For the past few days, the Dow has been setting all-time highs. One of the biggest reasons is despite rapid growth in the economy, there still seems to be no sign of inflation, even on the horizon. Usually when companies become more profitable rapidly, it signaled that inflation was coming soon. IMHO, the reason this is simply not happening is because of globalization, especially in the workforce, on a scale never seen before. A few decades ago, inflation would come screaming back because the profitability and expansion of companies would lead to higher salaries as companies started competing for employees here in the USA. But with globalization, companies are able to grow and expand, without that growth causing competition for workers since there are huge countries with high unemployment. Because of this, companies, especially tech companies are able to grow rapidly and defy history and basic economic principles by avoiding inflation and thus, avoiding the need for fed action to prevent inflation. The only constant is change, and a global workforce is something new that changes many of the common ´laws of economics´.
The interesting thing though is that inflation is popping up in some of the economies that the US has been outsourcing to. China has a big problem with property prices at the moment in its metropolitan areas, while wage inflation is forcing some companies to move some of their operations toward the less developed west of the country or even to offshore production themselves to places like Vietnam. In other words, inflation itself hasn't disappeared. It just keeps being pushed around this globalized world.
yeah, exactly. South India has the same problem. I read something about neighborhoods in Bangladore drastically changing when major call centers were placed in them during the 1980s. The point I was talking about is that old-school economics and so ingrained in our head, that every time USA companies post huge gains in revenues.... the analysts immediately start thinking the fed is going to raise interest raise to curb off the inflation they expect to come with it. But that inflation that is normally caused by employee competition doesn´t occur because employee competition is now global. Apple can double in size without creating any inflation from employee demand in the USA.
As a financial advisor type, it's in my nature to look beneath the headlines and hype, and to look at things at least somewhat from a risk control / risk management standpoint. To usually be cautiously optimistic at best, and to be somewhat fearful when others are manic. To look at things from a "what's the worst that can happen if I'm wrong?" standpoint, rather than assuming I know everything and am always right - no one is. The lack of inflation is concerning to me. Median household income is down in the last half dozen years. Industrial production is down, and we're now seeing more new businesses close than start up. The labor participation rate is lower than it's been in over 35 years in recent times, and many people who are technically "employed" after having lost a full time job in recent years are either working part time or are under-employed. GDP growth has been poor, debt to GDP is at record levels, etc. Much of the rise in the markets has been due to the interest rates being kept so low for so long and the Fed printing and pumping so much money in. It's not normal for the Fed to keep rates this low for this long. This is very concerning to me. At the end of the day, no one knows with anything near certainty what the broad markets will do, nor can they control it. I've found it's just best to be mostly bottom-up - to buy when I see great buying opportunities, and to sell and perhaps carefully short when I see companies that appear to be broken or ridiculously overvalued. I may do more dollar cost averaging, keep more cash on hand, and use more put options as hedges on more volatile securities at certain times (like now), but I'm almost never 100% long, and never anywhere near 100% in cash, shorts, or commodities like gold the way some are. A more moderate "all weather" approach is better, I think. Because no one can ever predict the tops and the bottoms anywhere near 100% of the time with anywhere near 100% certainty.
Also the low bond yields are a big factor. There simply are not many interesting places to park capital in right now. I can find lots of bonds yielding 3%... I can also find a lot of companies with some growth potential, good history of dividend increases, and still yielding that same 3%. When alternative investment methods don't seem too promising, most people keep pumping money into the stock market.
