|
US stocks rallied Friday on news that economic
growth was sharply lower during the second quarter. The decline
can be attributed to lower consumer spending. Consumer spending
makes up more than 70% of the US’s GDP, so when consumer
spending falls it has a really big impact on the overall economy.
It’s no surprise that economic growth
is slowing down. It would have been surprising if it didn’t.
The US real estate market is busy melting down and as I have
said many times in the past, the real estate bubble kept the
US economy afloat during the past five years.
What is surprising is that stocks are rallying
upon the release of weak economic news. The reasoning is that
slower economic growth will cause the Federal Reserve to stop
raising interest rates and since lower interest rates are
generally good for stocks, any news that could mean that interest
rates will stop rising must therefore be good for stocks.
They say the stock exchange does not ring a
bell at the top of the market. Well, I can hear all sorts
of bells ringing: when investors buy stocks because they believe
the economy is slowing down it is a sign that we have reached
the top of the market.
The news that was widely ignored Friday was
that while economic growth slowed in the second quarter, inflation
(as measured by price increases) picked up. The government’s
price index for personal consumption rose to 4.1% after rising
2% in the first quarter. I thought Ben Bernanke wanted to
fight inflation -- if inflation is increasing is he really
going to stop raising interest rates?
It seems the economy is slowing while prices
are rising and that means the Fed is caught between a rock
and a hard place.
Regardless, I don’t see how a slowdown
in the economy can be good for stocks, or for base metals
for that matter. But when it comes to base metals I have heard
numerous people say that the escalating war will be good for
base metals demand. The theory is that the US government will
build war machines and that its demand for metals will offset
any decline in demand from slower economic growth. I think
that is nonsense.
The Third World War is unlike the First or Second
World Wars in terms of war machines, and defense spending
will not create much demand for metals. During WWII the US
had 95,901 tanks, 220,689 fighter planes and 1,446 naval vessels
that, in total, weighed about 75 billion pounds. Today the
US has 8,290 tanks (8.6% of WWII) and 6,501 planes (2.9%).
What they have a lot of, which they did not have during WWII,
are missiles -- the US has about 67,534 missiles. But missiles
do not weigh that much nor do they require as much metal as
tanks or planes. The total weight of current war machines
we could identify, including missiles, comes to 9.9 billion
pounds. That is only 13% of the metal used in WWII. Today
the military spends a lot more money on scientists and engineers
and far less money on brute force. The United States will
not build a whole lot more tanks, ships and planes since it
is more cost effective to build missiles and bombs and since
these require insignificantly less metal than the tens of
thousands of tanks and hundreds of thousands of airplanes
that were built during WWII, I do not think we will see any
material increase in metal demand from the current military
buildup.
On a different note, I will be speaking
at the Resource Investors’ Forum in St. John’s,
Newfoundland in September but unfortunately I will not be
able to make to the Las Vegas conference. For more information
about upcoming conferences where I will be speaking, please
visit http://www.paulvaneeden.com/conferences.php.
Paul van Eeden
If you enjoy reading these commentaries I suggest you go to my website at http://www.paulvaneeden.com/commentary.php and register to get them by email. Rest assured that I do not sell or rent any of my subscribers’ email addresses.
Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477.
******
This letter/article is not intended to meet your specific
individual investment needs and it is not tailored to your
personal financial situation. Nothing contained herein constitutes,
is intended, or deemed to be -- either implied or otherwise
-- investment advice. This letter/article reflects the personal
views and opinions of Paul van Eeden and that is all it purports
to be. While the information herein is believed to be accurate
and reliable it is not guaranteed or implied to be so. The
information herein may not be complete or correct; it is provided
in good faith but without any legal responsibility or obligation
to provide future updates. Neither Paul van Eeden, nor anyone
else, accepts any responsibility, or assumes any liability,
whatsoever, for any direct, indirect or consequential loss
arising from the use of the information in this letter/article.
The information contained herein is subject to change without
notice, may become outdated and will not be updated. Paul
van Eeden, entities that he controls, family, friends, employees,
associates, and others may have positions in securities mentioned,
or discussed, in this letter/article. While every attempt
is made to avoid conflicts of interest, such conflicts do
arise from time to time. Whenever a conflict of interest arises,
every attempt is made to resolve such conflict in the best
possible interest of all parties, but you should not assume
that your interest would be placed ahead of anyone else’s
interest in the event of a conflict of interest. No part of
this letter/article may be reproduced, copied, emailed, faxed,
or distributed (in any form) without the express written permission
of Paul van Eeden. Everything contained herein is subject
to international copyright protection.
|
