The 3-year rise of inflation, and the coming end of Dollar dominance...
PETER CARDILLO, chief market economist at Avalon Partners, is a regular commentator on major financial media including CNBC, the Wall Street Journal, New York Times and MarketWatch.
Now serving high-net worth as well as institutional clients at Avalon, here Cardillo shares his 40-year experience of analyzing the investment markets with Hard Assets Investor.
HAI: How do you see the situation – the US economy, the global economy – in light of the past year which we've just gone through?
Peter Cardillo, chief market economist, Avalon Partners: Well, I think the US economy is probably going to pull out of recession in the latter part of the third or early part of the fourth quarter. I think we'll continue to see improving economic data. Now that doesn't mean we're going to see positive data for a while, but I think we'll be headed for data like, for instance, we just saw from the leading indicators, up one-tenth of a percent; we saw the Philly Fed Manufacturing Index actually come in lower, but a little less than the previous reading.
I think that's going to be the trend until we finally get into some sort of anemic growth pattern, which will probably last for at least three quarters, and we probably won't see any real pickup in terms of strong economic growth until the fourth quarter of 2010.
HAI: You have to go back to the 1930s or 1940s to see levels of government stimulus that we have seen so far. The textbook says that's going to have a big impact...
Peter Cardillo: Absolutely, it's going to have a big impact; there's no question about it. But that impact is basically taking us out of the recession and setting us up for a strong recovery, perhaps in 2011.
The reason I think we're going to just limp our way through the situation over the next four or five quarters is because the global economy is not going to give us any help until perhaps the second half of 2010; that's the reason why.
Remember, we're in a global economy, so back in the '30s and the '40s, that didn't exist; it does exist now and we need our trading partners. Unfortunately, they're going to take longer to recover than we are, simply because of the fact that their governments did not do what we did.
HAI: China's stimulus was something probably on the order of about 30% of GDP, however. Ours was probably around 8% of GDP.
Peter Cardillo: But let's not forget that China is not the only global market that's going to be leading the way. It's a big one, but we have to look at South America and we have to look at Europe; Euroland is powerful – even though we don't like to admit it – but they are powerful.
HAI: A lot of emerging stock markets are up 30% or more since March. Is that a barometer for you?
Peter Cardillo: I think the major barometer for me is the fact that India's election provided for a free market government, and that's very exciting. That tells me that we're going to see a quicker rebound in the global economy, and I kind of think that was big news.
HAI: It was huge; you had a big market reaction.
Peter Cardillo: Exactly. As I pointed out before, China is a huge emerging market economy – no question about it, the No.1. But India is right behind China.
HAI: So would you have more of a focus as an investor on India right now? That market has recovered almost all or a good portion of its losses since its peak.
Peter Cardillo: I like to be diversified. I always think there should some amounts of money invested abroad. Then of course you can pick your choice, but I think investors should continue to focus here in the States, because we'll be the leader and the stock market is telling us that.
HAI: Prior to the whole implosion, commodities and raw materials – along with the emerging markets – were really leading the charge. But some of those corrections or collapses were stunning, giving back the entire moves and more. How do you see that playing now?
Peter Cardillo: I think if you look at just two markets, then it's self-explanatory. Look at the Gold Price, knocking higher from $940 and above. That's telling you that we are in an economic rebound in terms of commodities. If you look at the price of oil it seems to have found a floor between fifty and $60 a barrel.
So I think, as much as I was in favor of the government's pouring in billions and trillions of dollars into the system, I do believe that when we have the economic recovery, that it's going to be a little difficult for the Federal Reserve and other central banks to begin to pull out that money without creating inflation. I think we're headed for inflation and that doesn't mean that that's going to knock the wind out of the stock market. I don't think we'll be headed for a 1979/1980-type inflation scenario, but I do think we'll have some inflation.
HAI: How can there be an inflation when you have – if we just look at the case of the United States – some 12 million people out of work? You've got 30% of our industrial capacity sitting idle, you have 5 million unsold homes, you have 3 million unsold vehicles...
Peter Cardillo: We're not talking about inflation next year or two years from now. I'm talking about inflation three years from now, when unemployment will probably march on back down towards 5%, and that's going to be a different story. I see a buildup in inflationary pressures moving into the pipeline; but not now, we're looking at three years down the pike. So would I play in the world of commodities? Well, I think oil is probably going to go...I know oil is going to go back up when the global economy recovers.
HAI: The Saudis are also setting prices higher...
Peter Cardillo: And look at what's been happening in the price of oil over the past three, four, five days; it's been responding to geopolitical problems, worries back in Nigeria if the market were really as depressed as it was six months ago, and there were problems in that area.
HAI: Gold Prices throughout this whole thing held up relatively well. But if that were considered a safe haven, and now you get risk appetite coming back, why is there an ongoing attraction for Gold Investment?
Peter Cardillo: It's a Dollar play, and unfortunately the Dollar is going to continue to get trashed simply because of the fact that the Federal Reserve continues to print money, and the velocity of money suggests what I mentioned a few moments ago: that inflation down the road is going perk up again.
In theory, when the Fed wants to remove the liquidity it's provided, it will raise interest rates. Which sounds bullish for the Dollar, and bearish for gold. But unfortunately the old textbooks don't pan out anymore, and the reason for that is simply because of the fact that we are headed toward some new reserve currency. I don't know what it's going to be. I don't know if it's going to be the SDRs, I don't know if it's going to be the Euro, I don't know if it's going to be a basket of currencies, but I think we're headed toward that. I think in the long run that it could be a positive and not a negative for the US economy.