Fri, 06.15.12 7:06pm EST
Van Eck Hotline on Money and the Economy
For: Friday, June 15, 2012
(800) 219-1333. VetHotline@aol.com.
The world has been waiting for the June 17 election in Greece to help set the tone in Europe and we are finally close to that date. The landscape in Europe could look quite different next week. Investors have been trying to position themselves to gain an edge on the situation. Despite many declarations from each side about imminent victory (the pro-bailout crowd and the anti-bailout politicians), no one really knows how it is going to develop. During the past year, when the media insisted that the euro was about to implode, I said that the basic human instinct for survival would probably overwhelm the other fears and help the region to save the currency and the EU – at least for a while. The agreements reached with Greece earlier this year vindicated my thoughts on the subject. However, the austerity measures have clamped down hard on Greece. The nation’s economy is in terrible shape and the easy promises of the left parties (especially SYRIZA) are tempting Greek voters to look for ways around their problems – instead of taking them on and addressing the root issues. It is going to be interesting to see if the voters choose destruction and chaos over the bailout road.
The stock market rallied yesterday on news that many of the world’s major central banks are ready to provide ample liquidity next week if the Greek election goes the way of the anti-bailout crowd. With all of the help that the Federal Reserve, the European Central Bank and others have provided during the past few years, some people have become addicted to liquidity measures. Every time there is even a slight sign of weakness in the U.S. economy, the media and many on Wall Street jump up and claim that the Fed is about to unleash a new wave of easing. With the Federal Open Market Committee set to meet next week, the calls for a third round of quantitative easing have been getting louder. For my part, I have not been expecting the Fed to make such an announcement anytime soon. That’s because I have not viewed the state of the economy to be as weak as some people have been claiming. A number of financial markets have been experiencing wild swings in recent weeks as investors and speculators try to get a handle on the prospects for QE III. The Fed stands ready to provide more help if deemed necessary. However, it is clear that Ben Bernanke shares my opinion that the U.S. economy is in better shape than commonly reported in the media.
Interest rates remain near historic lows, housing has shown clear signs of hitting a long-term bottom, private debt loads have been reduced and corporations have a ton of cash set aside. The people that spend their days predicting an imminent return to the 2008 financial crisis don’t seem too interested in those facts. However, you will see such realities play out during the time ahead. Even if Europe takes a turn for the worse next week, the economy is not going to head into the kind of credit crunch and downturn that created so much damage during 2008 and 2009. Quite simply, much of the excess leverage in the system has already been burned away. Despite the many calls for a huge second leg down in home prices, most markets in America have seen home values remain within a relatively narrow range. That has not stopped the bears from continually declaring victory on such fronts though – with every wiggle lower in home prices and home sales often called a new crash. I prefer to take a broader view of the world and the economy. The so-called fiscal cliff that looms ahead in 2013 is certainly going to present some challenges to America. Some of the recent economic data have been suggesting that a number of businesses and consumers are already planning for a recession next year. The economy is certainly not in the midst of a super boom, but at least it is in far better shape than the bears promised us would be the case during the past one to three years. Will those skeptics be proven wrong for the fourth year in a row?
A number of economic reports have come in weaker than expected during the past month or two. Employment drives so many other things and therefore it is getting the most attention. The last two nonfarm payrolls reports have been a disappointment. I discussed those reports last week and suggested that seasonal adjustments might have been throwing the data off a bit. However, the weekly jobless claims have also been showing signs of strain (up five out of the past six weeks). The latest report (released yesterday) showed jobless claims at 386,000. While that is still down significantly from the year ago total of 418,000 (and 474,000 two years ago), it is a troubling sign for employment and the broad economy. The usual suspects have already hit the panic button – based on such data. However, it is still far too early for such talk. Some of the big Wall Street firms recently lowered their second quarter GDP predictions – with Goldman Sachs now looking for an annual growth rate 1.6%, Morgan Stanley 1.8% and Credit Suisse 2.2%. That is a relatively wide range, but none of those numbers would represent a body blow to businesses, consumers and financial markets.
