Streetwise
Lauren Rudd
Sunday, June 15,
2008
They Talk the Talk But Do Not Walk the Walk
Please do not get me wrong, I do not mean to impinge on the
veracity of the number crunchers in Washington or the Administration’s spin on
the ensuing stream of economic data. After all, it is likely no one actually
“told” the President that a gallon of gasoline would soon be $4.00. Besides,
with seasonal adjustments Washington’s number crunchers had the price of
gasoline actually declining in April.
Much of the blame for rising energy prices can be tied back to
the dollar’s imitation of a falling brick. Stepping up to the plate, Treasury
Secretary Henry Paulson said he would not rule out intervening in currency
markets, stating that the economy's strength will "shine through" the dollar's
rapidly depreciating value.
Unfortunately, the White House’s strong dollar policy has a
credibility gap as wide as the Grand Canyon. Secondly, government intervention
in the currency markets has been shown time and again to be ineffective. It is
like fighting the tape on Wall Street, it simply does not work. The markets will
overwhelm any attempt with the result being that speculators will reap windfall
profits. Just ask George Soros.
Furthermore, I am not sure what economic strength our esteemed
Treasury Secretary was referring to because the revised first quarter gross
domestic product number indicated an anemic growth rate for the economy of 0.9
percent. However, when exports and business inventories are removed and imports
are added in, economic activity actually contracted at a 0.4 percent pace,
meaning the consumer is in no mood to spend.
This is reinforced when you consider that consumer spending
during the first quarter increased a mere one percent, the slowest pace since
the last recession in 2001. Yet, the level of consumer spending will determine
how well the country survives the blows of the housing, credit and financial
debacles. Yes, retail sales were up last month by 0.8 percent (discounting
gasoline sales) but one month of a volatile number does not a turnaround make;
and unemployment claims also increased.
Consumers are not going to spend if they are unemployed and
employers cut some 49,000 jobs in May, sending the unemployment rate to 5.5
percent. There is considerable opinion that the jobs number is understating the
true number of jobs lost because of so called “adjustments,” such as the
birth/death adjustment. That adjustment is intended to account for the
employment impact of new businesses starting up and existing businesses shutting
down. The adjustment can have a dramatic effect in either direction.
A valid criticism of the birth/death number is that it does
not reflect changes in the business cycle. Do new small businesses start up
because conditions are good or because economic conditions are weak (laid off
from a corporate job, you start your own business). The birth/death adjustment
is also a two-stage process, and only the magnitude of the second-stage
adjustment is reported every month because of the time lags involved.
Yet, the really tragic part is the lack of comprehension by
the populace of even the most basic concepts relating to economics and finance.
Therefore, the public is continually whipsawed between panic and euphoria by the
media each time new economic data are released. Not surprising considering that
in a nationwide survey of high school seniors, only 48.3 percent answered
questions concerning personal finance and economics correctly. College students
managed only 62 percent. And you wonder why so many homeowners are facing
foreclosure.
OK, so I once again rained on your parade a bit. Nonetheless, I still strongly
believe that continuing to invest in stocks is your single best route to
increasing wealth, even in today’s economy. Therefore, next week we will get
back to looking at stock suggestions that take advantage of the current economic
conditions.
