Too many dollars chasing too few goods

“Too many dollars chasing too few goods,” that was Herb Stein’s definition of inflation and it is as good as any. What we’d like to see is too many dollars chasing too few stocks in the upcoming months. There are over $4 trillion in money market funds, versus about $2.5 trillion a couple of years ago. Some of that increase is just that, an increase in the amount of money people feel is an appropriate level of liquidity they need for their well-being. But, part of that money is fugitive stock market money that is hiding-out waiting for the all-clear signal that buying stocks is okay again. There are other pots of money in other liquid alternatives to cash. Sooner or later, this will get back into the equity market or some other growth vehicle.

The flow of funds data from a couple of different monitors of investor cash flows tends to indicate that not much money has yet begun to flow back into equities compared to the volume that flowed out during the last year-and-a-half. The bounce we’ve seen in the last couple of months is not specifically beholden to a huge wave of investors getting back into the market. Mostly, it has been short-covering, some asset allocation moves by a handful of institutions and regular cash flows from investors, like 401(k) contributions.

The process of a bull market is a process of converting skeptics into believers about the outlook for the future. Today, a lot of people still believe that the future is cloudy and dangerous. They will begin to believe that the future is bright with the promise of an American dream of high growth and limitless horizons. When that is the common belief, we should run for the hills. That day is a long way off at this point.

Your pundit’s two-bits worth on healthcare in the good old US of A

Despite all the hoopla you’re going to hear in the debate about the future of healthcare in this country, one fact should be obvious to everyone. No matter how you slice it, the cost of healthcare is going to fall on the same people whether they are taxpayers or consumers. Whether we pay for healthcare via taxes or via insurance payments and out of pocket expenditures, it is the same people who will pay and the same people who will get treated.

Our radical solution is to not have any huge insurance program either from the government of from the commercial sector but have everyone take care of themselves. If you want to see the cost of medicine decline, then introduce more competition into the equation. When people spend their own hard-earned money, they will be careful how they do it. When we throw our bit into the pot of some insurance company or believe that what we are about to consume is some government largesse, we are a lot less apt to worry about the cost. If we are spending our own hundred-cent dollars, we will watch every one of them. We will shop for healthcare services. We will reward providers who are willing to compete for those dollars. We will punish those who charge too much. We will not buy unnecessary services to the degree we do now.

This will essentially put the whole industry back on the basis it was prior to World War II. That recently, everybody was their own insurance carrier. It was widely assumed in the insurance industry that only the sick would bother to buy health insurance, essentially plaguing the carriers only with people they didn’t want. Health insurance became feasible when companies began to buy it for their entire work force. That way, the carrier got the healthy young ones along with the sickly old ones. The odds of getting a broad cross-section of participants made the venture more likely to be profitable for the insurers. (This is also why health insurance for an individual is far more expensive than for a group and small groups more expensive than a large group. A group, especially a large group will have a fairly predictable range of claims, a couple of pregnancies, a couple of car accidents, some appendectomies and hysterectomies. When you insure an individual, you really can’t charge enough to protect the company. One heart attack and all your premiums go up in smoke.)

Back in the day, patients and doctors were each looking-out for the other. Patients tried to stay healthy and go to the doctor only when their own common sense and experience didn’t work. Doctors tried to provide a good service that managed the health without unnecessary complications. The picture of the kindly old family doctor making house calls wasn’t some figment of Hollywood’s imagination. Doctors had to do stuff like that to stay in business.

But, the point we are trying to make is that it will matter how we approach the question because if we choose to go with no competition, we will get less healthcare and it will cost more. That’s the way it has worked in every other nation that has tried to regulate healthcare. We don’t see why it would be any different here.

Good News

Nope, no really good news last week, we should have guessed when the week before was over-flowing with good news. But, if all the economic news begins to be fairly good news, we will just fold-up this section and lump it all together again.

Economic Numbers

The trade balance actually rose in April after several months of improvement. The difference of a bit over a billion dollars wasn’t by itself enough to sound alarm bells, but we’re used to be making progress in that arena and now that has stopped. Some of the problem is oil, as it always seems to be, but the slower pace of activity among our trading partners is also at fault. As Europe’s recession expands, demand for US goods falls. On the bright side, this month last year our trade deficit was $62 billion while this year is it $29 billion.

The fiscal deficit also rose but that wasn’t a surprise to anyone.

Retail sales rose 0.5%. That is the good news. The bad news is that almost all the increase was increased sales of gasoline due to the higher prices lately. Retail sales are 9.6% lower than they were last year at this time. Auto sales were 0.5% higher than in April, but that is like saying they were 0.5% less dead than in April.

