The inflation rate has not been a cause of concern in this country for well over a decade. On the contrary, economists have been worried that the opposite might occur, a bout of deflation.

 

Throughout the last decade, inflation has averaged no more than 1 1/2 percent, which is well below the Federal Reserve Bank's targeted inflation rate of 2 percent. Historically, that is highly unusual, given how economics are supposed to work. Central banks around the world (although they don't like to admit it), have no idea why the inflation rate is as low as it is.  Neither do global economists, or Wall Street strategists.

 

World economies continue to grow, and interest rates remain at historically low levels, the previous correlations between inflation and economic growth have somehow gone awry. It's as if the basic economic laws of supply and demand no longer apply.

 

Usually, when economic activity is rising, there is more demand for goods and services, which pushes up prices on almost everything. In order to produce more, there is also a greater demand for workers. But in a historically low unemployment rate environment like we have now, companies can't find skilled workers. As a result, wages should have risen dramatically to keep and/or attract workers.

 

Here in the U.S., wages are one of the key variables in determining the inflation rate. And yet, while wages have increased about 3.1 percent year-over-year, this has had little impact on the inflation rate. Those demand pressures in any other cycle would have had a much greater impact on the inflation rate, but not this time.

 

There are several theories going around to explain this phenomenon. As a result of a decadelong low rate of inflation, for example, people now expect inflation to remain low and stable. Therefore, there is no reason to buy that widget now because the price may actually go down (not up) in a few weeks or months.

 

Globalization may also be partially to blame. Greater trade in goods and services, and tighter connections between financial markets worldwide, may be influencing the U.S. inflation rate more than we know. If, for example, another region's economy is slowing, or simply not growing as fast as our own, there could be a dampening effect on prices and wages worldwide.

 

Continued breakthroughs in technology, as well as continued global competition in labor markets, could also be improving productivity, capping wage growth, and in the process, keeping inflation lower than in the past.

 

And let us not forget the source of all this data on inflation: the world's governments. Statistics are based on data and the means and methods of acquiring and compiling this information is constantly evolving. Who is to say that the government's numbers accurately reflect the real inflation rate?

 

Think of how the U.S. government's official Consumer Price Index (CPI) differs from the real world of prices that we face every day at the supermarket, or the hospital, or in tuition fees for our kids. In any case, there are few, if any, arguments that inflation is about to spike in the year ahead. 

 

 

It is that time of the year when fortune telling becomes a popular past time in the financial markets. Every Wall Street strategist releases their projections for the economy, the markets, and earnings for the New Year. What strikes me about 2020's crop of predictions is their similarity.

 

My own informal survey of analyst's forecasts seems to converge around a 1.8 percent-2.0 percent prediction for economic growth in the U.S. Earnings, for the most part, hover around the unchanged mark, or slightly better. These professional forecasters are looking for no more than average gains in the rate of return (ROR) for stocks based on the equity benchmark index, the S&P 500. What does that mean to me?

 

On average, over the past 150 years or so, the S&P 500 Index has returned roughly 4-5 percent. If you add in dividends, that ROR increases to 6-7 percent. You can read these consensus forecasts in one of two ways. They could mean that none of these people, who are paid to forecast, really know what the stock market is going to do next year, so they are hiding behind an average return. If they are wrong, they can always point to the fact that, from a historical perspective, the markets should have at least provided that much in gains.

 

The second possibility is that all of these high-paid Wall Street pundits actually believe their forecasts, in which case, as a contrarian, I worry that with everyone leaning to one side of the boat there is a chance that the markets will do something quite unexpected. If that is the case, you have to ask "Will stocks perform better, or worse, than the average?"

 

Ask yourself what could go right (or wrong) for the economy and therefore the markets in 2020. First of all, we are entering a new decade. The last one was wonderful for stocks. The chances of a repeat performance in the Twenty-Twenties could happen, but I doubt it. Physics would tell you what goes up, must come down, but who says it has to happen next year?

