I have just returned from three weeks in the US and as dangerous as it is to draw on anecdote rather than hard data, sometimes you can see the big picture a lot more clearly from first hand observation. And as I only spent time in the northeast, drawing conclusions from one region and extrapolating that to what is probably the most diverse nation on the planet is fraught with danger. With these important disclaimers, here is my two bobs’ worth.
Firstly, the unemployment rate of just 5.1% is real. I couldn’t believe the number of “now hiring” boards I saw, or employers saying that they couldn’t find staff. From Walmart (boasting that starting wages were $9.00 an hour – $1.75 above the regulated minimum), Dunkin Donuts, McDonald’s to any of the hotels I stayed in. And not just service industries – these boards were outside a number of factories I passed.
US Unemployment Rate – 10 years to Sept 15
[1]Source: Trading Economics
Normally, a falling unemployment rate would be accompanied by an increase in the participation rate – the number of people who are in employment or who are available to be employed. However, that hasn’t happened – and the participation rate at 62.4% is now at record lows. Maybe this can be explained by the data that says that there is almost negligible wages growth, and again the observation that there still seems to be a lot of people sleeping rough or with their bowl out at traffic lights.
Petrol is so, so cheap
Can you remember the last time you filled up the tank and paid less than $20? Ok, so these are US dollars and in Australian dollars that is closer to $28.50, and I was driving a 5-door automatic Corolla and in the US, regular petrol is 87 octane. And my price shock is also amplified no doubt because in Australia, I drive one of the most fuel inefficient cars – a rotary engine Mazda RX8 that runs on 98 octane and with a full tank that costs around $75, only takes me 350km.
However, what a difference! $28.50 for 800km in the Corolla, vs $75.00 for 350km in the Mazda!
The point about this anecdote is that the fall in oil prices is having a real impact on the consumer and is a material price deflator. While the direct impact of oil price changes gets excluded from the official inflation data, it does have an indirect effect on the price of other goods and services. When you see this first hand, you start to appreciate why the Fed is having such trouble getting the rate of inflation up. Last Thursday, the US Bureau of Labor Statistics reported that the US consumer price index was unchanged over the last 12 months – 0% inflation. The core rate, which excludes food and energy, rose by 1.9% over the 12 months.
Everything else is expensive
Apart from petrol and possibly videos and books (the latter, a special case), everything else in the US feels pretty expensive to the Australian consumer. There are very few bargains to be had!
This usually means that either the Australian dollar is undervalued, or the US dollar is overvalued. While I am going to plug for the latter, it is also a bit of a wake-up call for those pundits who have been calling the Australian dollar down into the low sixties or even lower. My guess is that although there is downside risk, at around 70c, the Aussie is not too far away from a medium term bottom.
For the US, however, an overvalued currency looks likely to persist for the time being. While this puts downward pressure on prices, it is also acting to slow growth in the economy as manufacturers and service companies look to cheaper countries. Also, topline sales growth for America’s multinationals is hard to achieve, as the contributions from their European and Asian subsidiaries is less in US dollars.
But where is the optimism?
While I am more the “glass half empty” type of person, one thing that has always struck me is that there are a lot of “glass half full” types in the US – Americans seem (and I am generalising) to be an incredibly optimistic group of people. What struck me on this visit was not pessimism, but the lack of any real euphoria. You would think with an unemployment rate of 5.1%, a stock market near 17,000, solid increases in house prices, record low interest rates, petrol so cheap and almost no inflation – some would be singing from the rooftops. Not so.
And as Peter keeps reminding us, that great investor Sir John Templeton said that “bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria”.
What does this mean for us?
Taking these things together, I can’t but help think that the American economy is “growth in the slow lane” — a bit like Australia, but off a stronger base. They have the drag of an overvalued currency; we have the drag of the resources slowdown.
For investors, US interest rates are going to stay low and for longer, and as a result, the US stock market can go up. Whereas before I would have argued that strong economic growth and robust company earnings might be the catalyst for a rally, my sense now is that low interest rates and the search for return will encourage investors to continue to allocate money into equities. A slow grind up for the market.
And in Australia, we will follow suit.
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