One of the main reasons why we are starting to see a slight expansion in the US Economy is the massive amount of liquidity that the Federal Reserve has been pumping into the economy through quantitative easing (aka: printing new US dollar bills). We can all agree that if there is more money in financial system, growth should follow.
Industrial production is signaling a slight expansion and the Purchasing Managers survey is also indicating a rebuilding of inventories. Though the price of gold is at almost an all-time high and the US Stock indices are at 2009 highs. Both of these suggest striking different future outcomes for the US Economy. Gold prices suggest that massive inflation is just around the corner and stock prices suggest that Goldilocks economy is back and greener pastures are to come.
Which of these indicator is correct?
A survey conducted by Duke University revealed that 60% of the 657 CFO's surveyed are more optimistic about their company's future prospects over the next 12 months, which is consistence with how the US stock market has performed year-to-date. On the other hand, this same group of CFO's expect to cut more jobs over the next 12 months as a cost cutting measure. Most agree that their profits will be derived from more savings for overhead than actual top line revenue growth.
Don Luskin, a CNBC contributor and managing director of TrendMacro, suggests that the run-up in Gold prices is no fluke. He believes that this is the result of the massive amount of liquidity pumped into the financial system by the Fed, and will result in an inflationary environment that will be very difficult to control. As we know some inflation is good, a lot of inflation is bad.
My take: The US stock market clearly has gotten ahead of itself and thee is a need for a hefty correction in the short-term. Whether or not this occurs will remain to be seen. Job losses continue and I do not see a reversal of that trend anytime soon. With nearly 70% of the overall economy dependent on the US consumer, and the fact that the Federal Reserve is going to have to turn-off the liquidity dump soon for risk of out-of-control inflation; I fear two possible outcomes over the next 12 months.
1. It might be too late to control inflation, because the Fed is going to wait too long to shut of the printing presses.
2. The US consumer is riddled with debt, the saving rate continues to increase, and many workers fear losing their job or becoming employed once again.
Sure we could see decent economic growth through the end of the year, but by next spring the real test will come: Out-of-control inflationary pressure, nascent economic growth, or the most unlikely scenario the Goldilocks economy returns.
Final thought. Be cautious and wary of the recent Zeal the financial markets are suggesting, we have a long way to go restoring long-term prosperity. It is going to be a turbulent ride.
By David A. Mascio
