Several people have asked me why the media circus du jour concerns about the U.S. debt crisis don’t seem to bother me as much as the Washington, D.C., policy wonks think it should.
First, the market doesn’t seem to care much about the latest attempt at political grandstanding. If the market were worried about the U.S. defaulting on its Treasury debt, then the price of Treasury bonds would be falling and interest rates would be going up. Instead, we see bond yields flirting with all-time lows despite rising inflationary pressures. Recent bond auctions have been well-received — there appears to be no shortage of buyers.
While the stock market swings day to day based on the latest headlines coming out of Washington, individual stocks are moving up based on strong earnings reports and continued merger and acquisition news. Cash-rich companies are buying earnings-rich competitors, driving prices higher in the process. Companies might be afraid to hire new employees, but they’re not afraid to purchase market share at current valuation levels.
In addition, the May-Investments Leading Economic Index (LEI) keeps moving higher. Retail sales continue to grow, export activity is giving the manufacturing sector a boost, oil and natural drilling activity nationally remains quite strong and banks are finding a few new borrowers, having spent most of the last three years kicking half of their old borrowers out the door. The money supply is growing at a rate of 6 percent – a key indicator for a closet monetarist like myself.
Finally, corporate profits are very strong. While profits in the banking sector are, in my opinion, illusory (banks aren’t replenishing loan loss reserves the way they ought to, which bloats earnings and bonuses at the expense of honesty and transparency), the profit rebound experienced by most large, publicly traded companies is nothing short of remarkable.
With access to public debt markets, these companies don’t face the same capital shortage as local businesses. They’ve cut labor expenses, interest expenses and inventories. The rebound in profit margins and reported earnings is very real. As a result, the economy keeps growing.
The U.S. economy is a strong and powerful force.
It took an inordinate amount of stupidity for Wall Street’s sub-prime mortgage cabal to bring the economy to its knees. Then an arrogant government attacked the engine of prosperity, creating a wave of panic and then holding back the ensuing recovery.
Soon, hopefully, the nightmare of endless deficits will be behind us and we will stop buying far more government than we need.
It will still take awhile to pay off the debts incurred during the past decade of economic insanity, but at least the direction will reverse.
As they say, when you’ve dug yourself into a deep hole and you don’t know how you’ll get out, first stop digging.