Monday, November 1, 2010

Sunday Night Economic Assessment

The US Industrial economy pushed ahead again last week (if pipeline scheduling is correct), while consumers retreated.

The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) rose for its fifth week-in-a-row, rising to 118.7 (from last weeks 118.3). In its dailies (See the "Part 7" posts on the InvestorVillage site) the index started the week very strong and tailed off just a bit as the week progressed.

The paperboard-based Consumption conversely broke its string of two up-weeks in a row, easing to 142.5 (from last weeks 143.8). In its dailies the measure started slightly soft and weakened sharply by weeks end.

The Inventories measure (the cumulative weekly difference between the Production Index and the Consumption Index) is continuing its pattern steep decline.

For the time being, the US industrial economy looks to remain strongly supported by an excess of consumption over production, a recent surge in consumption, and the ever-declining Inventories measure. Unfortunately, the recovery retains its jobless look (given the large comparative weakness of the production index to the consumption index, and the implied inventory declines... and the negative sentiment all of that implies within the business and investment communities).

With the US midterm elections a mere day away, and the assumption (given the press and polls) of a Republican congressional landslide, the danger is on the side of a decline in consumption as consumers react to changes from a strongly pro-consumption anti-business government, to one more divided (and possibly gridlocked). The burden thus falls to the Federal Reserve to continue to stimulate, giving politicians a chance to regain sanity before we hit the inevitable wall that foolishness places before us.

Perhaps the best chance for the US economy is the defibrillator method... vote for anything that talks Republican, looks Republican, or smells Republican... in the hopes that it both re-stimulates investment and hiring by rekindling investment and expansion (and rehiring), while reminding Democrats that while consumers are important, so is the business community that serves the consumer.

Though when the vote is finished and done, rhetoric from both Democrats and Republicans will either make or break the fundamental possibilities of working together. If they tear each-others constituencies apart with their tongues, they will tear the economy apart as well.

But even then most of the burden stays with the Federal Reserve, on reversing the foolishness of the last 30 years. Eventually, the Feds are going to have to both raise interest rates and quantitatively ease (all at the same time), to bring down debt and reverse a money supply that is in reality negative to the tune of many trillions of dollars (except from the vantage point of foreign interests)... and restore sanity to dollar-denominated savings.

You can see what's coming in the gas flows... industrial production is on a tear throughout, likely running towards capacity even as business is frozen in its steps and employment suffers.

You can see what's coming in precious metals, as silver (the "poor-mans gold" of the metals markets) is surging on fears that the Federal Reserve does not know how to extract itself from the hole it dug itself into (lowering interest rates to zero, to preserve a run-up in debt, to replace monetary outflows generated by huge foreign trade deficits).

We are desperately out of balance. Changes have to be made.

Perhaps it will be like 1992, when Republicans swept Congress after President Clinton's first two years. The Republicans forced fiscal restraint, we eventually got a balanced budget, and the economy (and psychology) recovered.

Well, at least one can dream...