The Economy March by Guy Baker
The economic data this month is mostly negative and has triggered memories of an economic dilemma that the 1970's economists call – "stagflation." What is it?
The basic idea behind stagflation is a period of combined slow growth (stagnation) and rising prices (inflation). The most optimistic government estimates put the 2008 GDP at just +1% to +2%. Compare this to India, where I just visited, where the GDP is at 9%+.
The CPI, a general measure of inflation, rose +0.4% in January, mostly due to increases in energy and food costs. The "core" CPI rose +0.3% which means inflation is not widely pervasive, yet. Over the past year, energy prices are up +19.6% and represent the single largest price increase in the CPI.
So, the FED is between the proverbial rock and a hard spot. Lowering rates will ease mortgage rates and improve housing, but keeping rates firm or raising them would choke off inflation. What to do? With the election coming, best guess is they'll lower rates at their meeting in mid-March and run the risk of higher inflation.
Good News! Housing starts were up overall in January, but all of the gain was in the multi-unit construction area. Single-family home construction actually dropped 5.2%. But building permits fell 3.0%, the lowest level since 1991. This does not suggest recovery is around the corner.
THE MARKETS
In a short trading week, the markets were split. The Dow [+0.27%; - 6.66%] and the S& P 500 [+0.23%; -7.85%] edged higher while the NASDAQ fell [-0.79%; -13.16%]. The strange news is that GE and IBM reported terrific results, along with others and the market ignored the news. The focus is on housing, interest rates, and the possible bailout of mortgage insurance companies.
While the 90-day T-bills and 30-year bonds were both unchanged, the ten-year note gained a few basis points in yield. Yet, mortgage rates for 30-year and 15-year loans jumped sharply. Why? The weakness in housing should be driving rates down. Here is a bad note – the forecast over the next two decades shows the U. S. would have a housing "surplus" of more then twenty million units. If so, then don't expect a rebound in housing prices any time soon.
The dollar weakened against the Euro (€) as oil futures crossed the $100 mark. Gas prices also crossed the $3 barrier as a variety of political and economic concerns meshed with some refinery production problems to worry investors.
PERSONAL FINANCIAL PLANNING
Two groups have been the most affected by these events. One of those groups has gotten almost all of the government's concern and the bulk of the press coverage. The other group hasn't gotten much attention and is ignored by the press even though they're a much larger group within our economy – the savers. With the yield on T-bills, CDs, and money-market funds dropping from about five percent a year ago to just over two percent today, this group has seen their income fall dramatically. A recent estimate has the drop in income from money-market funds alone to be about $55 billion. How do you increase return? You have two choices: Increase maturity or increase risk. Returns are higher the longer out your are willing to commitment to leave your money. Corporate Bonds offer higher returns than the safe money options. So you might want to invest in bonds with higher returns.
Now is the time to be careful.
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