Over the past several months stocks have staged significant rallies, with the Dow almost back to all-time highs and the NASDAQ Composite reaching levels not seen since the tech rally. Now, with a new wave of positive economic data being released, it’s easy to see why.
Those who stay on top of anecdotal evidence gathered among friends, family, and fellow business owners have tended to see this emergence of good data as it occurred, rather than having to wait for the official numbers. Thankfully, this allows investors to take advantage of the recovery as it occurs, rather than waiting until it’s already happened.
Based on what has been developing over the past several weeks, months, and even years, we have written and continue to believe that this is only the beginning of a major recovery in the United States. The American people have gotten to see a “Post-Industrial Economy,” and over the past several years have proven definitively that such a thing does not exist – or at least that it cannot be sustained. Only economies that produce can survive.
What does this mean? Among other things, it signals that the wave of outsourcing that began more than 20 years ago is officially over. US companies have for years been relocating manufacturing and other segments of their businesses to less developed countries like so-called BRIC nations. The savings incurred through cheap labor, less regulation, etc. have permitted them to invest in new technologies and automation processes.
However, the investment made possible by savings from plants in India and China is increasingly being made AWAY from Indian and China. Instead, they're being made either in the most developed countries - especially the United States - or in even less developed countries like Malaysia and Vietnam.
This process has been further encouraged by the emergence of middle classes in many of these nations, which have been created on the backs of their cheap labor. Suddenly, people in India and China, who have been producing microwaves and LCD TVs for Americans for years, want those same luxuries for themselves, and they’re demanding higher wages in order to afford them. This rising cost of labor is pushing a lot of manufacturing out of these regions, as are problems with quality control and theft of intellectual property.
Given that this is an election year, it is of supreme importance that in November Americans elect a president is who capable of encouraging business and further accelerating this process of repatriating manufacturing, without abandoning prudence.
The reason for caution is that, at the same time industry has begun returning to this country over the past several years, multiple calamities have brought about a number of other less desirable events as well. Most notable among these is the creation of billions of dollars worth of new money over the past several years, as a result of the financial crisis and ensuing economic slowdown.
Despite the creation of this new money and the Federal Reserve’s prolonged cheap money policies, inflation has not yet been a major issue, because the economy has been so slow that the velocity of money has remained low. In other words, all that new money hasn’t begun circulating around the economy.
As discussed earlier, the economy is now picking up, and this is where things can get dangerous.
The United States economy is going to continue recovering, and as it does all the new money created in the past several years is going to begin turning over at a quickening rate. If we aren’t careful, inflation could become a big problem as a result.
In order to keep inflation at bay, it is immensely important that our nation’s regulators be capable of making quick adjustments to fiscal and monetary policy in order to loosen or restrict lending and money flow without stifling economic growth. Whoever assumes office in January of 2013 ought to be capable of walking this tightrope and, more importantl, needs to be inclined to surround himself with a sound, knowledgeable supporting cast.
Dock David Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and is licensed with FINRA through Treece Financial Services Corp. He provides expert content to numerous media outlets. The above information is the express opinion of Dock David Treece and should not be construed as investment advice or used without outside verification.