As we speak, a confluence of factors runs towards an inevitable result. Consider that meanderings of the market during the past week were less important than the data which caused them. And the data was not great.
The most significant of these is the velocity of price increases across the board, from commodities and tangible assets to tuition, pharmaceuticals, and healthcare. We knew that we were in a period of pricing power, but the impact of its cumulative effect hit like a freight train last week. Wholesale prices jumped more than 7 percent in the past twelve months, and that was the least amount of gain amongst a basket of staples reported. Wheat, gasoline, copper and sugar rose at year-over-year increases nearly double the core rate.
Indeed, the confluence is one of those trends about which I wrote last week. Once it hits, it’s difficult to turn around.
Economics is global, not local.
Mini-rallies in stocks worldwide are symptomatic of a hope that we are near the bottom. In fact, all trends do end at some point, so one might assume a bearish stance during a bull market, or a bullish stance during a bear. But the truth is that you never want to commit your money, your hopes or your expectations to stemming the tide unless indications warrant a change in direction. That’s not the case presently.
Global stewards of monetary and fiscal policy seem to believe that one can spend out of decline. Lowering interest rates to “motivate” spending is misguided, in my judgment. As corporate (and consumer) earnings decline, reducing the cost of money only encourages hoarding of money, not spending, especially when there is little to spend. Psychological uncertainty and lack of vision do more to disrupt the flow of capital than do ordinary cycles of economic patterns.
What perpetuates the tone and behavior of the market’s current decline is the failure of the response itself. Investors have tremendous resiliency and likely would be inclined to invest in science, technology, infrastructure, agriculture and energy if properly inspired or incentivized.
Compared to last year’s lackluster performance, this year could be worse. The impact of price creep means that wars might be fought over natural resources, or that economic development might be held in abeyance for matters of national security.
Lower interest rates are a threat to capital gains expansion by encouraging an unsustainable and unrealistic perspective about the more onerous threat of inflation and price pressure.
Double-edged sword.
In previous decades, politicians spoke about globalism as a noble construct. Today it seems as if regions have become pockets of opportunity or isolation based upon their indigenous share of natural resources or economic potential. Such characterization creates consumer panic and pits region against region. If you want to see commerce come to a screeching halt, start playing the game of “who’s ahead and who has the most chips”. Isolating the money supply issue to ego or jingoism is a recipe for short-term planning and global disequilibrium.
Caught as we are in this dilemma, the best result is to hope for less intervention in the cyclical impact of traditional economics and more humanism towards those most adversely affected by the cycle, itself. Medicine needs to reach the infirm, infrastructure is required to deliver the goods, resources need to touch the most vulnerable.
Both the objective and subjective conclusion of my research is a vision of global commerce that levels the playing field and opportunity to compete. To eradicate the devastation of hopelessness, a clearer perspective must be constituted, and an ideology of moral capitalism should be transacted by the public and private domain. Whomever demonstrates the qualities of building for the future will attract the most capital and the most political goodwill.
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