January 4, 2005

Rotary Club of Galveston Island

H. L. "Shrub" Kempner, Jr. of Kempner Capital Management delivered his State of the Economy speech to the Rotary Club of Galveston Island at its noon meeting today. 

"I was right about the economic growth, but strikingly wrong about the long-term interest rates," Kempner said.  "Thirty year notes were at 5.17 percent at the end of 2003 -- I thought they would go to 5.75 percent.  They're ending 2004 at 4.82 percent."

Kempner said that he had thought employment was stronger than the early 2004 headlines and that turned out to be the case. "We've had a steady, although not massive, increase in employment on balance during the year, and now there are about 2.15 million more people working than there were at the beginning of 2004."

"Where I was most off," Kempner said, "I thought the dollar would be stronger, not weaker. As we all know, it's weaker by far, compared to a basket of currencies."

Kempner believes the 2005 U. S. economy will grow, but more slowly.  "About two and half to three percent, real," he says.  "And inflation will perk up as measured by the GDP Deflator to two percent or little above."

Short-term interest rates, says Kempner, will be raised several times more.  "Perhaps to as high as three and half percent, which will raise the prime rate comparably.  Long-term rates will rise to five and half percent in the 30-year bond."

"I don't have any idea what the dollar is going to do," Kempner said. "Our economy is growing twice as fast, or maybe more so, than Europe and Japan, both of which I believe will be even more stagnant in 2005 than they were in 2004.  China's growth is slowing on purpose.  We're raising our interest rates, in part to defend the value of the dollar, I think."

All those things, said Kempner, would ordinarily lead one to predict a stronger dollar.  "But they all also existed during 2004 and the dollar was consistently weaker."  

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