Big show today, markets trying to rebound after yesterday’s sell-off, earnings from Goldman and J&J as well as a look at this afternoon’s earnings, and author, economist and sometimes actor Ben Stein comes on to talk about the U.S. debt issues, the future of the economy and the importance of diversification.
Economy
First, dear readers, an apology. We’ve been pretty consumed with the live launch of the Markets Hub, and that combined with our regular job, the Market Talk service for the Newswires, plus features like The Upshot, has pretty much given us no time lately to write for this blog.
But, we do have a post today, or rather, a cross post, of something I wrote for the MarketBeat blog over at WSJ.com. And, look, if you’re a regular reader of this blog, and like the mix of opinion and analysis we’ve offered here, I’d recommend you start watching the Markets Hub, live daily at 10:30 a.m. on wsj.com.
Here’s the post:
How many more body blows can the global economy absorb? Three more? Two? One?
Japan’s economic recovery is “a thing of the past,” at least according to Japan’s Cabinet Office, which said so in its monthly report. It shouldn’t come as a surprise, given what the Japanese have endured over the past month, and officials are hopeful that the economy can regain its footing by the end of the year.
The combined earthquake/tsunami/nuclear crisis is more than most nations could handle, and we hope for nothing but the best for the Japanese people. But when the world’s third largest economy sees its economy stall, it should be a red flag for everybody.
There are other red flags, too. The U.S. economy limped into the end of the first quarter, as consumers contended with flat wages (should they be lucky enough to have wages at all) and rising prices.
Posted by Kevin Kingsbury
on April 08, 2011
Commodities, Economy, Federal Reserve, Markets / Comments Off
Commodities, Economy, Federal Reserve, Markets / Comments Off
Corn’s at an all-time high, supposedly on surging demand.
But just remember that whatever such increases there are, it’s primarily not going into people’s bellies, but their gas tanks just as crude oil is reliving its 2008 superspike.
Haven’t we seen this movie before?
We’ve been bellowing (and we’re not totally alone on this, as the Bank of Japan’s recent report shows) about how QE has been cascading untold liquidity into the financial markets, allowing for stocks to nearly double the past two years and commodities to surge toward, or past, their 2008 peaks. Much of the thanks for that can go to the nation’s central planners bankers, and the free-money bonanza of the last decade.
We’ve long plowed the road here of how the Federal Reserve helped goose the credit markets that allowed for dodgy borrowers to get dodgy mortgages. Then even-dodgier securities were created for “sophisticated” investors looking for the next best thing.
But the half-wits in Congress — dithering over how to cut a few billion here, a few billion there as shut down of the US government looms — have commodity-spike blame as well. Beyond refusing to enact trade deals that would boost US exports and potentially help develop new supplies of commodities in those markets, we get things like farm subsidies that incentivize not raising crops or animals and laws requiring ethanol — largely developed from corn — to be added to gasoline while its benefits are in question.
So until we get enough grown-ups on Capitol Hill and in the halls of the Federal Reserve able to bring about responsible policy, the likes of Dallas Fed President Richard Fisher will seemingly just be playing the role of graveyard whistlers or token dissidents while crony capitalism lives on and fans the flames of inflation.
Hopefully it’s not like the 1970s. Not like I would remember, being a tyke back in those days. But there’s no need for me to get first-hand experience, thank you.
I sat in a room with these three guys – John Mauldin, Marc Chandler and Christian Menagatti — for an hour yesterday along with a handful of other reporters, and it was completely fascinating, so the 35 minutes you might invest in this video is well worth your time.
Incidentally, we’ll have Mauldin on tomorrow’s Markets Hub, live at WSJ.com at 10:30 a.m.
Don’t worry, inflation may be a bit painful now, but it will pass…kind of like a kidney stone.
From USA Today, the head of Wal-Mart expects more pain for consumers:
U.S. consumers face “serious” inflation in the months ahead for clothing, food and other products, the head of Wal-Mart’s U.S. operations warned Wednesday.
Still, inflation is “going to be serious,” Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY’s editorial board. “We’re seeing cost increases starting to come through at a pretty rapid rate.”
Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.
“Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along,” Long says. “Except for fuel costs, U.S. consumers haven’t seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory.”
Long mentions June, which is incidentally right around the time the Fed’s bond-buying program ends. That’ll be a peachy combination for the consumer and the stock market, won’t it?
Ain’t no cure for the summertime blues…
Crude prices are back over $105 a barrel, something that until the Japanese calamity was a major story, given the wide implications. There is not a single aspect of the global economy that isn’t touched by oil prices, and some participants, think small truckers, say, or your average consumer, are touched more.
But even large companies have to deal with higher oil prices, and for some industries it’s an undeniable millstone. I’m thinking airlines, which weeks ago already said they to see their profits cut in half this year just on oil prices alone.
How many body blows can the global economy absorb, and the American economy in particular? I’d guess it isn’t many more, and given the confusion that seems to cover this entire Libyan intervention, it’s a good bet oil prices will climb higher, putting more pressure on small truckers, consumers, airlines and everybody else.
