Tom,
>>For that source of funds to end, there will have to be either legislative changes or else there will need to be a sea-change in attitudes that cause people en-masse to refrain from investing their savings in the markets. I don't believe that absent some external trigger that the latter is going to happen.
The very long term is not that different from the short term in the markets, only the reasons are different.
Same as the market can be overbought or oversold short term, it can be overbought or oversold on the mega scale.
It sure can stay there for a long time, but eventually it snaps back, and the very long term rubber band effect is even more pronounced because of the cross connection between the stock market and the economy.
IMO the current stock market is not only reflecting the economy but leading it. Greenspan knows that, too, and commented about the households that show negative savings rate because they see their portfolio gains as permanent.
AG was carefull enough to faintly hint to his disaproval of that this concept (relying on paper gains for consumption), but anyone that looks at the other side of the coin can see the avalanch that will happen once the stock market cannot cover for the consumption beyond the households' means.
It goes like this:
1. The stock market stops producing the now anticipated 25%annual gain (In '99 it would be a miracle to see anything over 10% S&P gain).
2. Used to consuming beyond its means, the average household is eating up its savings, instead of watching them grow.
3. New money cannot be funneled into the market by the households, without lowering consumption.
4. The market crashes.
5. No more IPOs, employees stock options become worthless.
6. Households watch their saving shrink, and decrease consumption to compensate.
7. Corporate profits drop because the overcapacity is now in plain view.
8. The goldylocks psychology reverses, people start worrying for their financial future and change their tastes fundamentally.
9. The rubberband snaps back - depression: high unemployment, deflation, massive shrinkage.
10. Stock valuation reflect discount on corporate assets.
11. Warren Buffett buys quality stocks for a song.
It took four years from '29-'33.
My guess that this time it would take 5 years.
I'm not saying we started on the way down. My opinion is (if 2yk will be benign) that there is one more big rally left (EW Intermediate 5) that could last between a few months and up to 3 years, after the current Intermediate 4 corrects for the rally since 12/94, and brings us to S&P 900 area in December.
But when it comes, this would be the greatest economic avalanche of all time. Bigger then the Big Depression, bigger then the South Sea bubble. I see this process as deterministic since 10/97.
ATG |
