October Economic Outlook

Greg Sweeney

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 November 2, we expect the Fed to leave rates unchanged between zero and 0.25%.


  • The year-over-year consumer price index (CPI) released in September shows inflation at 3.8%. It would not be a surprise to see that number go over 4% by the end of the year. The Fed will likely claim price increases are temporary or transitional, but that is shallow comfort for consumers experiencing price hikes even higher than those tracked by the CPI.

Economic Activity

  • “Operation twist” is when the Federal Reserve once again tries its form of monetary medication in the market by purchasing longer-dated Treasury bonds in an effort to reduce longer-term yields. Will it reduce long term rates? Probably. For how long? Good question. Will it to stimulate the economy? Not very well. Why? Because the consumer accounts for 70% of our annual gross domestic product. The biggest debt load for a consumer is usually a house. Consumers are not able to refinance their homes, because the equity has declined, they are not able to get through a new underwriting process, and therefore they are unable to take advantage of lower rates. The net result is no extra dollars for the consumer to spend. If the TARP/CPP financing plan was Hank Paulson’s bazooka, then QEI and QEII were Ben Bernanke’s machine gun, and operation twist would be a spitball shooter. In other words, the Fed’s tool box is nearly empty, short of the old standby of just printing money without giving it any sort of fancy acronym.
  • While the Federal Reserve is holding rates low, there are other major pools of assets having a very difficult time, including people living on fixed income, insurance companies and pension funds. Unintended consequences for these groups are starting to pile up. When retirees are not able to earn any income on their investments, they are unable to spend and add to economic growth. When insurance companies are not able to earn a return on investment income, insurance rates go up; and when interest rates are low, pensions become underfunded quite quickly. Combined, these three areas represent larger pools of assets than the money center banks – yet all of our economic policies continue to be built around banks. Is the industry really in that much trouble?
  • Greek debt is $356 billion, which amounts to $475,000 per worker. Even if Greece gets financing at 5%, the annual interest alone would be $23,750 per worker. Circumstances still don’t favor a “work out” for Greece’s debt issues. Federal debt per worker in the United States is currently $114,500 per worker.

Fixed Income

  • Treasury rates across the spectrum do not exceed the inflation rate. At one end of the spectrum, this suggests a lot of concern about weakness in the economy and the bleak prospects for our economic future. At the other end of the spectrum, those rates suggest that fixed income is a bad place to put money, because real return is negative.

Stock Market

  • In September, stocks flirted with bear market territory, defined as a 20% drop. The U.S. stock market continues to be influenced by news out of Europe and the impact on worldwide economic growth.
  • Stock correlations, the degree to which stocks move together, are quite high, making it difficult to pick the best stock to add value. The high level of exchange traded funds (ETF) investing and high-frequency trading appear to be the contributing factors.
  • Market timing strategies also struggle in a market that changes direction as much as the U.S. stock market has in the last 45 days. We expect volatility to be present as long as the European debt news continues to ebb and flow.

View previous Economic Outlook newsletters.

2 Responses to this post...

  • Caleb Grundyson on Oct 14, 2011 at 10:56 am #

    This is really great work. Thanks Greg!!

  • jlarson on Oct 14, 2011 at 11:01 am #

    We will let Greg know you appreciate his monthly newsletters!

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