Going back to what I wrote about on my recent article
Recession and Deflation: Myth or Reality?, today I wish to go over the current situation of the US Economy – a subject on which many expectations are being placed.
I am receiving reports speaking about the dormant risk of the US returning to a recession, about shares sharply dropping (a 20 per cent from current values), and Treasure Bonds approaching 2 per cent. Collective fears disturb me since they are responsible for panics, herd behaviours, and other patterns of collective dynamics.
I consider the present situation as being a breeding ground, a scenario with enough expectations, fears, and pressures as to justify a return to a mega monetary stimulus that would again boost the US Economy.
Nothing happens randomly in any of the levels we know, and of course finance is not an exception to this law. This collective fear will be extremely useful as a justification - both for the US individually as for the G7 in a general way - for a new stimulus; may this one be under the form of a new regulation package designed for the stimulation of their economies, through announcements aimed at the casting of prospects, or by means of maintaining interest rates at minimal levels.
The poor economic data that appears should not be a reason for panic. Let's look at them in the context in which they emerge – The US Economy got deep into a crisis marsh a year and a half ago. From that point, through a combination of a mega monetary stimulation and the natural rebound effect produced after having reached grounding point, the market set out in a recovery path. And so it kept for a year. Next, it began lateralising with a pronounced volatility degree. - From the financial market point of view I am not at all surprised at such behaviour in a recovery process. The market already took into account the good and the bad news, and now finds itself fearful in the face of uncertainty, not knowing where to go; it is extremely sensible.
This is the context in which the “breeding ground” I speak about is being worked, full of fears and uncertainties. Many know a finance saying: “bullish markets are built on uncertainty, bearish markets are built on certainties”. Today we find ourselves in the uncertainty created after having absorbed the good and the bad news. So, what is next?
It is the possibility for the US and the G7 to promote a new stimulating monetary policy, whether it is through specific measures or by means of announcements that would push the prospects of the mass of agents operating in the market. Whatever the policy adopted may be I consider it will generate a return to a bullish stock market.
Starting the year, when we were still in a recovery phase, I judged the Federal Reserve would begin to raise the Fed Fund by the end of the year once the economy settled. Now, the market being again submerged in recession doubts, I think the situation provides a perfect excuse for the Federal Reserve to maintain the reference rate of the US Economy in its minimal; at least until the first half of 2011.
The reference interest rate, the Fed Fund, is the big monetary stimulation instrument the US counts with. To keep this rate on minimal levels means that money is cheap, credit is cheap, shares are cheap, and bonds are expensive. It is a simple count. The shot of liquidity into the real market will translate, sooner or later, in an incentive for consumption and production. As long as inflation is not a risk the Federal Reserve can afford maintaining the rate low. Today the topics are recession and deflation, inflation is not in view - the fed fund in minimal levels is a guarantee.
Interest rates are low. Corporate profit per hours of human work it is at maximum levels – which give me the hint that unemployment rates will soon start dropping from their actual levels. Savings are high, consumption not as much. Corporate profits are doing pretty fine.
From my point of view this represents a very encouraging scenario.
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