 

For me, the largest risk out there in 2020 is a spike in inflation. This year, wage growth finally exceeded the inflation rate. It took the entire decade to get there, plus trillions of dollars of global central bank monetary stimulus. That stimulus is still going on and, according to all these strategists, should continue into next year on a worldwide basis.

 

If I accept that the U.S. economy will continue to muddle through, and unemployment will continue to remain at record lows, one could expect wage growth to gain even greater momentum. And wage growth, my dear reader, is the main engine of inflation in this country.

 

In addition, we could actually see economic growth higher than what the economists are predicting, because it is an election year. No one can predict what politicians will do, or who will win an election this early in the political cycle. Yet, the market's performance will depend on not only who wins, but prior to that, who is perceived to be winning.

 

However, I can confidently predict that neither political party will be willing to reduce government spending in 2020.  In fact, the opposite almost always occurs during a presidential election year. We are already witnessing both parties "coming together" to pass a flurry of legislation (including a spending bill) at the end of this year. I expect to see more of that in 2020. More spending should equal more growth, more growth means higher wages, etc.

 

Then there is the Trump trade war. Everyone seems to be predicting more of the same: tariffs will remain, Trump will continue to use trade to get what he wants, and. as a result, business confidence and investment will remain subdued, thus the "muddle through" economic forecast. What might happen if the president switches tactics?

 

Donald Trump has two things going for him when it comes to voter sentiment. Even those who hate him believe he has done a good job on the economy and the stock market. The only thing that has held back even stronger growth, people believe, is his trade wars. If he were to change his tactics, shelve the trade war for nine months, and work to expand the economy through government spending, then what?

 

The economy may grow faster than expected. Global growth could get a boost. Emerging markets might benefit, as would other overseas markets. As a result, Trump would probably win in November, because no matter what Americans say, they tend to vote with their pocketbooks.

 

Stronger economic growth, both here and abroad, a historically low unemployment rate, and the inability (thanks to Trump's immigration policies) by companies to hire the skilled labor they need, would mean more wage hikes. That would translate into higher consumer spending, higher prices for goods and services, and maybe, just maybe, the inflation cycle begins.

 

In my next column I will pursue this line of thought and provide some other scenarios that could play out in the New Year. Until then, have a most wonderful New Year.

 

Abuse of power, obstruction of Congress; these are accusations that ordinarily evoke sharp emotions among Americans. Yet, the financial markets have barely blinked, if they have paid attention at all. Why?

 

The short answer is that investors have done the numbers and calculated that Donald Trump has less than a snowball's chance in hell of being impeached by the U.S. Senate. For those who don't follow the actual political process of impeachment, once the Congress voted to impeach the president, the next step is up to the Senate. They are required to hold a trial to decide whether to remove him from office. A two-thirds majority is required to convict and then remove the president from office.

 

Trump is only the third president (after Andrew Jackson and Bill Clinton) to be impeached by the House. However, Trump's predecessors were acquitted in the Senate. And therein lies the reason investors are ignoring the event. Republicans hold the majority of seats in the Senate (53 seats). In order to get a conviction, 20 Republicans would need to join the Democrats' entire minority of seats to pull off a palace coup. That's not likely to happen.

 

Now, while the country is roughly split down the middle by those who believe impeachment is the only solution to end the reign of America's Mad King, an equal number of Americans believe that President Trump is an innocent victim who is being nailed to the cross of political partisanship by the Democrats. None of that matters to the markets.

 

The only question financial markets care about is "can money be made from this event?" Given the answer is no, (not directly) global traders focus on things that can provide an immediate return. Next month it will be the chances of a Brexit, the signing of a Phase One China/U.S. trade deal and the prospects for earnings in the first quarter.

 

I understand that the market's disregard of social issues rubs many Americans the wrong way. To be sure, it bothers plenty of Wall Streeters as well, but righting wrongs is not the mission of financial markets. It never has been.

