It is starting to feel like a bottom in the stock market, and similarly, a bottom in the economy. Recent economic outlook has been far better than even one month ago. A huge increase in home sales and durable goods suggests that spending is turning around, albeit slowly.
We've Only Had One Good Month
The markets have only performed well for a month. During many recessions/depressions and bear trends, the market has performed just as well as it is right now. It’s easy to try to call the V shaped bottom because that's exactly what we've experienced, although the future may not be as bright as the very recent past.
Employment Matters Most
Employment numbers are the next number that needs to turn to see any serious recovery. If we continue to see improving economic indicators but faltering employment, we've entered into the very serious realm of stagflation. Employment is the lifeblood of the economy, and there are plenty of unemployed individuals who will need months to be re-hired.
The Minimum Wage Hike
Minimum wage is again set for an increase on July 24, 2009. This will be the first true test of a fizzling economy. Can the markets escape from higher salary costs when summer arrives? Unfortunately for businesses, workers will not become more productive overnight. The next jump will be $.70 to $7.25 per hour, representing a whopping 11% increase in minimum wage incomes overnight. Many high volume, low cost employers will have a hard time employing extra workers, and we're likely to see a huge drop in employment right around June 24 when the wage is increased.
If you haven't noticed, it appears that virtually every analyst and investor has stopped using the word deflation. We've already been deflated from a 50% plunge in the markets and a nearly equivalent drop in real estate values and other assets. Now it feels like inflation is around the corner; bank reserves at the FED are nearly twice as large as when the recession began, interest rates are at zero, and quantitative easing measures are taking place. The global money supply is expanding and already influencing precious metal prices, as well as other commodities that are in demand, including oil and steel.
The Next Bubble is Forming
We may not yet realize it, but there is another bubble forming right now as we speak. It’s being fueled by cheap credit and inflation, but it hasn't yet shown itself. After all subsequent breakdowns of a stock market, some large industry balloons to surprise us with a bubble. After the tech bubble, it was the real estate bubble that was fueled by 1% Fed rates. It could again be real estate, but likely this time, the bubble will be in a commodity that is far more liquid and easier to buy.