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.

US Real GDP Index Base 100 set on 2007-12-01

'Plucking' Back Up: US Real GDP Index Base 100 set on 2007-12-01. Source St. Louis Fed Economic Research Division.

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.

St. Louis Fed Adjusted Broad Based Money Supply Measure

Adjusted Broad Money Supply Index Base 100 set on 2007-12-01 - Source St. Louis Fed Economic Research division.

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?

CPI Indexed at base 100 for 2007-12-01

CPI Indexed at base 100 for 2007-12-01, graph courtesy of St. Louis Fed Economic Research Division.

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.
Theodore Roosevelt

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.


Initial Unemployment Claims are definitely on a downtrend. Source St. Louis Fed Economic Research Division.

Unemployment 2011

But the unemployment rate is still too high for comfort. Source St. Louis Fed Economic Research Division.

Total Non Farm Payroll base100 on 20071201

Total Non Farm Payrolls are rising but have not regained 2007 highs. Index base on 2007-12-01; source St. Louis Fed Economic Research Division.

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.

Comments are closed.

Disclaimer: Material posted on 24-something does not contain (and should not be construed as containing) personal financial or investment advice or other recommendations. The information provided does not take into account your particular investment objectives, financial situation or investment needs. You should assess whether the information provided is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision based on the material above. You can either make this assessment yourself or seek the assistance of an independent financial advisor. 24-Something, associated parties and Tariq Scherer accept no responsibility for any use that may be made of these comments and for any consequences that result.