The price of a postage stamp just went up again. While a one cent increase in a postage stamp probably isn’t going to hurt anyone other than mass mailers, which isn’t necessarily a bad thing, the ever-increasing cost of stamps serves as a good reminder of the ever-increasing cost of everything else.
As the election draws near, stock and bond markets have been divided as to the significance of the outcome. A Trump victory injects policy uncertainty – something markets generally dislike. And a Clinton presidency provides more policy certainty, but with recent revelations from the FBI, a high probability of constitutional embranglement. The two players in the capital markets are sending separate signals. As Trump’s chances have improved, stocks have sold off 2.5% during the last seven days. The Chicago Board of Option Exchange’s Volatility Index, (left chart below) a measure of implied stock market swings, has reached its highest level since June.
With the pep rallies concluded, Democratic and Republican captains and their teams are charging onto the field to commence a battle for the White House unlike any other. The game plans couldn’t be more different on issues like immigration, regulations and taxes, but on trade there doesn’t seem to be any line of scrimmage at all. But on this one, Trump is on offense and Clinton, defense.
First let’s celebrate the fact that Janet Yellen actually did what she said she was going to do – she raised rates before the year was out. Investors love certainty and the Fed Chair just improved her certainty rating substantially – how refreshing.
The financial news is dominated by speculation of when the Fed will increase interest rates. It matters because the Fed is the only economic policy maker with any potential or apparent willingness to stimulate our economy. The Administration continues to pile on regulations and complicate the tax structure, while the Congress, through its brokenness, allows sequestration to continue cutting more deeply into the areas of government spending (defense and social) that are actually stimulative to economic growth.
Yesterday’s report that the number of Americans filing for unemployment insurance was the lowest since the early 70’s provides more evidence that the US economy is becoming stronger. Investors are becoming convinced that the Federal Reserve will soon begin raising interest rates back to levels reflective of a healthy economy.
The US economy continues to plow persistently ahead despite the strong headwinds of high unemployment and restrictive fiscal (government spending) policy. The economy added 195,000 jobs in June and has added an average of more than 200,000 each month this year. But the improvement in jobs, while steady, is not so robust that the Fed is going to soon reduce its generous stimulus measures of quantitative easing (QE3) or very low interest rates.
How we hate the idea of removing a bandage. It so nicely covers the damage and the pain underneath that we soon prefer the façade to the reality. We especially fear its removal as we know the adhesive will only reluctantly and painfully give up its sticky hold on our very sensitive skin. Knowing the quick yank is best, we often resort to the painfully slow tugging approach.
There was building sentiment in April that we were headed for another spring slowdown. Unfortunately, last Friday’s GDP report failed to put those concerns to rest as it showed the economy was growing, but more slowly than anticipated, and not fast enough to create meaningful job growth. This week the Fed announced no changes in rate targets or current stimulus plans saying the economy was growing “at a moderate pace.” But remarkably several usually hawkish (meaning tough on inflation) Fed bank presidents revealed their growing concern over “De”- flation. And just to keep things interesting, today’s jobs report stirred the pot further with a surprise on the upside. Today, we’ll try to make some sense of it all.
“How did you go bankrupt?” “Two ways. Gradually, then suddenly.” – Ernest Hemingway, The Sun Also Rises The economy is weak and probably getting worse. Europe remains shaky and China is slowing. Gasoline and food prices are high and going up, yet stocks are up 4.2% in September. How is that? A big factor is that last week the Federal Reserve renewed the lease for the money printers with its QE3. As the sole actor in Washington moving to stimulate jobs, the Fed took further bold steps.