Main Street is at a crossroads, which means the nation is at a crossroads. Will people finally start to spend money they don't have? After being bruised and battered, even those that have seen home values rebound and incomes that are staying ahead of the rate of inflation, there is serious doubt and hesitation. Those are the lucky few, for the rest of the nation, spending on credit is a bridge too far. This underscores the dilemma of the Federal Reserve, which in my mind gets too much credit for the stock market rally; not all that money printing has resulted in a fatter wallet.
In the classic sense, all of that money printing should have made its way to Main Street as banks pushed out more loans for personal and business use. This should have created a demand-pull version of inflation (see table). Pat your pocket, and tell me if you have extra cash that you are eager to spend? Then there's cost-push inflation, where prices move higher as businesses cope, but there are only a few spotty areas of such price hikes and none from higher wages (see table). The problem is we are actually taking home less money than before the recession began.
Definition of Inflation
Demand-Pull Inflation - This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.
Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.
There's no doubt that institutions are buying stocks and professionals are seeking best-case scenarios for return, but we aren't seeing the bum's rush or that massive bond rotation that should have started with a lot of vigor a long time ago. Our work says the majority of the rally is from real earnings growth generated outside the United States, the productivity miracle (euphemism for software and robots replacing humans), and the hype factor (see new technology names).