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| Market Report - 10/30/2006 |
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| Monday, 30 October 2006 00:00 |
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As investors expected, the Federal Reserve decided to leave interest rates unchanged during their Wednesday meeting. In its accompanying statement, the Fed said that the economy was likely to expand " at a moderate pace " in the coming months and that " inflation pressures seem likely to moderate over time". Market participants obviously welcomed the Fed's dovish tone , as they bid stocks significantly higher Thursday, the Nasdaq Composite closing the day at a fresh 5 1/2-year high and the S&P 500 at a new 6-year high , while the Dow Jones Industrial Average finished at its highest level ever . With the S&P 500 up seven days in a row , stocks were then due for a pause. It was therefore not surprising to see profit-taking hit Friday, with the major indexes giving back some of their recent gains on reduced volume, following the release of a weaker-than-expected GDP report . GDP growth for the third quarter came in at 1.6%, less than the 2.1% economists had anticipated . The shortfall was largely due to a significant slowdown in residential construction activity . The report provided better news on the inflation front, as the chain deflator, one of the Fed's favorite inflation gauges, only rose by 1.8%. The better-than-expected number confirms the Fed's view that inflation is likely to moderate going forward. In last week’s e-letter, “ Where From Here ”, Dr. Richebacher’s conclusions painted a rather disturbing economic picture. As you likely recall, the problems he pointed out have been created in part by excess credit and the lack of savings in the U.S. This week I read a short article by William Bonner that supports Dr. Richebacher’s conclusions. Here is what Bonner offered: When you hear about deficits, you think of America's great 'twin' deficits - one in federal finances, the other in its foreign trade. What is rarely considered, is a hidden triplet - America 's household deficit. There are two ways to get rich, dear reader. You can do it the old fashioned way...or you can get lucky. Traditionally, the way to get rich was the same as the way to get a good night's sleep. Families looked at two numbers: One was their revenue; the other was their expense. If the former was larger than the latter, they could sleep well at night. And getting rich was just as easy. It was just a matter of degree; the larger the spread between the former and the latter, the richer a family became. But the housing boom of the early 21st century, following as it did the great stock market boom of the last century, changed everything. It was a new era, in that people got so lucky, they began to think that luck was the only way to get rich. Suddenly, the difference between income and outgo turned negative. American households began running deficits. Household deficits are rare in American history. Never before did people have to go running to the dictionary to find out what the word 'thrift' meant. It was one of the first words people learned. Even without degrees in economics or financial management, they were nevertheless able to make sure outgoes did not exceed incomes - except in a few special circumstances. One of those circumstances was the Great Depression, which pushed down incomes to the point where outgoes couldn't readily keep up. In two years, during the '30s, U.S. households ran in the red. Another special circumstance occurred directly after WWII. So many new households were formed (returning GI's couldn't wait to get back to civilian life) and so much demand had pent up during the war years, that for four years in the postwar period, households dipped into savings to buy houses, cars, appliances and so forth. Other than those special cases, from 1929 to 2006, the only other time American households ran deficits was in the last six years. And during these last six years, the deficits have not only been unusual in that they were financed by debt rather than savings, they were also unusual in that they were breathtakingly large. Last year's household deficit - defined as personal disposable income minus personal consumption and residential investment - hit $477 billion. This year, households are on target to beat the $500 billion figure. In other words, American households are running bigger deficits than the U.S. government! How long can this go on? Not forever. Borrowing against housing has financed the deficits. Now housing is going down. "Five year rally in home prices ends in Ventura County," says one headline. "Phoenix: Prices, Sales Tumble," says another. "Home prices fall in some Calif. Markets," adds the Associated Press. If they are unable to continue borrowing, what will American households do? Perhaps the word 'thrift' may come in handy.
The information and data contained herein has been obtained from sources believed reliable, but is in no way guaranteed by Robert Matheson or Matheson Financial Services as to its accuracy. Furthermore, this report is provided as a complimentary service by Robert Matheson and is not a solicitation, or an offer to buy or sell any security, mutual fund, commodity or any other product mentioned in this or any other report. Past performance does not guarantee future results. |
