Far from the rally running out of steam, as I predicted (here and here) the rally merely paused, then continued steeply upward, revitalizing the talk of recovery and green shoots.
Gold has gone back to tracking the market, and has also done well, as has oil. This makes me wonder if the surging stock market isn't really an early sign of inflation. This is what can happen in financial markets - they act as a canary in a coal mine, sending off inflationary signals well before consumer prices are affected. But these signals are hard to read. We generally think a rising market is good, and it carries us along in a bullish daze. Even my phrase "done well" to indicate "rising price" is a sign of the positive spin we put on it.
But I wonder what the market is up to. All that money the Fed created has to go somewhere. A lot of money is still on the sidelines, waiting to get back in. Barron's asked recently, should you get in or get out? Could this be the time that the Dow chooses to get back above 10k, even claim 11k?
I do not believe that the worst is over. The economic restructuring that is inevitable has barely begun. But a rising market has a way of making us all feel better. The sooner we face the need to restore the balance between productive and unproductive labor, the better. We need to shake out the debt, and we need a sound currency under the dollar, which is sadly and hideously overvalued.
7 comments:
I think this stock market is peering out ahead 9-12 months and sensing the economy will surely be righted by then.
But my sense is the economy is in for another few years of up and down quarterly GDP numbers, at least.
So I predict the market will continue to gyrate up and down, but within a fairly narrow trading range. The market could even be lower a year from now.
Do you disagree?
Twelve months seems like a pretty short time to reverse an economic transformation that has been the work of 5 decades.
What I'm referring to here is the hollowing out of the US economy, as manufacturing, agriculture (and other productive economic activity) has declined in favor of services, finance, retail, etc. - all economically unproductive in the sense that they all must receive a portion of the surplus generated in the productive sector.
While we may see growth in the years to come, it will be held back by the need to redirect capital into productive sectors. Of course, this could happen quickly, in a year or two perhaps, if the market's signals were left in place.
Unfortunately, the market's signals are being consistently distorted by huge bailouts, fiscal stimulus, and money creation. That means the transition will take longer. I'd say it'll probably take 5 or 10 years at the rate we're going.
As far as the stock market goes, I'm going back to my earlier position that the market is in an extended technical bounce that could take it back to 10k or higher, but I think the market will ultimately re-test its low point of 6547 and seek still lower points.
Hi Dr. Bair, Just like you said, the retail business which is the non productivity portion of our economy, yet it is keep growing bigger. take Kohl, for instance, they opening 6 locations in the bay area. the conter argument is that it will provide thousands of jobs, so what are the differrences.
And at the same time, the car industrial might benefit from the CARs program that will definitely lead to thrive in the car manufacturing industry since reporters said that how popular this program have been and GM will get back on production line in the end of this month or so.
Not all jobs are equal. As Quesnay pointed out 250 years ago, there are situations where rising employment does not bode well for the economy; his example was employment in the military, which must be funded from the productive side of the economy.
As far as the government trying to put more money into the automakers, it begs the question: how many cars do Americans need? I've been thinking about this question, and I never hear much of an answer to it. Is it truly better, from a big-picture perspective, if everyone replaces their car every 2 years? I think what we're looking at now is a period where Americans will keep their cars (and probably other durable goods) longer than in the past. While that will hold back spending, it may be a plus for the environment.
But then are you disagree with that placing the old cars with the fuel efficient cars won't help to save the enviroment in the long run?
You make me sound like a monster who hates the environment!
The decision to buy a car is a complex one, because it's a consumption item with a long life, and because cars are generally financed, so they are sensitive to interest rates and future income.
The cash for clunkers program is all about replacement of existing cars. While I agree in principle that replacing old cars with higher-mileage new ones will probably result in a gain for the environment, I worry that introducing this large subsidy from the government distorts the car-buying decision too much. If it induces people to buy now who would've bought not too far in the future, there isn't much of a gain. If it induces people to buy who wouldn't be able to without the subsidy, then it's an open question. Being a redistribution, it's hard to say when taking the money from all taxpayers is good and when it's bad.
Since much of the spending we're doing now is debt-funded, and since the debt is expanding rapidly, it's an unsustainable situation.
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