March 2015 - Forecasts & Trends

Forecasts & Trends is much more than just investment blog posts. You need to know the "big picture;" you need to have a "world view," especially in the post-911 world; and you need more information than ever before to be successful in meeting your financial goals. Gary intends to help you do just that.

Forecasts & Trends

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  • On The Economy, The Environment & Income Tax Time

    The combination of topics for today’s E-Letter might seem unusual, and it is – the economy, the environment and income tax time. How do those fit together? They don’t really, but I think you will find today’s discussion on each to be interesting.

    The economy has been in a slow recovery for the past five-and-a- half years. It’s the weakest post-recession rebound in generations. The Commerce Department’s latest revision of 4Q GDP shows that nothing much has changed. Meanwhile, winter economic reports for retail sales, manufacturing and capital investment point to a weaker 1Q, perhaps only around 1% growth in GDP.

    Today we will look at several recent economic reports, most of which were (you guessed it, unless you didn’t read last week’s E-letter) disappointing. That includes last week’s final Gross Domestic Product report for the 4Q, Gallup’s Economic Confidence Index and February durable goods orders and housing starts.

    I also want to share with you some of the latest interesting polling results from Rasmussen Reports that I think you’ll find very interesting, especially regarding how most Americans feel about the IRS – given that income tax day is just two weeks away.

    But before we get to those topics, I want to share with you the findings of a couple of new Gallup polls which gauge Americans’ concerns about the environment and global warming. With so much alarmist rhetoric out there, you would think that the environment would be near the top of most Americans’ worry list. Let’s take a look.

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  • US Economy Badly Disappoints Analysts’ Expectations

    Today we will talk about an economic indicator that I have not written about before, which is compiled and reported monthly by CitiGroup, the American multinational banking and financial services corporation headquartered in Manhattan.

    The report is known as the CitiGroup Economic Surprise Report. It is an interesting indicator in that it measures how actual economic reports exceed or fall short of their pre-report expectations, or “consensus” as we call it. 

    CitiGroup compiles the Surprise Report each month, not only for the US but also for other regions of the world, including the Eurozone, China, Asia and others. We will look at this particular indicator today since most US economic reports this year have come in below expectations, whereas in late 2014, most exceeded the consensus.

    What does this tell us about the future? Most analysts conclude that the recent downward trend in the Surprise Report means that the US economy is slowing down, perhaps significantly. I tend to agree. Yet some others maintain that the report tells us little, if anything, about the direction of the economy. That’s what we will talk about today.

    Following that discussion, we’ll turn our attention to the latest developments in the oil patch. Given the collapse in oil prices over the last year, the number of working oil rigs has plummeted by almost 50%. Yet very surprisingly, daily oil production and our level of above-ground crude inventory have continued to increase rapidly.

    The question is, how can the rig count drop by almost half, yet daily oil production has continued to soar? The answer may surprise you.

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  • The Surging U.S. Dollar - Good For Some, Bad For Others

    The US dollar has been surging against most other currencies over the last year. The question is, is the rising US dollar good for the economy and the investment markets, or not? No doubt, the rising dollar has been buffeting the US equity and bond markets this year and is increasingly cited as the main culprit. That is what we will delve into today.

    Opinions differ whether a rising dollar is a net positive, or a net negative, for the US economy going forward. But as I will point out below, the strong US dollar is a good thing, despite what others may say. However, the main reasons why the dollar is surging may surprise you.

    The US dollar has risen about 33% from its low in April 2007. The euro is approaching a new low relative to the US dollar, reaching $1.05 last week, the lowest level since 2003. The euro could be at parity with the US dollar, or even less, very soon. But what does that mean for most Americans? We will answer that question today.

    At the end of today's letter, I will recommend that investors reduce exposure to equities or hedge long positions due to rising financial risks around the globe, which are reflected in the soaring US dollar. Be sure to read my analysis below.

    Before we get into that discussion, let’s look at some recent economic reports and data. We start with the results of the latest Wall Street Journal survey of over 60 economic forecasters. Next, we look at the wholesale price index which has now declined for the last four months. And then we look at retail sales which have declined for the last three months, well below expectations. Let’s get started.

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  • Strong Jobs Report Hits Fed’s Rate-Hike Target Zone

    Last Friday’s unemployment report for February was stronger than expected, both in terms of new jobs created and the headline unemployment rate which fell from 5.7% to 5.5%. This sparked growing fears among investors that the Fed will move to raise short-term interest rates sooner rather than later. Stocks fell sharply just after the report.

    The debate over when the Fed will raise interest rates this year, by how much and over what period of time, continues. The financial media hangs on the Fed’s every statement, looking for clues as to whether the first rate hike will happen in June or September or even later this year.

    Whenever “liftoff” happens, it is likely to be only a quarter-point hike in the Fed Funds rate – the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight – which is currently around 0.1%.

    How much the Fed Funds rate could rise over the next few years is a subject of much controversy – as I discussed in my blog last Thursday (you really should subscribe) – but most analysts don’t expect the key rate to rise above 1% by the end of this year.Today we will discuss when the Fed might make its first move and how much rates may rise over the next several years.

    But before we jump into that discussion, let’s take a look at last Friday’s unemployment report, which saw the headline unemployment rate drop to 5.5%, the lowest in seven years. However, as is often the case, not all the data in the latest jobs report were positive. I’ll explain the good and the bad as we go along today.

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  • January Inflation Turns Negative - Is Deflation Upon Us?

    Consumer prices fell in January for the third straight month, while inflation over the past 12 months turned negative for the first time since 2009, largely because of cheaper gasoline. In January, the Consumer Price Index sank by a seasonally-adjusted 0.7%, the biggest one-month drop since the end of 2008, the Labor Department reported Thursday.

    The pace of inflation over the past 12 months, as measured by the CPI, fell to negative 0.1%, and it’s down sharply from 2.1% last summer shortly before crude prices collapsed. That’s the lowest annual rate since late 2009/early 2010. If this trend continues, we will fall into deflation.

    Deflation, not to be confused with disinflation, or a slowing rate of inflation, is dangerous because it reduces the supply of money and credit flowing through the economy, and it can create less demand for big-ticket items from cars to washing machines. At its worst, dwindling demand can lead to global depression.

    Many investors are celebrating the widely-held belief that lower inflation is good for stocks and higher inflation is bad. But, as is often the case, this conventional wisdom is misleading, if not plain wrong. A study by the by the National Bureau of Economic Research found that corporate earnings and inflation tend to move up and down together, generally speaking. So the idea that lower inflation is good for stocks may be dead wrong.

    But before we get into that discussion, let’s take a look at last Friday’s report on 4Q Gross Domestic Product, which was a disappointment. At the end of today’s E-Letter, I will comment on Fed Chair Janet Yellen’s testimony before the Senate last week. And we will end with some thoughts on President Obama’s quest to reach a nuclear deal with Iran.

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