Crude Oil Inventories go down, Retail Sales Go up

The Federal Reserve left interest rates unchanged yesterday and the market responded with minimal relief. The Federal Reserve also said that inflation is still higher than they would like and I believe they are concerned about the devaluation of the dollar. Some drop is okay and a gradual slide is fine, if it corrects the trade imbalance a little, but a drastic slide could be problematic.

America is entering a period of confusion in the economy. Although, those individuals in the bottom two quintiles of American net worth, have not felt the good economy of the last two or so years. They haven't had better paying jobs, they haven't been able to cash in on tremendous equity in their homes, and they salaries have not gone up. But they did feel the higher price of oil, the rise in their credit card and other loan payments (maybe even mortgage) and it became more difficult to stretch the dollar.

However, a weaker economy, with less robust growth in housing and autos, may not be so bad for the broad swatch of Americans. Even though the tax cuts and housing boom primarily benefited upper middle and upper classes and has not yet filtered completely through the economy, as corporate profits were distributed to shareholders, and not spent on capital investment or employee raises or hiring. In the past 3-4 months, the labor market has begun to tighten and there has been some wage inflation. This will affect the broader swath of people. Further, although cash rich corporate America has pursued mergers and acquisitions and private equity buyouts, for further return, investment will be required and this will provide a domestic demand stimulus to the economy.

One thing that the Fed and we should worry about is continued inflation due to energy costs and a dramatic drop in the dollar. There is a turning point where Asian economies start trading in their greenbacks for Euros and Yen. But a cheaper dollar and a rising and productive economy in Germany and the Euro region will mean cheaper American exports and a better trade balance.

Cheer up folks, maybe the Fed may begin cutting rates even by the end of the first quarter if inflation stays under control and the dollar doesn't drop too much. I think this choppy environment may be just what we need to bring certain overheated sectors back into check.