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“A Tale of Two Economies”

BY CARTHER E. ANTHONY, CFA

 

On Monday, Andy Kessler wrote an op/ed in the Wall Street Journal entitled “A Tale of Two Economies.”

It describes about as well as anything I’ve read the current situation of the U. S. economy today.

In May, according to the Bureau of Labor Statistics, employment increased by 339,000.

The number was widely ballyhooed and the stock market responded with a celebration. However, in the same report it was reported that unemployment increased 440,000.

Silence, no ballyhooing, the media must be controlled by the democratic administration!

Everyone knows tech layoffs are continuing but there are shortages all-across the line including cashiers, floor salespeople, clerks, cooks, mechanics, all wage earners.

On the positive side, the S & P 500 is up 12% this year but if you remove seven tech stocks from the index, the S & P is down this year.

We’ve seen this act before. The seven bubble stocks crater the rest of the market when the bubble bursts.

How many Congressmen can you get in the clown car at the circus? The Democrats and the Republicans spar for months about the debt ceiling.

Democrats must be born borrowing against their lunch sacks in grade school. Recently, Republicans haven’t been far behind.

Democrats have never seen a project they didn’t want to fund (more votes). Republicans pay lip-service to holding spending down (again more votes).

The debt-ceiling wrangling was little more than a clown show trying to convince the public one party is stronger than the other.

There had to be a resolution or the U. S. would have lost its credibility as a safe investment haven.

As a compromise was reached, there was a photo-op of the President and the Speaker of the House in the Oval Office where only the most important decisions are made.

Proving it to be even more of a show was Madam Vice President sitting in on the meeting. Tie the debt-ceiling negotiations to Congressional salaries and watch this sparring stop.

However, when the accord was reached, the stock market breathed a sigh of relief and posted a small artificial rally.

What’s next? The Treasury has to raise $1 trillion through bond auctions in the next few months.

Who is going to buy the bonds?  Not the Fed which is in a tightening phase, not the banks which are losing deposits to higher-yielding MM funds, are underwater in their existing bond holdings and are being handed the keys to real estate holding on which they have loaned.

Commercial real estate loan defaults are the highest since 2008-09. City office occupancy is 50%.

What is the outlook?  Inflation has crimped purchasing power but it has lessened to 50% of its rate 12 months ago.

Higher interest rates and fewer supply chain issues have helped.  As a result of the Fed’s raising rates, bond yields have risen and the stock market has been stagnant for two years.

Fed Chairman Powell said this week that he is not finished raising rates.  Depending upon the writer, we are entering a recession, we are already in a recession or we will have a recession by yearend.  The question is how severe?

On the other hand, out of a stagnant period arise great opportunities.  On the broad horizon lies Artificial Intelligence (AI).

In some respects, it is already here but it is expected to be the next big bang!

Nvidia, the largest specialty chip maker has been the darling of the AI investors.  It is up 186% this year, 25% in May alone.

It is trading at a PE of 123 times, the S & P 500 PE is 25, considered high by some.  Of such, bubbles are surely made.

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