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Eurodollars, Treasury Bonds, the S&P 500 Index, and the U.S. Dollar index
Eurodollars
Short-term Chart Comment...
The September eurodollars jumped higher recently, boosted by economic fears and a panic for short-term cash. The latest spike on September 16th, however, did not surpass the old high set on St. Patrick's day and that may be an early sign of weakness. Even so, prices remain above the 125-day moving average for now (updated 10-3).
Fundamental Stats -
The Fed is in a tough balancing act with concerns about an economic slowdown on one hand and rising inflation on the other. The recent break in commodity prices and fact that other major economies like Europe and the U.K. are slowing dramatically are good news for the U.S. (at least temporarily) and will help keep rates lower than they would otherwise need to be. On April 30, 2008, the Fed cut the federal funds rate to 2.00%, the fourth reduction this year.
U.S. nominal GDP was up 4.1% in the second quarter from a year ago. In 2007, nominal GDP was up 4.7%. The consumer price index in August was up 5.4% from a year ago. The unemployment rate remained at 6.1% in September, the highest since 2003. The Congressional Budget Office (CBO) said on February 15, 2008 that they expect real GDP to grow 1.9% in 2008 and 2.3% in 2009. They also expected three-month T-bill rates to average 2.1% in 2008 and 2.4% in 2009.
Treasury bonds
Short-term Chart Comment...
The Treasury bond chart is similar to the eurodollar chart, but choppier. On September 5th, the December T-bonds broke to new contract highs as investors came looking for a safe haven from the financial panic. Prices have had a wild ride since then and it is not over yet. So far, prices remain above the 125-day moving average (updated 10-3).
Standard and Poor's 500 index
Short-term Chart Comment...
On June 6th, the December contract closed at its lowest level in seven weeks, tipping off the resulting drop. Prices have been weak since then, hurt by the U.S. financial panic, and I see no reason to buy yet (updated 10-3).
Fundamental Stats -
Seven years after 9/11, the financial pillars of the American economy are caught in a downward spiral under the weight of the worst housing contraction/mortgage crisis since the Great Depression. What, if anything, will break the cycle? The takeover of Fannie Mae and Freddie Mac is a start, but there may be more to come. In the meantime, energy prices have backed off their highs, but the world is still in desperate need of new sources of energy. On September 23, 2008, Standard & Poors said that they expect the operating earnings for the S&P 500 companies to be down 6.0% in 2008 and up 34.2% in 2009 (the 2009 estimate sounds too rosy).
The Heritage Foundation's rating of economic freedom for the U.S. increased to 9th in 2007, hurt by the increased burden of government. In 2008, the U.S. rating improved to 5th, but that sounds suspiciously optimistic. The government spends 37% of the nation's income which is high when you consider that the government funds only 25% of the country's healthcare costs (In comparison, Australia's government spends 35% of the nation's income and funds 66% of the healthcare costs). The top personal and corporate income tax rates are 35% and total tax revenue amounts to 27% of the nation's income.
U.S. Dollar index
Short-term Chart Comment...
On August 7th, the September U.S. dollar index posted its highest close in five months - an impressive sign of strength. Prices then shot up and might have gone too far. Fundamentally, it is hard to get bullish on the dollar given all the problems that the economy is facing, but so far, prices are holding up (updated 10-3).
The Markets
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Editorial Comment
In the big picture, war and peace are the main drivers behind investor preferences for commodities or stocks. In the 20th century, most commodity charts show three big upmoves that correspond to World War I, World War II, and the 1970's (a combination of the Vietnam war and a big surge in the size of the federal government). On the other hand, the stock market had its best performances in the gaps between these three events and that is understandable. War hampers production and takes resources out of the private sector. Peace does just the opposite.
U.S. stocks did very well in the decades after Vietnam and Watergate as the public lost confidence in the government and became resistant to any further military ventures. Defense spending increased for weaponry, but Congress was not eager to commit troops. This period of limited conflict and the eventual dissolution of the communist threat allowed the growth rate of spending by the federal government to decline significantly. U.S. federal spending tripled in the 1970's, doubled in the 1980's, and increased only 43% in the 1990's. That trend of shrinking growth in the public sector allowed more capital to flow to the private sector and gave the credit and equity markets a big boost.
Since 9-11-2001, the trend of shrinking public growth has been interrupted and, according to Joseph Stiglitz, the decision to go to war has cost the U.S. $3 trillion so far (and counting). Federal spending is on track to increase 76% in the first decade of the 21st century and may actually double by the time we reach 2010. In addition, the global trend of nationalizing the oil industry pinched off world oil production and put a huge, war-like burden on all forms of production. Those two factors together have swung the pendulum in favor of commodities, for now. If there are any positives here, it may be that the current unpopularity of the war in Iraq and high energy prices will eventually swing the pendulum back in favor of less future conflicts and lead to the development of cleaner alternative fuels. At this point however, the aggressive growth in government spending and high energy prices are burdensome and the economy is showing the effects.
Revised July 10, 2008.
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