Dennis Gartman, who edits and publishes The Gartman Letter, sums it up well in his morning missive:
Energy prices are quite a good deal higher as the markets try to make sense of the situation in Libya…a senseless situation if there ever was one. We have a madman on one hand, and a Constitutional “crisis” on the other, and no one truly understands what the end-game shall be. In most instances, confusion breeds contempt and lower prices, but in the energy world confusion breeds stronger, higher prices.
The only people who benefit from the confusion, it seems, are oil traders.
Now, as opposed to Yardeni’s sunny view, here’s another take, from the University of Maryland’s Peter Morici, who’s in what seems to be a very small camp of people looking at everything going on in the world, and actually finding it disturbing.
Crises in the Middle East and Japan threaten to thrust the U.S. and global economies into a second recession.
Since the economic recovery began in July 2009, GDP growth has averaged only 2.8 percent, a pace insufficient to bring unemployment down to acceptable levels. And that rate of growth leaves the economy too vulnerable to the slightest hiccup and a deceleration into recession.
Prior to the turmoil in the Middle East, economists were forecasting 3.5 percent growth for 2011, but the surge in oil prices to $110 a barrel and gasoline to $3.62 a gallon will likely shave half a point—perhaps more—from that rosy outlook.
I found an interesting contrast between this outlook, from Ed Yardeni, president of Yardeni Research, and this one from Peter Morici. What I find interesting is the divergence; two guys who from my reading of them are both in the conservative camp, but with wildly different takes on what’s going on.
I don’t know that I have some brilliant insight into what all this means. I just found it very interesting, and seeing as this is Market Talk, well, here’s some talk.
From Yardeni:
What’s driving the global economy? For the past two years, it has been the boom in global manufacturing, led by demand for manufactured goods in emerging economies. The OECD index of global industrial production rose 0.9% m/m and 6.9% y/y during December to a new record high. It is up 15.3% since the most recent cyclical trough during January 2009. It had plunged 12.2% during the most recent downturn.
It should continue to grow this year. There are certainly challenges confronting global manufacturing. High food and fuel prices may depress the purchasing power of consumers around the world. Concerns about rising inflation are pushing central banks to tighten their monetary policies, particularly in emerging economies. Serious disruptions to global supply lines are already an issue for the auto and technology industries. It is difficult to assess how long these problems will persist.
As if to illustrate our post this morning, and to illustrate just how jittery the market is, and to painfully illustrate just how dangerous the situation in Japan is still, the news late this morning out of Europe, regarding the nuclear crisis in Japan, drove every asset into an immediate nosedive (or in the case of the safe havens, a sharp spike higher.)
The latest news roiling the markets is about Japan, but it isn’t actually coming from Japan. Rather, the EU’s commissioner for energy, Guenther Oettinger, told a European Parliament committee “the site is effectively out of control.” This reiterated the same comments reported in two UK papers, the Telegraph and Daily Mail.
Look at the pictures in the Mail’s story; I have a more comprehensive grasp of just how bad the damage is after seeing them. They are sobering. There have been reports that those 50 people who’ve been — heroically — trying to save the plant had to be evacuated temporarily, and you wonder how long they can stay there.
The Dow dropped as much as 190 points in a matter of minutes. It bounced back to about down just 100, and is currently down around 170. All this underscores the fact that the market is a rough place to be right now, especially if you’ve been hooked by the Street’s usual sunny pronouncements.
Well, it took your average institutional stock investor all of about four hours to digest the shock and horror of the devastation wrought by the earthquake in Japan, and start thinking about the profitable boost to economic activity that’ll occur once the Japanese are done burying the dead and start rebuilding.
Does that sound harsh? Of course it does, but the market operates under a cold, hard math. The fact of the matter is, stocks often get over these kinds of things long before the people who suffer from them do. They have to, because the markets hardly ever shut down. But that doesn’t mean the ramifications of the earthquake are already all known and discounted. That would be impossible, and as Simon Constable pointed out earlier, these things have a way of manifesting themselves in ways nobody right now can anticipate.
DJIA rises 60 (0.5%) to 12044, still down 1% on the week; the index is down two of the past three weeks. S&P 500 gains 9 (0.7%) to 1304, Nasdaq Comp rises 15 (0.5%) to 2716. It’s another low-volume day. Crude fell, both on the fears about lowered demand from Japan, and the fact that the much-hyped “day of rage” in Saudi Arabia didn’t amount to much. The yen also rose sharply, a sign that Japanese corporations and investors are already, or soon will be, repatriating money to the homeland for the rebuilding effort.
Markets tend to move past the shock of something like the earthquake pretty fast, and after yesterday’s sell-off a modest rebound is no surprise. Newswires’ columnist Tomi Kilgore noted that the market has a history of doing this, from the Kobe quake, to Katrina, to today.
From his column today: (subscription required)
“These types of events, they’re very sad and they’re very alarming, but they don’t have a huge impact on economic activity and momentum,” said Christian Thwaites, president and chief executive of Sentinel Investments. “They kind of distract people from their terminals but I don’t think people see them as big buying or big selling opportunities. Ultimately, they don’t stop an economy in its tracks.”
How the quake will affect Japan’s economy, and how that will affect the global economy, is the long-term question. UBS’ Art Cashin scratches the surface of the questions in his commentary this morning, and also offers a great insight into how traders react to tragedy. Hint: they’re not all computers.
