So, the Fed is looking for a soft recovery.
The central bank basically sees no inflation at all on the horizon.
They’re showing no imminent sign of ending their ultra-easy money for an extended period any time soon.
But my message to them and to investors is this: Are you sure about this low-growth recovery?
Commodity charts are showing a V-shaped rebound. So are the latest ISM reports. Retail chain sales may actually be up 10 percent in March according to the latest reports. 10 percent. And don't forget growing household employment, up 1.1 million jobs in the first quarter according to the March report last Friday. And by the way, even non-farm corporate payrolls in March rose about 220,000 including prior upward revisions.
We know that money remains very loose with a negative real interest rate and a bloated Fed balance sheet. We also know there’s a global boom going on among the emerging countries. So the key issue is how long will this boom last?
Here’s my concern: we could get the big boom between now and the end of the year. On the other hand, higher tax rates next year and beyond may very well stifle this boom.
But between now and year end, I think the Fed may be missing an emerging story that suggests much stronger growth, with a big dose of commodity inflation thrown in. That is the risk right now.
You see, we are not operating a supply-side, free market model. What I wish for is sound money and lower tax rates. Instead, what we're getting is easier money and higher tax rates. So my fear is that we’re setting up a temporary boom which may be good for stocks and jobs in the short run. But all of this may backfire at some point, perhaps next year. We are on the verge of much higher tax rates and potentially higher interest rates. That would confound the whole scenario.
But for now, let’s take a look at this budding market boom story. The first thing I want to focus on is the boom in commodities.
This chart of raw industrial materials shows all the stuff that’s been booming—iron ore, steel, you name it. It doesn’t even include the rise in oil or gold. As you can see, there is clearly V-shape going on here. The Fed isn’t really talking about this V-shaped recovery. I wish they would, because this commodity strength is a powerful driver.
The ISM manufacturing prices paid is a proxy for commodity prices. All of the raw materials go into this chart. Look at that rebound. Once again, we have something resembling a V, from the prior decline. In the Alan Greenspan heyday of the commodity price rule, which included gold and the exchange value of the dollar, Greenspan used to look at these kinds of commodity indicators. I don’t know if the Bernanke Fed is paying any attention to this. But the stock market is looking at this. So is the commodities market.
The whole ISM manufacturing index has had a tremendous run-up. To some extent, this may be the strongest evidence yet. In fact, with higher commodity prices running virtually across-the-board, there is every incentive in the world for a rapid inventory rebuilding. Because inventory prices are going up as commodity prices go up. This could drive the economy to 5-6 percent annual growth between now and the end of the year.
A lot of this is being driven by very easy money from the Federal Reserve. Unlike other central banks, most notably Australia, the Fed remains ultra-easy.
This is the real Fed funds rate adjusted for the year-to-year changes in inflation. You can see the peak of around 4 percent back in 2007. Now we’re below the zero line. Money has been easy.
This is what we witnessed between 2002-2005.
So, will history repeat itself?
My point in all this is that while the Fed is talking about a very moderate, indeed a slow based recovery, what we are seeing from increasing signs in the ISMs, in the commodity market, and even the jobs market is a much different economic story. Even retail sales from the shopping centers are suggesting a little bit of a boomlet. I’m just wondering whether this boomlet may eventually turn into a boom?
This is not forever. We are facing higher taxes and probably higher interest rates next year. But for now, we’ve got several quarters of booming economic growth.
More on CNBC.com:
- Cramer’s Top 10 Emerging-Market Stocks
- Slideshow: Which Oil Producers Are Making Money?
- Slideshow: How Your Tax Dollars Are Spent
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