Here we are, just two weeks into the New Year, and things are looking up. So far on the year, the S&P 500’s up 2.9 percent, the Nasdaq’s up 2.5 percent, and gold’s up 3.1 percent. Even silver, if you can believe it, is up about 4.5 percent.
Good times are coming, you can almost touch it. Moreover, there’s an excitement in the air that hasn’t been felt since before the housing market deflated. It’s about time things picked up…right?
Particularly after the way things have gone the last several years… What’s not to love about rising asset prices?
They make a man feel wiser, richer, and better looking all at once. Suddenly his bald spot’s no longer getting bigger…it’s getting smaller, along with his waste line. Conversely, his 401k statement’s no longer getting smaller…it’s getting bigger. Joyfully, upon opening his monthly statement, he’s greeted with the pleasing satisfaction of ballooning wealth. He fancies his shrewd investing abilities to be equal to Warren Buffett – maybe even superior.
Soon, however, the pleasant aroma of rising asset prices goes to his head. Before long he’s spending money – lots of it – on credit…
Telling the Story of an Economy that’s Improving
The latest Federal Reserve report, released Monday, showed consumers increased their debt in November by a seasonally adjusted $20.4 billion – the largest increase since November 2001. Yes, as you can see, things are looking up. For the first time in years consumers are eager to spend money on credit.
No doubt, the world is ready for a new bull market. And if things continue the way they have since the beginning of October, they may just get it. Since October 3, 2011, the S&P 500’s up 14.5 percent.
But this may not be just another credit induced bull market. For not only are financial markets improving, the leading economic indicators tell the story of an economy that’s improving too…
The Conference Board’s index of U.S. leading economic indicators, last reported just before Christmas, rose 0.5 percent in November. This was in addition to the 0.9 percent October increase. Manufacturing, housing market, and consumer spending improvements point to strong economic growth over the next three to six months.
If this trend continues, the unemployment rate will begin going down in earnest. Increasing payrolls will spur further economic growth, which, in turn, will result in more hiring. In short, the reverse of the self-perpetuating cycle that took the economy down over the last few years will serve to push it back up.
Seeing the First Glimpse of Dawn
Obviously, financial markets still carry a lot of risk. For instance, the European debt crisis could trigger a panic any day. Additionally, nothing substantive has been done to improve the U.S. government debt problem, which, unfortunately, will continue to be a source of instability to the world monetary system.
Bond King, Bill Gross, says “financial markets and global economies are at great risk.” Gross also says, “we appear to be morphing into a world with much fatter tails.”
Maybe so. We don’t deny that there are any number of unexpected, unforeseen, events that could crash markets and send the economy into a tailspin. Yet, at the same time, and despite our pessimistic disposition, we cannot deny the fact that the economy is strengthening.
Here at the Economic Prism we’ve been down on the economy for so long we thought our mindset had been permanently stuck in a world of gloom. Somehow, we seem to be coming unstuck…and we can hardly believe our eyes…
After a long, dark and dreary night, we see a distant light approaching. Not a locomotive headlight, we hope. But the first glimpse of dawn hinting of a rising sun just beyond the horizon for the U.S. economy.
More to follow…
for Economic Prism