.
Perhaps, however, we are anticipating the hereafter and should
focus more on the here than the after. Not hourly, weekly
or monthly but something a little further out.
Is the consumer dead? To paraphrase Mark Twain: The reports
of my death have been greatly exaggerated. The consumer has
been given up for dead many times in the past only to rise
like the Phoenix. Consumer spending still accounts for two
thirds of our GDP and that level should remain relatively
constant. Consumers can be very imaginative. However, the
biggest boost to the economy we feel will come from corporations
as they strive to increase productivity to become more competitive
with the rest of the world, China in particular. Expect a
new boom in spending on new technology.
With all the terrorist threats in the world today, we expect
a boom also in defense spending. The UN is too weak-kneed
to do anything about Iran or North Korea, and it would be
very unpopular at this time for the US to take drastic measures,
so the last alternative would be to boost our defense mechanisms.
Look for more spending on research and development of radar
missile systems. The US and Israel are jointly working on
a laser cannon that would accurately intercept nuclear tipped
missiles. This will open up whole new industries.
So, while the gloom and doomers focus on the hereafter,
there are fortunately those focused more on the here to prevent
the terrorists from bringing the after too soon.
Random thought for September 2006 - continued
from August 2006:
French Corporation: You have two cows. You go on strike
because you want three cows. You go to lunch and drink wine.
Life is good.
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