The Economy As We Know It: December 2014
The economy as we know it
- Interest rates are in the tank, so bonds aren't earning any significant return
- Stocks are priced high in comparison to their intrinsic value
- Balance sheets are very strong for lots of companies, but their earnings aren't so hot
- Companies generally have cut their spending budgets about as much as they can
- The velocity of money is still incredibly low (in other words, we need some spending to go around)
- When that velocity speeds up, inflation will become a serious risk unless the Federal Reserve can pull the very large amount of money pumped into the economy off the table and raise interest rates
- If interest rates rise, investors (particularly older ones) may sell stocks ("taking gains") and put that money into the "security" of bonds
- Millennials and other young workers are unhealthily skeptical of the stock market
- Baby Boomers are shifting into an period of life where they will tend to be net sellers of stocks, not net buyers
- Foreign investors want to buy American companies and assets
- Long-building (and enormous) trade deficits mean that foreign investors have a lot of American cash burning a hole in their pockets
- Global political and legal uncertainty makes the United States artificially more attractive to the rest of the world's investors, leading to sustained net capital inflows to the United States
- The energy boom being experienced right now is artificially cushioning our economy, and we don't know how long the energy-related stealth stimulus will last
- Low energy prices will serve to destabilize politics in Iran, Venezuela, Russia, and other countries, leading to unintended and unforeseen consequences
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