Notwithstanding some concerns over in the Middle-East (see: Vigilant Freedom and Costly Dreams) or some potential for budgetary issues in the US (see: a Gridlock Yield), the US economy appears to be on track. Most readings are now fortunately in line with my previous October article 4 Fundamentals according to 24.
Returning back to the measures raised in that article is certainly heart warming. As recent ISM readings have shown, sales and inventory turnover are now accelerating. Adding to this momentum are ongoing pressures on capacity slack. The recent GM earnings report provided a quick snapshot: a shift from 48.0% to 89.5% in capacity utilisation over a year.
The return of capital from balance sheet collateral lock-ups is also going well (see: Writing Back the Down Up Redux) and it seems that capital arb is back to play with expected M&A fever rising over the course of this year. NYSE/Deutsche Borse, LSE/TMX and ASX/SGX are all in talks, and that’s only on the stock exchange front.
So the Fundamentals are Sound?
The fundamentals are definitely buoyant at this point in time. However, it is true that investor sentiment out there is perhaps a bit on the sidelines at times. It’s difficult to say always what is the final core driver on that aspect.
Just as an example, I recently had a phone conversation with a client (not related to this website) who was convinced that US money supply had contracted over the past two years. Unfortunately, to this day, I remain baffled as to how he came to form such an opinion.
Though differences of opinion certainly make a market; it was quite perplexing to encounter a person who did not accept the somewhat significant increase of US broad money supply readings. Perhaps this was an illustration of how investor sentiment can indeed skew the perception of even fundamental economic data.
Drowning in Liquidity Or Buoyant Flotation?
Now, I hear you say, with easy money comes easy problems, but again the data seems reasonably supportive at this stage. The difficulty over this front, is that a slow trickle in price rises arising from a liquid money source can, possibly, pick up pace. And nobody likes mud-slides, let alone floods. One point is starting to come clear, we are no longer in a zero-inflation range. The question then becomes: is this inflation reasonable and acceptable or is the price-rise just too expensive?
As noted in previous posts, this last question impacts pricing in both equities and fixed-income markets but, in a similar fashion, might also be supportive of ongoing positive earnings and economic expectations.
When you play, play hard. When you work, don’t play at all.
Unfortunately, it’s not quite play-time just yet in the US economy. This is not to say that things aren’t doing well or, indeed, much better out there. But it is acknowledging that the substantial slack built into the economy is one that limits the potential for loose economic behaviour (albeit still a justification for loose monetary policy).
The data at hand, this time around, are unemployment figures, which as previously noted in 4 fundamentals by 24, are a lasting reminder of the recent downturn.
A Monetary Nod
The title of this post was a quick nod to the monetarists out there, in particular those favorable to the ‘plucking model’ of the business cycle put forward by Friedman.
Monetary policy was put into overdrive over this recent crisis and is still a critical function in the ongoing economic recovery. However, the hard road ahead may still be unpaved.
Questions regarding monetary unwinding are perhaps premature but are beginning to enter peoples minds. The proposal of applying significant money markets reverse-repos transactions should prove quite a heart stopper when and where they get applied. Essentially, this will be the mother of all shorts applied over the very existence of money.
Whichever way you look at it, 2011 still holds a number of exciting months ahead.