Ramsey, some counter 2 cents:
Domestic Economy: Yes, do not see 5% to 6% growth continuing indefinitely, but I do not think that a decline to let say 2% growth on the next through will be so catastrophic either. If we just get our trade balance back to around $200 B annually, we can provide an equivalent slow down of $300 B, which will be a reduction of 4% or so to just 1% growth, I do not think we will go that far, because the rate of growth of export will compensate part of that "end demand deficit". Unemployment in the next through (assuming a reduction of growth to 2%) would probably not get much above the 4.9% to 5.1%, a level still too low to cause any "collapse" in end demand and the economic catastrophe that doom sayers are predicting.
Global economy. True, in the last three years the US served as "the consumer of last resort", and thus our inflated trade deficit. But if you look at the rest of the world GDP (at about $30 Trillions), a reduction in our trade deficit of $300 Billions to a more "manageable" $200 Billions annually, would only decrease the world's GDP growth rate by 1%, and the injection of economic activities created by the US serving as the "consumer of last resort" has created enough momentum in domestic consumption in the rest of the world to compensate for this, even if Japan's own rate of economic growth remain somewhat weak. In many other parts of the world, like South Korea, selected SA countries and Europe, and possibly even some of the less developed countries, acceleration of economic activity is underway. So, I do not see a relapse of the problems dating back three years ago, even with a reduction of our own trade deficit and reduction in our own economic growth rate.
Inflation I agree completely, but that is actually a bullish sign for the US, as long as this excess capacity is "managed" and massive write offs of that excess capacity is not forced by some financial accident.
Liquidity Here, I disagree with you. There is a huge pool of liquidity, not only in money market funds in the US, but in the form of a mammoth 1 trillion dollars or so in the Japanese Postal saving system which is going to seek higher returns. Thus these funds are going to be "redistributed" and provide a pending pool of liquidity. There is also the "intention" of either paying down the debt in the US at the rate of between $10 to $20 B per month (or redistributing it in the form of tax relief), and these "projected surpluses" did not count on 5% growth rate of the US economy, but closer to 3%. Since I do not see unemployment ballooning much above 5% in the next through, the impact on the budget will not be so severe short term (later on when SS payments balloon, that is another story).
Thus liquidity pressure on the price of paper assets may be with us a little longer, IMHO.
Valuation, yes, valuations are excessive IMHO as well. That is why I "see" a protracted period where earnings catch up with valuations, this being achieved by a protracted period of 7 to 10 years where the US markets are bound between let say a low of 6000 to 13,500 on the DOW and about 1900 to 5500 on the NAZ.
Strategy? Well I do not short (I lack the right mental "constitution" for that), so cash when we get to the top of the range and reinvestment when we get through bottoms is my strategy, such a strategy must forgo the principles of "investing for the long haul" and rely heavily on market timing, asset allocation variations etc. Another strategy is identification of unique companies that will have growth in real earnings that are much faster than the growth of the economy, and buying when these earnings are discounted badly (during one of the next three to five bear markets in the next 10 years or so).
Zeev |
