Column: Economic Musings
Recent economic indicators have been coming in at better than expected levels over the past month. After falling at a 4% rate since the summer of 2008, consumer spending is expected to rise slightly in the first quarter of 2009. The University of Michigan Consumer Sentiment Index is expected to climb again in April after bottoming in November. After revising January durable goods orders downward, February orders showed surprising strength. At the same time, inventories continue to drop sharply, suggesting the need to increase production as businesses restock goods for sale.
It remains to be seen just how much of this recent strength is the result of short-term fiscal stimulus and tax refunds, and to what extent it can be sustained over the coming months.
The recent G-20 meeting to coordinate worldwide monetary and fiscal stimulation efforts had mixed results. It was agreed to add $1 trillion to the IMF reserves to help bail out third-world countries. Direct additional stimulus was refused by many European nations led by France and Germany. However, these nations all have much broader social safety nets than the U.S. (unemployment compensation, medical care, etc.) and this partly compensates for less direct stimulus spending.
Adding to the existing Treasury and Fed stimulus packages such as TARP is the new Treasury initiative referred to as PIPP. This would create public and private partnerships in which five designated purchasers (Goldman Sachs, Pimco, etc.) would team with the Treasury and make bids on packages of toxic assets from major banks. One difficulty perhaps is that should the assets subsequently decline in value, the Treasury (i.e., the taxpayer) would pay the difference whereas if the assets appreciate in value the private investors would receive most of the benefit. It is a question as to whether public opinion will allow this particular formulation to stand.
China and India at this point continue to report positive GDP growth numbers, albeit much smaller than a year ago. If these continue, it will make a return to growth come more quickly for the U.S. and Europe.
Crude oil has traded recently between the low 30’s and the upper 50 dollar range. It appears the $30.50 bottom of November was a turning point and that crude is on its way upwards. OPEC, which did not further cut output at its last meeting, stands ready to make additional cuts if necessary.
The effects of lower crude prices are felt throughout the alternative energy market with many wind-power and solar-power projects being put on hold or terminated. Substantial additional capacity in the Canadian tar sands has also been put on hold and shale oil in the Western U.S. looks less probable than it did at higher prices. As the oil price moves up, some of these projects will be coming back on line. We have, however, laid the base for higher oil prices.
Despite the growing need for public and private debt issuance and continuation of monetary expansion, we expect U.S. Treasury yields to remain relatively low this year because of the perceived safety. Agency bonds, because of the government backing and a more favorable yield, are better for accounts desiring to maximize yield. Corporate debt, carefully selected for the quality of earnings, should be accumulated.
We continue to advocated state, county and municipal tax-exempt bonds as the yields are attractive on a relative and historic basis for those able to enjoy the tax-free interest. Investment-grade credits, even during the depression, experienced a low default rate, below 2.5% on average. The few defaults were in lower, non-investment grade special assessment districts and special-purpose issues. It is likely conditions will be somewhat more volatile this time – but not unmanageable.
With frozen credit markets slowly thawing and the effects of recently passed, worldwide stimuli suggesting the worst may be behind us, equity markets staged a strong rally through March. Whether this rally was a reaction to the over-sold price levels reached in February or based more on the prospects for an economic rebound in 2009 remains unclear. Should corporate earnings and consumer activity stabilize and improve from here, present values are quite reasonable, particularly for those with an intermediate to long-term viewpoint.
Fred Ruopp was named one of the Top Value Managers in the country by Kiplingers. He is founder and CEO of Chelsea Management Company, which manages just over 1 billion dollars for a small number of clients including individuals, insurance companies, charitable foundations, endowment funds, religious organizations and employee benefit plans.
A well-grounded and thoughtful Catholic, Los Angeles-based founder and CEO of Chelsea Management Company, Mr. Fred Ruopp, Sr., is ranked by Kiplinger's as one of the... MORE »