New optimism of the rich may be leading indicator
The rich may be different. But they could also be a leading economic indicator. The corridors of wealth and finance are alive with new optimism. The Federal Reserve, though, doesn’t seem to share it. The U.S. central bank seems to have no intention of raising interest rates any time soon. The trouble is, if the Fed is behind the game there’s a good chance the rich will not be the only ones to suffer.
All seems very well indeed at the top of the food chain. Whole Foods Market, the purveyor of richly priced organic onions, last week raised its best estimate for same-store sales growth this year to as much as 7 percent from as little as half that much. Its stock has gained 45 percent this year while that of price-conscious Wal-Mart is down a bit.
Other anecdotes tell a similar story. The chief executive of one of America’s biggest banks reckons the strength of the U.S. economy will surprise everyone. Another senior banker thinks the Fed should hike rates right away. And billionaire hedge fund manager John Paulson has been busy telling investors he is seeing the upward side of a V-shaped recovery, and his investments in banks and other economy-driven stocks — now even including financially strapped casino outfit MGM Mirage — back that view up.
These could be the observations of a cloistered few inhabiting the asset-based, rather than the real economy. And it’s true that a big bank executive’s views are cushioned by the relatively rude health of customers like Paulson and multinational corporations that are reporting improved earnings and have balance sheets bulging with cash.
Then again, Paulson’s arguments, echoed in big company boardrooms, have evidence behind them. Indicators from Californian housing prices and U.S. household net worth to bank lending practices and the Institute for Supply Management’s manufacturing index back up the idea of a sharp recovery.
Of course, a chart in the deck yet to turn convincingly positive — job growth — is the one that matters most in Washington and on Main Street. That’s still a key factor behind the politics and, it would seem, the Fed’s desire to keep interest rates near zero.
The Fed’s caution may prove well-founded. Maybe the rich do live in a bubble. But the risk is that they are simply seeing the recovery first. If robust growth is just below the surface, a failure to bring interest rates into line early enough could bring about an inflationary cycle. That wouldn’t just hurt the rich, but everyone else as well.