The U.S. stock market has been acting like a yoyo. Up and down, up and down. The reason is understandable. Higher interest rates orchestrated by the Fed are perceived to justify lower stock prices, at least in the short run. The Fed Chairman, Janet Yellen, has signaled rather opaquely that interest rates are eventually going up, but she has been deliberately vague about when that might happen.
Wall Street traders are generally believing rates will go up within six months, but the statistics are so inconsistent it is leaving the markets terribly confused.
Unemployment seems to be plummeting, it’s currently at 5.5%, but wage growth is still sluggish. The income gap between rich and poor is growing. Huge numbers of people are incarcerated in America and when they get out of jail it is very tough for them to get jobs.
A large number of people have chosen not to work, many because their skills won’t earn them enough to live better than they are living on the various government subsidies available. So unemployment statistics are not a slam dunk for the Fed to raise rates to combat its bogeyman, INFLATION.
The markets keep asking – where’s inflation? It’s harder to find than Waldo.
Oil prices have been cut by more than half over a few months. The dollar has risen 30% versus the euro and the yen. Europe and Japan have cut their interest rates to almost zero, and some countries like Germany and Switzerland, below zero. So money leaps out of Europe and Japan to America with its strong currency and low rates but still better than zero interest rates.
The oversupply of almost every commodity except brains is pushing prices in the United States down, not up. Toyota has a lot of room to haggle on a Camry with the yen at 120 to the dollar and costs figured at 90 yen to the dollar. China is so glutted with steel it is stabbing Nucor and every other American mill in the gut by lowering prices. I know the specialty mills are holding up prices of bar-stock at the moment, but one wonders for how long. Corn is cheap, gasoline and natural gas are up from the lows, but $2 gas appears to be coming soon. Many of the jobs produced over the last five years have been from the presently waning shale boom.
So the Fed looks around and wonders why it should push up rates when American consumers are socking away money and Millennials are paying off college debt and not buying big houses in the burbs for kids they don’t have.
And the stock market yoyos. I get it.
An equally intriguing issue for folks in the machining world is, how do we play this new world of no inflation that may become disinflation and heaven forbid, DEFLATION.
Gary Shilling, the brilliant American economist, has correctly predicted the economy for decades. He thinks oil could go to $10 a barrel, at least for a little while, because of huge overproduction and lack of storage facilities.
What if everybody’s house lost 25% of its value, mortgages dropped to 2% for 15 years, and car prices dropped by 30%? It could happen.
I think there is a persuasive argument to be made today that we should be renters of capital equipment and real estate. This possibility scares me as a buyer and seller of capital equipment and a home owner, but I see the logic of being a renter today, if long term assets may deflate in value.
I know young people seem to prefer renting over buying these days, and not just because they cannot raise a down payment. It may be an important trend.
Renting capital equipment still seems to be the exception in my world, but if you are looking at a 3D printer, where technology is bringing prices down rapidly, it seems to make perfect sense to rent.
If I step back, the tug of war in the equities and bond market is fascinating, but for people making big bets on machinery and property every day, it is scary.
Which side are you on? Brian Beaulieu, who I wrote about 10 days ago, is confident that the big spending by Governments will keep the economy buoyant for two more decades.
Gary Shilling, also a great predictor, sees a deflationary trend, though he’s not buying a generator and waiting for the apocalypse. Is it a time to rent or a time to buy? To everything, there is a season.
Question: Is it better to rent or buy today?