Posted on 09/11/2002 9:10:04 AM PDT by john bell hood
Given that the offices of Griffin, Kubik, Stephens & Thompson, Inc. are in the Sears Tower -- a high profile target -- it is impossible for us to forget the changes that have taken place since terrorists murdered thousands one year ago. Every morning when we come to work, we must pass through metal detectors and send our bags through x-ray machines. And as the anniversary date approaches, the intensity of security is palpably increasing.
But from an economic point of view, this increase in security is just the outward appearance of an altered landscape. Underneath, insurance costs have skyrocketed, delivery times have lengthened, travel has become more tedious, and a cautious attitude has crept into decision-making. Despite all of these added costs, however, the economy is actually performing rather well.
Real GDP has grown at an average rate of 3.0% in the past three quarters, the unemployment rate has fallen back to 5.7% (once considered an inflationary level), productivity is rising sharply, and consumer spending is booming. In fact, following last week's news that auto sales in August hit their third highest monthly total ever; retail sales were likely up 0.7% in August. If so, the three-month annualized percent change in retail sales will rise to over 13% and real GDP will grow at 3.5% or 4.0% in the third quarter.
Given these numbers, there appears to be a clear disconnect between financial markets and the economy. And at this point, we believe that equities are undervalued and bonds are overvalued. A likely attack of Iraq, renewed fears of terrorism, higher oil prices, and a constant barrage of negative press on the economy (remember we are in an election year) is clearly having an impact. But these psychological developments cannot offset what can only be described as a very easy monetary policy. The yield curve is still steep, the price of gold is back up to $324 an ounce, the dollar is still weak, and the CRB futures index jumped to 224 on Friday, up 21.8% since 10/25/01. Money will always win in the battle against psychology and eventually the markets will reflect this reality.
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