Another update in a series of posts on this subject. The selloff of recent days looks like another wiggle on this chart, not a change in direction. When the dollar rises and equities fall, as they have recently, it's a sign that the market is cautious. Everyone's been worried about a correction, and with good news today (the ISM report up much more than expected) failing to rally the market, lots of people are probably taking profits and retreating to safe havens like the dollar.Concern over banking losses has presumably contributed to the weakness today, but I think the news that the economy is in full recovery mode, as suggested by the ISM release this morning, should trump just about everything else in the end.
I am in the "New Normal" camp. You had your equity rally ;) Now it will be a long slug fest for quite some time.
ReplyDeleteMost of the returns during the boom years came at the front end of that rally. We hardly have the sort of tailwinds it will require to power ahead.
China is a sterling example of what can happen with all the exuberance these days.
Obviously you believe everyone is depressed and fearful, thus it only requires less than terrible news to fuel the rally along.
I think attitudes have changed and will need to see some real jobs created to power ahead. And I am not talking about transfer payment jobs or other government funded shenanigans.
Real jobs, real wage increases, and real security for retirement. Those three things have been in short supply and we have all witnessed how quickly you can go from retirement to Walmart employee these days.
If we got to the point that we had real nice job increases, then I think the market would be up another 50% from here. So there's huge upside. As for downside risk, aren't people still worried about all sorts of things? The economy would have to really hit the skids, in my view, for there to be meaningful downside risk. Meanwhile, super-easy monetary policy and a global upturn in manufacturing are like having a free insurance policy against downside risk. Add it all up and I continue to think the market is cheap, even if we do have a "new-normal" type of recovery (which is basically what I'm calling for).
ReplyDelete"Long-term unemployment soars"
ReplyDeletehttp://www.epi.org/publications/entry/long-term_unemployment_soars/#When:17:44:48Z
One interesting piece you do not hear anyone speaking about is during the current downturn, almost 2M jobs were needed just to keep up with population growth.
Taking that into consideration, we are over 9M jobs short over the past 19 months. Not the 6.7M headline news talks about.
Staggering.
It is going to take "real", back to basics, growth measures, to get me excited about America.
"super-easy monetary policy and a global upturn in manufacturing are like having a free insurance policy against downside risk."
ReplyDeleteI would have thought that you would look at like this: you're paying for the option by taking on inflation risk.
MW: That's a good point. I would partially counter by saying that the effects of inflationary monetary policy are very difficult to predict. It may take a year or two to show up. In the meantime, easy money lubricates the wheels of finance, and easy money obviously reduces default risk, which is not exactly bad for the owners of debt, and by extension, the owners of debt-financed equity.
ReplyDelete