Economic Growth Ignores Partisan Gridlock

Several people have asked me why the U.S. media circus du jour, concerns about the U.S. debt crisis, don’t seem to be bothering me as much as the Washington D.C. policy wonks think it should.

First, the market doesn’t seem to care much about the latest attempt at political grandstanding. If the market were worried about the U.S. defaulting on its Treasury debt, then the price of Treasury Bonds would be falling (i.e. interest rates would be going up). Instead, we see bond yields flirting with all-time lows despite rising inflationary pressures. The recent bond auctions have been well received – there appears to be no shortage of buyers. I don't know who is buying, and I can't imagine why, but the fact of the matter is that Treasury Bonds aren't suffering as a result of the bad p.r. that we've been generating. And while the stock market will swing day-to-day based on the latest headlines coming out of Washington, individual stocks are moving up based on strong earnings reports and continued merger and acquisition news. Cash rich companies are buying earnings rich competitors, driving prices higher in the process. Companies may be afraid to hire new employees, but they’re not afraid to purchase market share at current valuation levels.

 Also, May-Investments Leading Economic Indicator keeps moving higher.

• Retail sales continue to grow,
• Export activity is giving the manufacturing sector a boost,
• Drilling activity (nationally) remains quite strong and
• Banks are finding a few new borrowers.

Having spent most of the last three years kicking half of their old borrowers out the door, now banks are so overwhelmed by the generousity of U.S. taxpayers that a small amount of the bounty is actually finding its way out into the business community.

The money supply is growing at a 6 percent rate of growth – a key indicator for a closet monetarist like myself.  Finally, corporate profits are very strong. While the profits in the banking sector are, in my opinion, illusory (banks aren’t replenishing loan loss reserves the way they ought to, which bloats earnings and bonuses at the expense of honesty and transparency), the profit rebound experienced by most large publicly traded companies is nothing short of remarkable. With access to the public debt markets, these companies don’t face the same capital shortage as local businesses. They’ve cut labor expenses, interest expenses, and inventories. The rebound in profit margins and reported earnings is very real.

 As a result, the economy keeps growing.

The U.S. economy is a strong and powerful force. It took an inordinate amount of stupidity for Wall Street’s sub-prime mortgage cabal to bring the economy to its knees. Then an arrogant government attacked the engine of prosperity, creating a wave of panic and that is restraining the ensuing recovery. Soon, hopefully, the nightmare of endless deficits will be behind us and we will stop buying far more government than we need. It will still take awhile to pay off the debts incurred during the past decade of economic insanity, but at least the direction will reverse.

As they say, when you’ve dug yourself into a deep hole and you don’t know how you’ll get out – first, stop digging.
 
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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