Wow! That was one weird opening on the DIJA this morning. It looked like a schizophrenic stop light for the first two minutes, flashing between green and red with barely an interval of time between the shifts. If that doesn’t speak to the lack of commitment, I don’t know what does.
This morning, I have an interesting question, one that has me both perplexed and fascinated. The question is perplexing because it asks for an answer I do not know, something I believe is unknowable. It is fascinating because it suggests the reader understands, but then it throws out information that points to a lack of understanding. Here is the question separated into three parts for better clarity.
- We severely lack demand in the economy. The FED gives us more and more supply, the congress is adamant on destroying whatever demand there is.
I clearly understand what the reader is saying here in his first sentence, and it is correct, to a degree. The US economy lacks demand, but not severely so. Just look at the auto and housing sales over the last two years. Clearly, large demand is driving those sales; yet, these sectors can handle more demand, for sure, and the economy can certainly handle more demand in discretionary retail sales as well.
As to the Fed giving supply, well, I am not sure what the reader is referencing. It is true that the Fed is creating cheap money, and that is money supplied, in effect. As to economic supply, I have not a clue as to how the Fed contributes directly. The reader is correct about the US congress, at least one party, anyway.
- What indicator, such as the VXX for the VIX, do I follow to see demand in motion?
This part of the question throws me. First off, the VIX is an index that tracks implied volatility in the S&P 500. The VXX is an instrument designed to trade the VIX. Neither has anything to do with economic demand, but they both have everything to do with market sentiment, which, at the moment, appears sanguine, even with the political headwinds and uncertainty.
- We know that corporations are sitting on enough cash to pay off the national debt. If they would start throwing that around, that IS demand. How will we know the tide has turned? What indicator or government statistic do I watch and plot.
This last part of the question is a mixed bag. It begins with a complete factual misstatement. Estimates for the amount of excess cash on the books of US corporations ranges between $1 and $2 trillion, whereas the US debt is nearly $16 trillion. In fact, corporations are starting to throw that cash around and that is not demand; it is in response to demand.
- The outlook for U.S. business spending is improving as rising earnings, easier credit and pent-up demand prompt companies from Warren Buffett’s Berkshire Hathaway Inc. to Chrysler Group LLC and Lowe’s Cos. (LOW) to expand.
As to the tide, it has already turned. US businesses saw their corporate profits dip a bit this last reporting and US productivity hit lows this past quarter. This will spur expenditures of cash to improve productivity and profits. As well, US businesses smell consumer spending in the air. The numbers in US housing and auto sales are steady and impressive and retail sales have held their own through a long period of political and economic fear, a time that has tried the patience of the consumer. Employment is ticking up, as is consumer credit and both speak to more demand.
Factory orders are up. Big jets, big trucks, and heavy machinery are being made and exported to countries replacing or adding infrastructure. Aside from these indicators, mergers and acquisitions are up, meaning corporations are spending cash on accretive growth, which will generate more growth. On top of all this, consumer and business confidence are up and climbing.
As to the government statistics to watch … watch any or all of them, as they all are pointing toward growth, and the only way growth happens is if there is demand, which is here and more is coming.
Trade in the day; Invest in your life …