Consumer sentiment from the University of Michigan rose again, albeit very modestly. After a couple of months with very dramatic changes in this index, the June reading was only modestly above the May version. The index rose to 69 in June from 68.7 in May. This index hit a low in November at 55.3.

Foreclosures dipped in May from April. That is mostly because several states with moratoria on foreclosures have largely expired. This is sort of pent-up demand for foreclosures on the part of lenders. As this has past, the level of foreclosures has fallen back to where it would have been had the moratoria not been in place. By the way, California has just imposed another 90-day moratorium on foreclosures that won’t work either.

Weekly Stuff

Most US stock indexes hit new year-to-date highs last week. Those new highs tended to be marginal new highs above the highs of early January, but new highs all the same. Well, they’re not all the same at all, really. New highs ought to be reached with enthusiasm, verve. These were almost after-thoughts. The excitement level was missing. It isn’t like we’ve been hitting so many new highs that it is getting old hat. No, this is tiredness. This rally seems largely played-out.

We have successfully pulled ourselves up by our bootstraps from deeply oversold and deeply undervalued to almost overbought and not so dramatically undervalued. It is notable that the one index to not high a new high last week was the Russell 2000, which managed the feat a week ago. The small caps are quite overvalued again, already.

By contrast, the only index that seems to have any momentum behind it is the NASDAQ. The NAZ is well above the highs made back in January. The chart may not look stellar, but it does seem to want to go up.

Part of the problem could be that we’re up against another earnings cycle in a few weeks. Right after window-dressing is completed, the managers of all this wealth are going to have to look reality straight in the face. Could this quarter be any worse? After two lousy economic quarters, with the recession still going on, with inventories lean and with labor down to bare bones levels, can corporate America give us any earnings at all? Stay tuned for the answer to this and many other vital questions.

Foreign stocks had their own issues last week. Most foreign markets hit their highs two weeks ago. Since then, there’s been a long series of bad news from manufacturers, from central bankers, from politicians, from financial companies. In the face of this bad news, the markets have been going sideways. We are starting to see a differentiation between the haves and the have-nots. Those markets with any momentum tend to be those that are plying the recession waters better than others. The resource-based economies seem to be losing their momentum as the prices of many raw materials stall-out.

Foreign bonds have also had a tough time with the specter of growth now casting its shadow across many bond markets. Growth isn’t here yet, but it is coming. The G-8 finance ministers got together last weekend to discuss how to reduce and then reverse the vast amounts of stimulus in the system. It will be tough for the US to go against the grain of further stimulus by our trading partners when we decide to stop the huge liquidity provision to our financial markets. Better for everyone to work together.

US bonds had some good news, which is usually bad news for everyone else. There had been some trepidation about the last huge Treasury bond issue, and whether it would be warmly received by investors. Several foreign central banks had muttered that they’d rather sit this one out, but they showed up anyhow. With the bonds sold and the world all aright again, the bond market celebrated on Thursday and Friday last week. This was good for almost every sector except GNMAs and municipals. The Ginnies because those were jerked around by brokers hedging their Treasury purchases. The munis for no good reason except that maybe the sorry state of the states is starting to catch up with them. Again, stay tuned for further news, sports and weather.

Real estate markets gave back some of their recent gains. Foreign markets continued gaining while the US slipped. Our global play has paid-off with gains on a year-to-date basis while domestic real estate is still down year-to-date.

Commodities had another mixed week. Energy prices gained with crude oil up about 5% on the week. Many other areas of commodities were down. Industrial metals, agricultural and precious metals were all on-balance weaker last week. This is somewhat surprising as the commodities have been moving as a block most days and since the commodity complex has been moving contrary to the US dollar most days. Look today and the dollar is up and most commodities are down.


We are entering a bright time of the year, literally. These days, we get about 17 hours of daylight here in Portland. Folks in Anchorage and Stockholm are getting a lot more than that. This weekend, we’ll have the longest day of the year with over 18 hours of daylight on June 21. This is a tough time to be a morning person. We get plenty of daylight even without daylight savings time. Heck, if people really wanted longer evenings to enjoy bar-be-cueing or watching a ball game, they could get up at 5:30 and have all the daylight they could handle. But, now-a-days, the kids stay up playing until 10:00 PM and then it takes a while for all the complaining and arguing to end. It is starting to interfere with our beauty sleep.

Have a really great week, and good hunting.

Karl Schroeder

Schroeder Financial Services, Inc.