The Fed at the Crossroads
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“The least that can be said is that neither the forecasting tool of the Columbia University (which peaked at the beginning of 2006), nor the expected inflation are showing any signs of panic. We certainly do not see any significant rise in any of these two tools similar to the ones we saw from 1998 to 2000 or from 2002 to 2006. So maybe, just maybe, what we are seeing today is a change in relative prices (food and energy higher, housing lower) and not a general rise in the inflation rate.”
I would not be surprised at all to find that inflation is not the problem it is today, by this time next year. In fact, given that we are seeing two bubbles burst and a recession and slow recovery, all of which are by definition deflationary, it would be odd if inflation got worse from here. Stranger things have happened, but the odds favor a view that inflation pressures will ease.
Bottom line? I think the Fed will be on hold for a rather long time. We are in a Muddle Through Economy. Even if the economy gets worse, as Jamie Dimon predicts, the problems in the economy would not be helped by lower rates. And until the economy starts growing at a rate above 2%, it will be difficult to justify raising rates in the face of such slow growth. And given the pressure on consumer spending and housing prices, I think the recovery that should begin later this year is going to be a rather tepid one.
Sell In May and Go Away
Numerous studies show that since World War II, as much as 99% of stock market returns have been generated between November 1 and May 1. Good friend and fishing buddy David Kotok of Cumberland Advisors sums it up nicely:
“According to the Ned Davis (NDR) database, starting in 1950, $10,000 invested in the S&P 500 Index every May 1st and then liquidated every October 31st would only be worth $10,026 today. That’s right: had you stayed out of the stock market from November through April and only been in the market from May through October, you would have had no change during the last 57 years. 21 of those years would have been negative; 36 were positive. This happened during the same period that stock prices were rising about 75% of the time and markets made extended upward moves.
“Consider the results of the reverse strategy. Buy the S&P 500 Index on November 1st and sell all your stocks on May 1st. The outcome is dramatically different. Your original $10,000 would now be worth $372,890 as of April 30th closing prices in 2008. Out of the 58 periods you would have had positive results in 45 of them and negative results in only 13 years.”
David goes on to show research at www.cumber.com as to why he thinks you should hold off on selling. I disagree, but then the stock market has been confirming David’s position. My thought is that the Continuing Crisis will put pressure on corporate earnings throughout the summer, with more earnings disappointments at the end of this quarter.
Earnings disappointments are the stuff of bear markets. Richard Russell, one of the more astute market observers and in the past a serious bear, thinks we are now in a bull market. Dennis Gartman is now a bull. How do you argue with such astute traders?
I am sure Larry Kudlow will argue that the markets are telling us a recovery is imminent because the markets are rising. Nevertheless, I think this could be a very rocky summer for the markets in general. I look back to 2001-02 and find three bear market rallies of 20%. The market evidently did not know as much as it thought. But then, what do I know? If you have specific stocks you like, or are a trader, then that is fine. But for those whose only real equity choice in the retirement plan of investment in a long-only index, I would find one of the other options in bonds
South Africa, Flowers, and On the Road
South Africa was wonderful. I so enjoy the country and the people. The game runs were excellent at Sun City, as was the resort. I highly recommend it. And thanks to Prieur du Plessis and Paul Stewart at Plexus for being such great hosts.
And now I must tell a story about assumptions, and how they can rise up and bite you. It seems I left a bag on the American Airlines flight which I took to connect with South African Airways at Dulles in Washington, DC. It had my shoes, belt, and ties in it. So, I got to Johannesburg without the basics. On Monday morning I rushed to the local mall, walked into a well-known men’s clothing store, and bought a belt and ties, paying for them with my personal Citibank credit card. I did not like the shoes in that store and went to another one and chose a nice Italian pair, as there were no other options and time was running short. I tried to use the same credit card, but it was turned down this time. I then used my Citibank business card, and promptly forgot to call Citibank to see what the problem was.
The next Sunday, at a gift shop at the Cape of Good Hope, my business credit card was turned down. I pulled out my emergency-use-only, don’t-leave-home-without-it American Express card (I don’t get miles from them I can use). I then called Citibank, and they said they just wanted to make sure I had the card in my possession and was using it. They then reactivated it. I asked them to do the same for my personal card.
They looked up the number and then said I needed to talk to the fraud department. I was then asked if I had charged a rather large sum of money for flowers. I informed Citibank that I had not. They said the store was trying to run the charge every day. We both assumed that someone at the first men’s store had stolen my number and was using the card to run a scam, buying flowers that they could sell on the local street for cash. I was glad that Citibank was on top of things. When I got back in the office today, my new personal card was waiting.
As I was activating it, I told Tiffani to come in and began to tell her the story, with embellishments, of how I was almost the victim of fraud. Why would anyone think I would spend such a preposterous amount of money on flowers? And I am afraid I used that story in the last of my presentations in South Africa, talking about the need for credit research and liquidity (you would have needed to be there to see the real relevance).
Assumptions.
“Dad,” said Tiffani with a Dad-has-done-it-again smile and a don’t-tell-me shake of her head, “that was the florist for my wedding, and we have to make a deposit. We couldn’t figure out why the card was not going through.” I just dropped my head and gave the Dad sigh. I guess I do in fact spend mad sums of money on flowers. And I will enjoy every minute of them. August 8 is just around the corner.
I am off to La Jolla for a quick trip Monday and then back the next day, hoping to get some writing done next week. Look for a very interesting Outside the Box on Monday evening from my friends at Casey Research. They provide some very sobering data on the energy market.
We have not yet found the lost bag at Dulles. While the shoes and books can be replaced, the bag is actually a delegate bag from the 1996 Republican National Convention and has some personal sentimental value. I hope it can be found.
Have a great week. And avoid assumptions.
Your wiping the egg off his face analyst,
John Mauldin
Source: The Fed at the Crossroads
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Tags: , BLS, Citibank, economics, ECRI, fed, Federal Reserve, Food, food costs, Food Sales, Gas, Gasoline Sales, inflation, OER, Oil Prices, Paul Volker, politics, recession, Wal MartAbout the Author
As a recognized expert and leader on investment issues, Millennium Wave Investments president John Mauldin is primarily involved in private money management, financial services, and investments. John is a prolific author, writer and editor of the free popular Thoughts from the Frontline e-letter which goes to well over 1,000,000 readers weekly, and is posted on numerous independent websites. John is a Fort Worth, Texas businessman, and the father of seven children, ranging from ages 11 through 28, five of whom are adopted.