A basic tenant in negotiating is to start with an extreme position from which you allow your opponent to gain ground against, but only to a point that is better than or at your original objective. Have we as a ‘civilization’ gotten so accomplished to negotiating/posturing our own objectives that we completely lose sight of the greater good? You name the arena and it seems that leaders on both or more sides are so entrenched in their own beliefs and positions that no middle ground exists. Seemingly unsolvable conflicts abound, in the NFL, state houses, Washington, Pakistan v. India, Pakistan v. US, even Israel v. the US: The sense of urgency or the bigger picture are held hostage by ideology or greed. It’s the story of mankind, but it just seems louder and more prevalent lately. 

There were a few bright spots in an otherwise gloomy week for economic data. New home sales in April jumped over 7% and drew down new-home supply to 6.5 months. Corporate profits were up an annualized 25.6% for the first quarter. And personal income rose 0.5% in March as wages and salaries rose a modest 0.3%. But, from there the news was less encouraging. The government’s second estimate of economic growth for first quarter GDP was no higher than it’s initial estimate of only 1.8% annualized. Initial jobless claims rose 10,000 last week to a 424,000 level. And on the manufacturing front, damage from interrupted Japanese supply lines began to show in the numbers. 

If you’ve invested long enough, it’s almost certain that you’ve been made to feel less than knowledgeable, either by your advisor (unwittingly, of course) or by ‘Mr. Market.’ People invest for as many reasons as there are people. Today’s Brief addresses the purpose of the vast majority of investors; that of saving to replace the paycheck. Some call it retirement, some call it freedom from salary, others refer to it as their second half, and still others call it doing what you really want to do, or were meant to do all along. Whatever you call it, it happens when you begin depending on your investments to see you through life, no longer relying on what is commonly referred to as ‘your day job.’ 

Prices are rising where we notice them the most; the grocery store and the gas pump, so it feels like inflation is rearing its ugly head again.  On an unadjusted annual basis, headline inflation was up 3.2% in April while the core (excludes food and energy) was up 1.3%. A headline rate of 3.2% is not unusual for recent history. It peaked once in 2008, reaching 3.8%, but has not sustained highs much above 3% since the 70’s and late 80’s.

Our economic recovery has, in the opinion of most economists, become self-sustaining, but remarkably slow relative to former recoveries. Job growth has been a primary drag and remains exceptionally slow to recover. Ben Bernanke, during the first-ever press conference following a Federal Open Market Committee meeting said “the labor market is improving gradually. We would like to make sure that that is sustainable. The longer it goes on, the more confident we are.” Economic growth slowed to 1.8% in the first quarter, following at 3.1% rate in the fourth quarter of 2010.

In perhaps the most audacious and partisan verbal tempest so far as we approach the looming budget storm, Treasurer Geithner said “what I want to make sure they [italics added, referring to Republicans] don't do is take us too far into June, take us too close to the edge.” Amplifying those remarks, White House Press Secretary Jay Carney said any Republican effort to hold out on a debt-ceiling vote for deficit-reduction measures “could in fact tank the global economy.” He added “it would be foolhardy to play chicken with the full faith and credit of the United States of America. It is simply too risky.”

Based on the rhetoric flying around Washington, it seems unlikely that meaningful budgetary reform will come in the next two years. In his Wednesday campaign-like speech Mr. Obama stated his intention to raise taxes more clearly than any other part of his plan. Just as clearly, House Republicans claim that tax increases are dead on arrival in their chamber. It even turns out that $38.5 billion ‘savings’ in government spending, triumphantly celebrated by Boehner, Reid, and Obama, will only cut this year’s deficit by $352 million according to the non-partisan Congressional Budget Office. Don’t these guys get it that Americans are fed up with reckless spending, political posturing and outright lies?

Stocks continue to rise in the face of 30-month highs for oil. Gold hits a new record at 1,468.90 and Treasuries are declining. Bulls find new reasons to buy each day, despite the challenges of Japan, the Middle East, and European member states, and rising commodity prices to name but a few.

Indications are that the US economy maintains sufficient momentum to avoid a double dip recession. Non-farm payrolls rose by 216,000 jobs last month and the unemployment rate inched down from 8.9% to 8.8%. Domestic stocks, as measured by the MSCI US Broad Market Index, were up 5.8% for the first quarter of the year. The Dow Jones Industrial Average gained 6.4% for its best first-quarter since 1999. The Fed, eyeing economic strength might be thinking about increasing rates sooner rather than later as well. Minneapolis Fed President Narayana Kocherlakota said it was “certainly possible” for interest rates to be raised by more than half a percentage point this year. 

Markets are reacting positively to a rare concerted intervention in the currency markets by the world’s biggest economies, known as the G7, to stem the damaging rise in the value of the yen as well as from news that Libya’s government announced an immediate cease-fire and end to all military operations across the country. A strong yen makes Japanese exports much more expensive on world markets. As a primary part of Japan’s economy, exports will be crucial to the re-building of their economy. Additionally, Japan’s decade-long struggle with deflation will be made even worse by a strong yen.