The Market Has Turned Up But What About the Economy?
With the DOW around 10,000, it's hard to argue with a market that has gone from 6,500 in March to 10,000 in October.
But many are now asking is it real? Will it hold? Will it continue to go up? No one knows for sure, but many believe it will continue to move higher because: 1.
Interest rates are at zero and the Federal Reserve has no plans to raise rates anytime soon, 2.
Government spending is increasing as fast as Congress can vote with current budget deficits at $1.
4 trillion, 3.
Massive spending coming on the health insurance program which will result in billions of additional borrowed money (do you really think congress is going to cut $500 billion out of Medicare when they have been unable to cut out five cents in the past,) 4.
The possibility of another stimulus package as soon as this fall.
5.
The Federal Reserve printing money 24/7, 6.
The Treasury trying to come up with new acronyms as fast as they come up with new "investment" programs, 7.
I could go on but you have the idea.
All of these spending programs add dollar-for-dollar to the Gross National Product (GDP.
) Spend a dollar and GDP goes up a dollar.
When you are spending trillions of dollars, you are going to get an up turn in GDP (more consumer, business and government spending.
) And when you spend month after month, you are going to get a trend.
So for those people who see the economy through the lens of a statistical model, defined and framed by the GDP, it may look like a V shaped recovery.
But what happens when the music stops? What happens when the government stops spending (IF that happens,) and the Federal Reserve raises rates and or stops printing money 24/7? What happens when the government has to hand off the economy to the private sector? To make that handoff; however, we will have to solve some of the problems preventing the economy from recovering faster.
For example: 1.
Get both major banks and regional/local banks healthy again because of mortgage defaults, credit card defaults, a significant downturn in commercial real estate loans, declining revenues, etc.
2.
Get consumers to spend again.
But they have to get de-leveraged first and increase their saving (which they are doing, but they have a long, long way to go (consumers were leveraged to 130% of assets and are now down somewhere around 127% of assets.
) 3.
Get positive job growth.
With a GDP growing at 1% per year (pessimists) or 3% per year (optimists,) we will not create enough new jobs for people entering the market let alone the 6 or 15 million (depending on how you count unemployment) already unemployed.
Continuing unemployment will compound the problems above, 4.
Get congress to come to their senses and stop spending, check their anti-capitalist, anti-free market, anti-globalization wishes and programs, 5.
Get congress to recognize that every dollar they impose in new taxes (and there are going to be significant new taxes) will have to come from the people they want to spend, invest and create new jobs.
6.
That is enough for starters.
So far, all we are doing is kicking the can down the road like they did in Japan after their real estate bust because dealing with these problems is very difficult and painful.
For example, to recapitalize the banks and reduce the toxic assets problem, we may have to "force" the bondholders of these banks to convert their "assets" into equity at a significant loss.
This is capitalism.
But it appears that not enough politicians in our mixed economy have to courage to solve this problem.
To answer the question of whether the market will continue its upward ways, the answer has to be yes; It very well could in the short-term.
The long term will depend on first solving some of the problems preventing real economic growth.
So, you need to be both a bull and a bear, stay tuned in and be willing to change colors at a moments notice.
But many are now asking is it real? Will it hold? Will it continue to go up? No one knows for sure, but many believe it will continue to move higher because: 1.
Interest rates are at zero and the Federal Reserve has no plans to raise rates anytime soon, 2.
Government spending is increasing as fast as Congress can vote with current budget deficits at $1.
4 trillion, 3.
Massive spending coming on the health insurance program which will result in billions of additional borrowed money (do you really think congress is going to cut $500 billion out of Medicare when they have been unable to cut out five cents in the past,) 4.
The possibility of another stimulus package as soon as this fall.
5.
The Federal Reserve printing money 24/7, 6.
The Treasury trying to come up with new acronyms as fast as they come up with new "investment" programs, 7.
I could go on but you have the idea.
All of these spending programs add dollar-for-dollar to the Gross National Product (GDP.
) Spend a dollar and GDP goes up a dollar.
When you are spending trillions of dollars, you are going to get an up turn in GDP (more consumer, business and government spending.
) And when you spend month after month, you are going to get a trend.
So for those people who see the economy through the lens of a statistical model, defined and framed by the GDP, it may look like a V shaped recovery.
But what happens when the music stops? What happens when the government stops spending (IF that happens,) and the Federal Reserve raises rates and or stops printing money 24/7? What happens when the government has to hand off the economy to the private sector? To make that handoff; however, we will have to solve some of the problems preventing the economy from recovering faster.
For example: 1.
Get both major banks and regional/local banks healthy again because of mortgage defaults, credit card defaults, a significant downturn in commercial real estate loans, declining revenues, etc.
2.
Get consumers to spend again.
But they have to get de-leveraged first and increase their saving (which they are doing, but they have a long, long way to go (consumers were leveraged to 130% of assets and are now down somewhere around 127% of assets.
) 3.
Get positive job growth.
With a GDP growing at 1% per year (pessimists) or 3% per year (optimists,) we will not create enough new jobs for people entering the market let alone the 6 or 15 million (depending on how you count unemployment) already unemployed.
Continuing unemployment will compound the problems above, 4.
Get congress to come to their senses and stop spending, check their anti-capitalist, anti-free market, anti-globalization wishes and programs, 5.
Get congress to recognize that every dollar they impose in new taxes (and there are going to be significant new taxes) will have to come from the people they want to spend, invest and create new jobs.
6.
That is enough for starters.
So far, all we are doing is kicking the can down the road like they did in Japan after their real estate bust because dealing with these problems is very difficult and painful.
For example, to recapitalize the banks and reduce the toxic assets problem, we may have to "force" the bondholders of these banks to convert their "assets" into equity at a significant loss.
This is capitalism.
But it appears that not enough politicians in our mixed economy have to courage to solve this problem.
To answer the question of whether the market will continue its upward ways, the answer has to be yes; It very well could in the short-term.
The long term will depend on first solving some of the problems preventing real economic growth.
So, you need to be both a bull and a bear, stay tuned in and be willing to change colors at a moments notice.