Your Economy (No Politics)

[Bullwinkle]

"And Then, Alas, it's Too Late"
Market Views of Comstock Partners, Inc.
Thursday, April 14, 2005


The fragile economic recovery now appears to be softening significantly. Although the headline March retail weakness is only one number, it fits a recent pattern of widespread softness throughout a broad range of both U.S. and overseas economic statistics.

We have long believed that the economic recovery was artificially spurred by massively stimulative monetary and fiscal policy that, for a while, overcame the severe structural imbalances left over from the prior boom. In recent months, however, the stimulation has faded, and in its place we have the negative effects of sharply higher energy prices and a significant move toward a far more restrictive monetary policy. As a result the U.S. and global economies are now being exposed as a house of cards.

Although the media has just picked up on the weakness following the release of the retail data, the negative evidence is widespread. Initial unemployment claims bounced back up into the same lackluster zone where they spent fourth quarter, while March payroll employment gains were again highly disappointing. March chain store sales were already known to be disappointing despite an early Easter, thus hinting at the weak retail sales figure reported yesterday. In addition Wards is estimating that April vehicle sales will decline 1.2% and auto production 4.1%, a nine-month low. Auto parts makers are already feeling the pressure, and according to Harley Davidson, even motorcycles are not doing well. Various consumer confidence indexes are virtually unanimous in showing waning consumer confidence and small business optimism is fading as well. The weakness in these areas probably means that April manufacturing PMI, employment and industrial production will also be soft.

In addition to tighter monetary policy and gasoline prices that have risen 30% over the past three months, tax refunds have also fallen behind. Although refunds were up year over year by 8.6% in February, they slipped to plus 1.0% in March and have turned negative so far in April. The February conference board index of leading indicators has not been reported, but we already know that seven of the ten constituents are down, leading to the probability that the index will be down for the month. If this turns out to be the case, it will be virtually flat from a year ago, not a good sign for period ahead. Other indications of pending weakness are mortgage refinancing, the rig count, and statements from some trucking companies that their business has slowed. It is also significant that the percentage of upward earnings revisions reported by First Call has dropped from 58%in mid-2004 to 48% now, and the down trend has been accelerating recently.

Although the signs may be early, there is also evidence that the slowdown may be affecting commodities. The CRB Commodity index has declined since Mid-March while oil prices have also come down from the peak. In the U.S. steel demand is slowing, prices are dropping and manufacturers have announced cutbacks in production.

The global economy, too, shows significant indications of softening. The latest OCED leading indicator was down with the six-month average breaking to the downside. Industrial production has been softening in Germany, the UK, France, and even India. Japanese leading indicators have similarly been weakening. ASMZ Holdings, the leading chip producer in the EEC has seen a drop in orders. Otmar Issing, Chief Economist of the EC Central Bank, recently stated that oil prices pose a real danger to all of the EU economies.

Given the severe current global economic and financial imbalances, the impending slowdown of the global economy has ominous overtones. You don’t have to take our word for it. Here are some excerpts from Paul Volcker’s recent article called “An Economy on Thin Ice”:

“…under the placid surface there are disturbing trends; huge imbalances, disequilibria, risks—call them what you will. Altogether the circumstances seem to me to be as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it… A wise man once said that ‘what can be left to later usually is—and then, alas, it’s too late’.”

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