Jacob, I agree that At some point ...
3. consumers get scared enough to start saving, lenders get scared enough to stop all sub-prime lending (to consumers, businesses, and governments
4. consumption finally cracks (with incomes flat, consumption contracts enough for significant deleveraging to happen)
However, I think that this point marks the theoretical nadir of the business cycle, rather than an event that is destined to transpire during this business cycle.
Intelligent policy measures by the Fed can forestall or prevent the final reckoning scenario that you have so eloquently portrayed. Interest rates can and should go up again, though not to the moon. [How does your interest rate forecast jibe with your zero-inflation forecast?] Housing prices can stabilize without falling into an abyss. Consumers can adjust their marginal propensity to save without necessarily sending the economy off the cliff. Default rates on sub-prime loans can rise without choking off ALL sub-prime lending. The consumption engine can temporarily stall without "cracking". And capex can stay in a rut for over a year without signalling doomsday for companies with sufficiently strong balance sheets to weather the storm.
The reckoning day that you envision can only take place in a "loss of confidence" environment such as we are now witnessing in Venezuela. But it is not a foregone conclusion that the US will suffer the same fate. The latest Michigan and Conference Board confidence numbers do not confirm your dour predictions. They are consistent with a US economy that is no longer in a recession and is actually in recovery mode. Sure it may recover slowly and in fits and starts. That would not be unprecedented. As it recovers it is likely to bring up the rest of the world with it.
Your prognistications have taken on such a pessimistic cast of late that it makes me even more bullish because you and many other young investors have already acted on your beliefs by disinvesting and hoarding cash. This is probably the first significant bear market that you have encountered as an investor and it has shaken your confidence in the economy. My prediction is that once you catch the slightest whiff of inflation in the breeze, which runs counter to your zero-inflation forecast, you will desert your depreciating cash and come running back to your favorite asset class, the cheap tech gorilla, regardless of whether AMAT is selling at $10 or even $20.
Sam |