The May reading on retail sales was released earlier this week and the report played right into the hands of the people that are talking about the economy falling back into a recession before the end of 2012. There was a major flaw in the report. I believe that just about all of the analysts and commentators that played up the weakness as proof of an economic collapse know about that flaw – but they chose to downplay it or ignore it altogether. May retail sales posted a net decline of 0.2%. That made for some scary headlines. However, all of the decline in retail sales was the direct result of a collapse in the cost of gasoline. Gas prices fell by 6.8% last month. That was the steepest monthly decline in three years. Total retail sales fell by $691 million in May – compared to April. However, the nation also spent an astounding $998 million less on gasoline than was the case the previous month. As you can see, retail sales likely would have posted a net gain in May if gas prices had just remained steady. However, that has not stopped an army of skeptics from declaring the recent drop in retail sales to be a disaster.
I recently took some time to break down the role of gas prices in the economy and showed you how even a modest decline in such costs could help to bolster the economic recovery. With speculators recently abandoning the oil market – and the price falling by about 20 percent from its recent peak – gas prices have come down dramatically. They are likely to fall even more during the time ahead. In fact, with the current average gas price in America at $3.54 per gallon, it is down by $0.09(2.5%) so far this month. If that trend holds up during the time ahead, the June retail sales report might be skewed to the downside as well. You probably heard that not only did the May retail sales report show a net decline of 0.2% – but the April report was revised from an originally reported gain of 0.1% to a decline of 0.2%. Looking at the details of both of those reports, it is clear that the drop in gas prices have been responsible for the weakness. From March to May, sales at gas stations declined by a whopping $1.644 billion. That was more than the reported decline in headline retail sales over the course of those two full months.
I don’t think that someone should need a degree in economics to understand that the drop in gas prices has temporarily depressed total retail sales. Yet I have seen countless articles and commentaries this week that claimed that the Fed must act immediately – because consumer spending is turning lower. Earlier this year, higher gas prices were seen as a dagger at the throat of the economy (remember all of the silly talk about how gas would be at $5.00 by the Fourth of July?). Now that the predicted explosion in gas costs has failed to materialize, many of the same people that were telling you to worry about higher prices are now using the lower costs to back up their case for weaker consumer demand. Well, the $1.6 billion that America saved on gasoline during the past few months is still out there – ready to be put to work. Some of the savings will no doubt be used to reduce debt – continuing a recent trend. However, you can also expect to see plenty of that cash find its way into the economy via spending. In the near-term, there should be plenty of volatility in the economic numbers. There will be something for each side of the debate to cheer. Again though, I am focused on the broader trends.
The November election will play a major role in setting tax and spending policies next year. A few weeks back, former President Bill Clinton raised some eyebrows when he urged the Congress and White House to take immediate action to help bolster the economy (and business confidence) by extending all of the Bush/Obama tax cuts. While he was quickly forced to retrace his steps on that subject, his original statement holds the most credibility. It is obvious why Bill Clinton has been taking shots at both sides. The Clintons are no doubt still upset at the way that Hillary was pushed aside back in 2008 by a candidate that had only a handful of years of experience in the U.S. Senate. Bill Clinton is a lot of things, but he proved himself long ago to be a master politician. You do not reach that level in politics without knowing about people. He knows that the American people are feeling nervous – indeed that some of them have never stopped feeling nervous after the recession ended three years ago this month. The Congress and White House would do this nation a service by extending most or all of the tax cuts. But, the subject has become a political football and the November election is the goal line. While the world is focused on Greece these days, there is another election set for Sunday – in France. More likely than not, the left in that nation is set to achieve its most power in the recent history of the nation. That would mean less austerity for Europe and more growth measures – a story well worth watching. More next week.
Next hotline will be updated no later than 8:00 P.M. Eastern on Friday, June 22, 2012