 

Plenty of people, including the president, in my opinion, get confused on this point. Every time the stock market hits a new high, a tweet from the White House follows shortly thereafter. It appears that the president attributes the market's gains to some policy or action he has taken or may take. His view is that the market is a better and more accurate indicator than voter polls. And he is correct, as long as the action or policy is something investors perceive will move the market.  Good or bad, traders will respond, otherwise it is ignored.

 

Markets don't care if immigration policy is changed, for example, unless it has an immediate impact on prices. Trump can fill containment camps to the brim. He can kill, maim, and starve whomever he wants, but markets won't care unless money can be made (or lost) over it. Markets do not approve or disapprove of the impeachment of President Trump. They just don't care.

 

That's why financial markets need to be regulated. If the most profitable business in the world is building and selling nuclear weapons to terrorists, the markets will do it, if they can get away with it. It is society's responsibility, through their governments to make sure that does not happen. Right now, few if any market participants are enamored with either Bernie Sanders or Elizbeth Warren.

 

Both candidates are proposing policies that Wall Street fears might curtail or change the game for everyone in the economic arena. People in the financial markets worry that they will make less money, or worse, actually lose money, if either are elected. As such, they will oppose everything those candidates do.

 

It is nothing personal. In fact, some trader or other might actually approve of their social platforms. And if suddenly one of them proposed something that could make investors lots of money, you would see Wall Street change their tune. It is the nature of the beast, so you might as well get used to it.

 

Officially, the Santa Claus rally has not even begun. And yet, almost every day over the last two weeks stocks have climbed higher. Unlike last year, there appears to be nothing stopping the market from continuing to make new highs at least into January.

 

Historically, the Santa rally begins on the day after Christmas and stretches through to the second day of January. The fact that last year he failed to make an appearance might mean that the jolly old elf could be making up for lost time by coming in early.

 

The markets action is especially impressive since this is the time of the year when investors usually sell their losers in order to establish a tax loss for the year. Large institutional investors and mutual funds do the same thing. But that selling pressure has been met with buyers, which is supporting the market.

 

There are two recent trends that are keeping things bullish. The first is the Phase One trade deal breakthrough. Despite its lack of substance, it does reduce some of the uncertainty in the markets even though the final deal has yet to be signed.

 

The second, and more important development, is the Federal Reserve Bank's injection of over $425 billion into what is called the "repo market." It is the market that provides critical short-term funding for banks in need of cash to settle certain end of year obligations in their day-to-day business. The Fed actually provides cash to financial institutions in exchange for some of their U.S. Treasury bond holdings.

 

Although the Fed won't say it, what they are doing is a form of quantitative easing or "QE" that reduces the cost of borrowing money as effectively as if they cut interest rates. In the past, the Fed has used QE in order to stimulate the economy. And every time the Fed eases monetary policy, the stock market responds positively.

 

On Monday alone, the New York Fed increased the amount of its bond buying by $86 billion. We could see a like amount on Dec. 30 through Jan. 1, 2020, according to Fed watchers. When all is said and done, the month of December central bank monetary stimulus could total $500 million. That is not chump change.

 

And before we forget, there is also the "January effect" just around the corner. Historically, January is the best performing month of the year. That's when folks on Wall Street usually receives their bonuses, and a lot of that money goes right into the stock market. In addition to the bonus play, a lot of those stocks I mentioned that are sold about now for tax losses are repurchased in January, especially in the small cap arena.

 

The likely results of all these beneficial trends this month and next should provide pretty good support for stocks.  I would like to see a bit of a pullback in stocks (30-50 points on the S&P 500 Index) between now and Christmas, however, just to relieve some of the overbought conditions. That could set us up for a sprint to the upside in the markets after Christmas through the end of the year.

 

There are some investors who raised cash a few weeks ago, betting that Trump would not sign a trade deal, more tariffs would be introduced on Dec. 15 and the markets would plunge. That was the wrong move. Now, they are waiting for a pullback to get back in.

