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Gathering Momentum
By: Dr. Charles Lieberman
Date: 12/14/2009
Much stronger than expected retail sales and a rise in business inventories provide solid evidence in support of our judgment that the economy continues to gather momentum for renewed economic expansion. Self-reinforcing growth is not yet locked into place and won't be until recurring payroll expansion is evident. However, we should arrive at that point within the next few months. So, we remain quite bullish on stocks and bearish on bonds.
It is easy to find reasons to be negative. In fact, being negative is all the rage. Unemployment is very high, the economy is still losing jobs, credit availability is weak for small business, mortgage and loan defaults are high, and Congress seems more interested in playing politics than in good policy. Within a questionable banking reform bill passed by the House is authorization to audit Federal Reserve monetary policy, which would undermine Fed independence. This is awful beyond belief. I suppose policy could be worse. They could pass more spending bills for which they do not have adequate funding, but the Administration is considering such a proposal, too. What passes for economic policy merits widespread outrage.
The above notwithstanding, there is also reason for hope and optimism. First, such stupid policies are unlikely to become law, simply a majority chose to showboat now. Opposition will grow quickly in response to these bad policies and final passage is unlikely. But we are also unlikely to be so lucky that Ron Paul is sent back to grade school to get an education or to Argentina, where politicians just like him have destroyed that economy.
Bad politics aside, economic forces are building for recovery and growth. Inventories have so depleted that industry must increase production to meet demand. The rise in retail sales only reinforces this need for increased output. The same economic forces are at work in the housing sector, where sales have increased, even as inventories decline. Population trends ensure that demand will remain solid, even as construction activity is still very low. That's just not sustainable. We expect construction activity to rise quite sharply in the coming quarters, far more than is expected by most forecasters. Put this all together and they provide a solid foundation for recovery. As we wrote last week, our outlook promises very good support for further gains in stock prices and suggests that bond prices are too high, even as retail investors stay away from stocks and keep buying bonds. As always, they figure things out too late, just like the politicians.
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