If you check out my bi-annual outlook, there are sections named “Keeping an Eye Out”, which are signals that my thesis is coming to fruition or I’m full of hot air. Below I cover some sectors of my outlook.
–> Regarding the Global Economy, the situation in China remains muddled. Property stocks haven’t broken down which would signal a bursting of a property bubble, but news of additional rate increases continues to trickle in. In this respect there’s no sign of a impending property collapse in China. Recent trade numbers as well as PMI gauges do show though that the economy is entering a slow down phase while inflation is increasing. Additionally, officials have signaled that they will not be battling inflation with an appreciation of the Yuan. They will be using interest rate increases as their primary weapon, precisely what I envisioned about a year ago. No signs of impending protectionism are seen and is contrary to what I am expecting at this point. The Eurozone may be coming to boil in the months ahead, particularly if oil prices continue their steady climb…longer-term the situation remains bleak.
–> Fed presidents have been all over the place in regards to their opinions on a possible QE3. This makes the outlook regarding the US Dollar/Monetary policy still pretty hazy. Lockhart said that he would vote to open the spigot and I bet Bernanke and Dudley would do the same. Charles Evans thoughts have been pretty dovish as he doesn’t believe that the Fed’s QE program has caused surging commodity prices (umm ok). Fisher is clearly against the program. Kocherlakota seems pretty neutral. Finally, Plosser believes that we are in a sustainable recovery and that the threat of deflation is eliminated. That leads me to believe that if the economy were to begin to double dip, he would probably vote for QE3. Overall there’s still a pretty strong proclivity towards resorting to QE if the economy were to show signs of stalling. This is contrary to my outlook and is something I need to keep an eye on. A QE3 instituted in time would possibly yield a good buying opportunity if markets are panicking and officials start to talk about QE3. Commodities would benefit as well. I’m still sticking with my overall point though: eventually officials will begin questioning the efficiency of QE as a means to pull the economy out of recession. All one needs to do is look at oil prices and how they’ve been moving higher even though we have a near 9% unemployment rate. It might just take longer than I expected.
–> Economic conditions are certainly improving in the US, however, oil prices (commodities in general) are clearly having a negative effect on consumer confidence despite a slowly improving job market. There is uncertainty. If this continues, wallets will be held close. The consumer is on the bubble! (for you basketball fans out there!) The equity market is smelling this to a certain degree.
–> Regarding Inflation, the job market is slowly improving, and wages rose 1% in January (due to the tax breaks)…overall a strong recipe for an inflationary argument, however, consumers actually saved the extra cash. They remain cautious and personal consumption for January was actually the lowest since June 2010 @ 0.2%. Will wages rise organically? That’s the question I need to find an answer to, though with a 9% unemployment rate, I find it difficult to see them rise strongly anytime soon. We’ll need to see how wage growth looks like in February to see if we are seeing an organic increase in wages. Overall my deflationary thesis stands, however, I definitely acknowledge that we are seeing inflation in commodities and raw materials. Consumers are devoting more of their spending power to gas and groceries (we see inflation here) but at the expense of discretionary spending (we see deflation here). Eventually high gas and food prices may lead to a drop in consumer confidence (happening now) which will cause consumers to spend less overall and possible result in recession….an overall deflationary outcome.