 

Of course, markets usually do what is most inconvenient for the greatest number of investors, so we could conceivably just grind higher and higher forcing those on the sidelines to capitulate and buy back in.

 

You don't have that problem, readers, because you have been following my advice and remaining fully invested. That had paid off nicely. In my next column, I plan to throw the bones, (as I do every year), and see how 2020 will shapes up, so don't miss it.

 

In the meantime, have a Merry Christmas, Happy Hanukkah and for those who can, spend it with your families and loved ones.

 

As we approach that most joyous of holidays, the image of Santa Claus greets us in every nook and cranny. From television commercials to internet greeting cards, "Jolly Old St. Nick" is a ubiquitous figure. What you probably didn't know is without American business there probably wouldn't be the Santa Claus of today.

 

Santa and business go back a long way, but before you ask, the answer is no, Coca-Cola did not invent Santa Claus, although they will celebrate their 100-year anniversary in 2020. This modern-day, cherry-cheeked, fat elf of a figure has been best buds with the owners of many U.S. enterprises. Montgomery Ward, Macy's, F.W. Woolworth, General Electric and dozens, if not hundreds, of other businesses have made Santa the elf he is today.

 

Back in the day, "Sinterklaas," the Dutch name for a monk named Saint Nicholas, was the stuff of legends. His kindness and compassion were his claim to fame among the Christian faithful, and through the centuries he became known as the protector of children. His myth emigrated to America from Europe in the early 1800s.

 

Christmas at that time was a great big drunken party over here, especially in New York. Remember, it was the beginning of the Industrial Revolution, and the differences among the social classes in the U.S. was as large as it is today. Bands of tough, working-class young men, rowdy and often-times angry, would roam the city blocks, going from home to home, demanding

handouts from the rich. Often, these gangs would "wassail" (sing) bawdy tales at the top of their lungs in the process.

 

History credits a number of figures, from John Pintard of the New York Historical Society, to Washington Irving, to Clement Clarke Moore, who took it upon themselves to "tame" Christmas for the American masses. "A History of New York," published in 1809 by Irving introduced a more benevolent St. Nick, while the 1822 poem, "A Visit from St. Nicholas" ("Twas the Night before Christmas") by Moore attempted to hone in on the exact time and date of the modern-day legend we call Christmas.

 

The American version of Christmas continued to expand through penny press publications and women's home magazines. These publications were an early version of both marketing and advertising. The notion of Christmas trees, for example, can be traced back to Godey's Lady's Book that featured Queen Victoria and the royal family gathered around one such tree.

 

In 1841, a Philadelphia store created the first Christmas blimp of sorts (a life-sized model of Santa) as a marketing effort to draw kids and their parents into their store. In 1862, Macy's introduced the first "live" Santa. An army of Santas soon followed, creating an entirely new business in America. But Santa still lacked the vigor of today. He was most often depicted as a small, elf-like figure, grim and serious (sort of like the Grinch with a red suit and a white beard).

 

It took the marketing efforts of Coca-Cola to transform Claus into the Santa of today. He was first featured in Coke's advertising in 1920, and within a decade became a staple of their holiday advertising. The company hired an illustrator, Haddon Sundblom, to create a more "wholesome" image of the big guy that would sell in America. It worked so well that just about everyone adopted Coke's version of Santa Claus.

 

But Santa isn't the only figure that business created. Rudolph the Red-Nosed Reindeer was a marketing effort by the department store, Montgomery Ward. They used one of their own copywriters, Robert May, to write a children's book that the department store could give out to the children of their customers. Millions were given out in the first year, and many millions more have been published since then. In 1949, May's brother-in-law wrote a song, based on the book, that is now part of holiday history.

 

So, the next time you want to complain about all the bad things that big business does to this country, take heed. There are some things they do well. If it wasn't for business, Christmas in America — gift-giving, Christmas trees, ornaments, dinner, caroling, holiday cards and all that family love — would probably not exist.

 

And on that note, "Merry Christmas to all, and to all a good night!"