Marshal McLuhan, one of the iconic figures of the 1960s, essentially said that there are not two sides to any story – there are many. Regarding the economy and the markets, this adage surely appears to be correct. Everywhere one turns another side to the economic/market story pops up.
Yesterday, I answered a reader’s question about where the market would be 6-18 months and part of that answer was that business inventories are getting low and, thus, we are entering an inventory build-up phase in the economy. I suggested that this would inspire the market to keep on track (go up slowly) for the next six months or so. One thing for sure is that “predictions” are, at best, shots in the dark, even when professional economists give them. Mine are no exception, yet even without the economic education, the letters behind my name, or the often cult-like following some economists have, I would put my chances at being right equal to any economist on the planet. The reason is simple – economics is about extrapolation based on both historical and current data. A myriad of variables can impact the economic flow at any given time, thus changing the predicted outcome. In complicated environments, economic predictions are, at best, fifty-fifty propositions. So, when I come across another side to the economic story, I am compelled to at least consider that point of view. The excerpt below is another side to the inventory build-up story.
Looking ahead to 2011, our outlook for growth factors in that the fiscal stimulus and the effects of the inventory-restocking cycle in 2010 will not only fade by next year but will become a drag on growth. House prices are projected to correct downward in 2011, and consumer spending will remain anemic as consumers continue the process of de-leveraging and repairing their balance sheets and the slack in the labor market depresses growth in wages. These factors point to anemic growth and easing inflation in 2011.
Okay, I considered it. First, the author might be right. I don’t want to think so, but, hey, fifty-fifty, remember. Second, I disagree with two points he makes – inventory buildup will fade and consumer spending will remain anemic. The latter disagreement is the reason for the first disagreement.
In fact, consumers are spending. Just look at the widening trade deficit. Who the heck is buying all those imported goods? True, it might not be the spending we want, but it is spending, so the issue is not solely how much but on what as well. Additionally, cars sales are up in October, and even though J.D. Power is slightly lowering forecasts for 2011, the projections indicate consumer spending in this area will remain. Anemic? Not quite that bad, I say. If this trend continues, inventories will continue to rise at least through the early-to-mid part of 2011. After that, well, who can really say?
Finally, when looking at another side to any story, one has to consider the source. In my case, my bias is toward optimism, and my frame-of-reference is, well, basic and simple. In the case of the author above, he is a follower of the Nouriel Roubini economic school, and there is a reason Dr. Roubini is also known as Dr. Doom.
Trade in the day; invest in your life …
