Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 31 October 2014

US economy grows at 3.5%

US turns upbeat

The US economy grew at a 3.5 percent pace in the September quarter (Q3), following on from a big rebound in the June quarter (Q2) when the economy grew at a 4.6 percent pace.

David Scutt of Scutt Partners summarises the overnight news in his excellent daily update here.

US stocks rebounded strongly with the S&P 500 adding 0.6 percent and the Dow Jones (DJIA) index rebounding by more than 220 points all the way back up to 17,195 after the recent wobbles of the index.

There have been no shortage of bubble analysts warning of a massive correction in recent months, particularly now that quantitative easing (QE) is to be withdrawn by the Federal Reserve.

Timing stock markets is difficult

Of course, stock markets are liquid and as such are always and everywhere prone to sharp corrections, and with the market at or around all-time highs, there is no question that downside risks almost by definition must outweigh the likely upside in the short to medium term.

Calling bubbles is one thing, but timing them is quite another, as Shiller found with the US housing market - a correction did happen, but not for some years after the "bubble" call was made in 2003, as we looked at here.

Indeed US stocks have been described as a bubble since 2013.

& 2012...

...& 2011...

The Dow Jones average is up by more than 70 percent since July 2011 (returns have been higher still when dividends are thrown in) and the index has run up massively from its nadir of around 6600 in early March 2009, which gives you an idea of the potential size of a correction when it comes.

This is why I tend to favour an averaging approach and diversified products.. 

Reading markets appears easy in the rear view mirror when reading the chart from right to left and everyone is an expert after the event. 

Reading the chart in real time from left to right is not nearly so easy.

QE ends

It interests me how dramatically views differ on the stimulus known as quantitative easing or "QE".

Some people, including my missus in fact, are vehemently against the idea on a matter of sheer principle, and suggest that it will all end badly when the stimulus is withdrawn.

Indeed, with both of us being from a CA background, we have heated arguments about this kind of thing (thinking about it, perhaps that's why the dinner party invites dried up?).

I guess the "against" argument is that a problem in part caused by (private) debt should be solved by austerity as penance rather than by more debt. 

"For" QE

Hailing from a part of the world - Sheffield in South Yorkshire - where the sad decline of the steel industry and then later the coal industry devastated a workforce, a city and indeed an entire county (the population has declined over the last few decades), I believe wholeheartedly that faltering economies should be stabilised by government expenditure.

An economy which slips into a prolonged recession with high unemployment may fall into a depression and perhaps never come back out again as a negative spiral takes hold.

Jobs should come first

Indeed, probably to the detriment of holding a balanced viewpoint, I believe that jobs should come first always, and governments should move heaven and earth to bring elevated unemployment rates down, at almost any short term cost.

As I said, we are all a product of our environment, experiences, and our upbringing.

The US has seen millions dropping out of the workforce, but at least the unemployment rate has fallen from double digit levels to 5.9 percent, which I personally would argue makes QE a success, as the labour force data continues to steadily improve (would it really have one so without stimulus?). 

Of course, this has inflated balance sheets and debt ultimately needs to be repaid or at least curtailed, but what chance would there be anyway of balancing the books when there is huge slack in the workforce and tax receipts are way down?

Like the US, the UK also engaged in stimulus and has also seen its unemployment rate tumble, while total employment in Britain has soared to a record high of more than 30.75 million. although an unspecified number of new employees are known to be on zero-hour contracts and real wages growth has been dire.

The UK economy is growing at a 3 percent pace too, as I looked at last week, among the fastest growing of the developed economies. 

Of course, Britain has massive challenges to face including deficits, falling real wages, sliding inflation (CPI) and more, but less slack in the workforce can surely only help to face down each of these problems.

Of course, it is impossible to know the counter-factual and what might have been had Britain and the US not indulged in bond-buying programs, but a glance across the English Channel to the continent might provide us with a clue.

The Eurozone is threatening to slip in a devastating deflationary funk and youth unemployment rates in some Med countries are at astronomically high levels. 

Austerity is one thing, but what have those youths done to deserve such a total lack of opportunity (I would argue)?

Anyway, a debate for another day, perhaps!

Gold dives below $1200

One thing that is certain is that the gold market didn't like it with the price plunging below US$1200/oz, which is a collapse of 37 percent from the 2011 peak of above $1900/oz. 

We shouldn't cherry-pick numbers too much, though, since over the past decade gold has performed strongly as a hedge.