June 2012 Economic Outlook
This is a monthly newsletter by Greg Sweeney, CFA, Chief Investment Officer, at Bell State Bank & Trust. Sweeney holds a bachelor’s degree in business from the University of North Dakota, is a CFA charter holder, and is a 25-year veteran of the Investment Management team.
Federal Reserve Monetary Policy
- At the next Federal Reserve meeting on June 20, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed indicated rates would remain near these lows until late 2014.
- The year-over-year consumer price index (CPI) released in May shows inflation at 2.3%. We expect the next release on June 14 to reflect little movement either way from this level as the Bureau of Labor Statistics (BLS) calculates it. Outside the walls of the BLS, we estimate that the consumer experiences much higher levels of inflation.
- It is nearly impossible to get through this section without mentioning something about Greece or Europe. Greece is back where its problems began, in spite of great efforts to help out that nation. France appears to be interested in moving the same direction. As one would expect, there is little support for austerity or getting spending under control in Greece or anywhere else – including the United States. The theme of Greece abandoning the Euro is again a daily topic for the news media. Here is an idea: how about if Germany exits the Euro and leaves countries that are of Greece’s mindset in the Euro?
- JP Morgan lost $2 billion on a trade in an investment office where they manage $350 billion. That is a 0.6% loss. Nobody likes a loss, but a loss of less than 1% suggests that some form of diversification and risk controls were in place, although JP Morgan may have been slow to respond. If there’s any humor in the situation, it is in the way politicians jumped all over the loss with formal hearings and inquiries to get the to the nature of the problem. Did they forget that they have a $2 billion loss nearly every 12 hours in the form of deficit spending? And that in the last 4 years, that practice has led to trillion-dollar-plus deficits each year? Those losses are 7%+ of gross domestic product (GDP) and total about 33% of annual taxes collected. Seems like politicians are focusing their energy in the wrong place.
- Economic growth is reported at 2.2%, which lacks a certain amount of feel-good emotion, especially considering the high levels of federal government deficit spending and generous monetary policies aimed at supporting this growth. We expect growth to remain in the area of 1.5 to 2%.
- The most noticeable impediment to growth is the expiration of tax cuts and automatic spending cuts on the horizon at the end of this year.
- Housing has stabilized in a much narrower range over the last 12 months, with some areas of the U.S. seeing prices moving higher.
- Treasury rates are at 60-year lows. The 10-year Treasury bond yield is 1.74%, which is a half of a percent lower than the inflation rate. Fixed income investors are moving backward. There is a big push by the Federal Reserve to force investors into more risky investments in order to generate yields, at a time when demographics suggest that baby boomers are looking for secure investments in order to feel more comfortable about their retirement plans.
- In addition to open market purchases of Treasury securities by the Federal Reserve, there is noticeable purchasing from investors around the world as they look for shelter from uncertainty in other markets.
- It is simple to pick out trends that have moved significantly, but it is a whole other story to determine when they will shift.
- Stock market volatility has reasserted itself, bringing renewed concerns from investors who have stock allocations. Concerns about Euro problems are part of the reason for market weakness, but so are corporate projections for revenue moving forward.
- With interest rates at historic lows, investors with long horizons likely still see the stock market as the better allocation.
Leave a Reply
Realize your comments are visible to the world, so avoid sharing your personal account information. Comments that are abusive, unlawful, off-topic, use vulgar or offensive language, include spam, or attacks of any kind will be removed.