The Commerce Department revised its second quarter numbers saying that the economy expanded at a 3.7 percent rate. That news prompted Federal Reserve Vice Chairman Stanley Fisher to say that interest rates might be raised this month.
Unfortunately, this is only wishful thinking because the numbers are just not there.
Even Bill Gross, the bond king who might have supported a rise in interest rates, says if the Fed were to do so, it would “create self-inflicted instability.” He went on to say “the Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy – it destroys historical business models essential to capitalism such as pension funds, insurance companies and the willingness to save money.”
The decline has also led to decreases in investments and long-term productivity.
As a result you find huge swings in the market as experienced in August. Mr. Gross said, “It is demand that must be increased, which is missing across the globe.”
Overall, Gross said “super-size” August movements in global stocks are but one sign that something may be amiss in the global economy itself, China notwithstanding.
Cash is king in this environment. His recommendation would be 1-2 year corporate bonds. The reward might not be much, but as Will Rogers once said, “I’m not so much concerned about the return on my money as the return of my money.”
Regardless of what the Obama administration wants to report there is anemic demand across the globe resulting in manufacturing at home expanding at the slowest pace since May 2013.
Confidence in the U.S. economy among small business owners has been declining for much of the year, the Wall Street Journal reported. Wage growth is also tepid something that economists say “has constrained consumer spending growth.”
Bloomberg reports, “The dollar ascent which has accelerated since the middle of last year is making it tougher for U.S. producers to drum up overseas sales, prompting plants to slow hiring and production.”
In China, the official factory gauge dropped to a three-year low. As a result China devalued their currency hoping to stimulate demand. In Germany, the index expanded and in France it contracted.
“In the United States, the Institute for Supply Management index for new orders dropped to more than a two-year low of 51.7 from 56.5 the prior month. It marked the biggest decline since January, when shaky overseas economies and weaker business investment tied to a slow-down in the nation’s oil patch held factories back.”
What the Commerce Department said in the second quarter was that there was a surge of inventory which today cannot be sold.
With China not purchasing commodities which would have been needed for manufacturing, Brazil has slipped into recession. As reported by Bloomberg, “a plunge in commodities prices and an emerging market sell-off coincided with a corruption scandal that has crippled Brazilian builders and left President Dilma Rousseff fighting for her political survival.” You might recall that the BRIC’s (Brazil, Russia, India and China) were expected to catch up and exceed the United States.
What the global economic malaise and the Fed’s false economy have brought are wide swings in the U.S. equity markets. August results were the worst month in three years.
The S&P 500 ended down 6.3 percent in August “as China’s currency devaluation spurred concern over global growth erasing more than $5.7 trillion in equity market values worldwide.”
Given this environment no one needs to be in a hurry. As Bill Gross reminds us “cash is king.” The future belongs to the prepared and in today’s market environment that translate to paying down debt and waiting out the storm.