Markets continue to behave as if they are at least a year ahead of themselves and we at NP Fisher continue to believe that there is likely to be at least a 10% correction in the DOW as well as other major indices sometime in the not too distant future.
One of the effects of the quantitative easing deployed by the FED is that interest rates are essentially in negative territory. Although that may technically not be possible, it does help to think of think of it this way in terms of theory. This means the Gov. is not only printing money and pushing inflation but that it is to some degree losing money on each treasury note it issues. It’s kind of like a shop selling its products for less than what they paid for them.
Now then, when it comes to the debate of whether or not inflation or deflation is the main concern in the US economy at the moment, it is important to remember that we can in fact experience both at the same time. What is occurring now is that producers of goods and services are experiencing inflation on sourcing their goods while consumers are experiencing inflation is some areas but overall deflation. Let me outline what I mean. When nearly 10% of the workforce is out of a job, (or in reality nearly 15-20%) shopping activity slows as consumers don’t have enough to go shopping with as they either aren’t earning an income, or very little. Therefore, shops need to reduce their prices in order to get customers to buy. The problem is that the shops have to pay higher prices for their products as I mentioned before. This phenomenon creates a squeeze on business profit margins and, therefore, many businesses are likely to fail over the course of this year and businesses left standing are likely to be the ones with a much more stable ‘book of business’ or those whose sheer size will protect them from failing. Increasing gas prices are typically the main culprit when it comes to inflation and, as anyone can see now, they are in fact rising. In fact, many other commodity prices are on the rise. What we find interesting is that much of the increase in commodity prices is coming from the developing world at a time when the developed world is working its way through this recession.
It is possible for the US economy to steam ahead as it drags 10% of the unemployed along with it, but sustainable growth will only return once jobs start coming back at a pace much faster pace than they are now.
We at NP Fisher continue to wait for an appropriate pull-back before recommending that investments should be made in ‘most’ equity markets at this time. However, there are still some fantastic opportunities to be had in specifically diversified portfolios, of which some include ADRs.
To find out more, please feel free to contact us!
