Hi Stingray,
Judging by your posts in BK thread and here, I see we share the same viewpoint on the markets.
IMO recession (I like the word depression better, cause it also describes what people feel) is inevitable once the bubble bursts.
For over a decade, all guns are pointed at inflation, the evil enemy. It looks like inflation took the role played by the USSR in Reagan's days. So after AG killed the inflation everybody is still kicking the dead body just to make sure it's dead.
If I can remember economics text books then 3% yearly rise of the CPI is DESIRED to keep growth (not to mention products improvement in the computer industry), and unemployment rate of 4% is considered full empoyment (due to friction).
I think the model for the coming years is Japan. Yes, there's a world of difference between the two countries' social structure and embedded values, but the main theme is the same.
As long as the stock market keeps climbing, there are some big unappreciated factors at play:
1. People just love "saving" in the rising stock market, and do not pull out as long as the bull is alive. This lowers spendings b/c everybody think they could spend much more in the future. The misconception that the stock market will rise forever brings people to irrational conclusions like: "Let's take a second mortgage on the house, put it in the market and eventually we'll pay back both mortgages from the gains and will have some to spare". These are IMO the players that joined the market in the recent year. This way, when personal debt reaches record highs, you can't see a single inflationary sign. The extra cash obtained by personal debt didn't go to consumption but rather to the stock market. Inflation is therefore not in the prices of goods and services but in the prices of stocks.
2. People feel rich as they see the constant growth in their paper assets. This and no other leads to the record high consumer confidence numbers. When conditions remain unchaged for a long period of time, people have a strange tendency to percieve them as constant, and to make linear extrapolations on them. One might say: "My portfolio made me $20,000 since January, so by the end of '98 i'll make another 60k". Another, who consider himself smarter would compound : "My 80k portfolio made 25% and is now 100k, in the second half of the year I'll make 25k and in '98 I'll make almot 70k. Wow!".
After the bubble bursts all of this would be gone. Suddenly the portfolios and retirement plans will start shrinking. Do you think the tendency to spend will grow when people stop feeling that well off?
This would start the snow ball rolling, and this is why I believe a bear market in itself will inevitably bring depression. If personal debt #s weren't so high maybe there was a chance for quick recovery, but when people deep in debt (MARGINS!) see their savings go up in smoke they would get very depressed, and so would the economy.
How about those Microsoft employees that percieve MSFT stocks they get better then cash?
Not a very cheerful Saturday morning post, but this is how I see the things to come.
Arik.
P.S. that last line reminded me of that '60s film about the youth that becomes President and orders everyone over 35 to a concentration camp. The theme song said: "Nothing can change the shape of things to come". |
