Thanks Marc. I never had much respect for ML (except in the Semies arena), but now I know they suck. They should hire me as their chief economist and even though I only have a minor in it, they'd be much better off <G>
Steinberg's argument has more holes in it than the strainer my mother used for her cooking. And many parts of his points are contradictory (at least as presented here). But rather than continuing on why he was wrong, let me add my 2 cents to the inflation/deflation argument.
Undoubtedly, there is a deflation wave sweeping the globe. However, as I pointed out last year, deflation does not necessitate soup lines and misery. There have been times when a sustained (10 years) mild deflationary period has led to great prosperity for the people. In addition, though the stock prices correlate to economic growth, they correlate even more to money supply growth and demographics. This is another way of saying that so long as the public pours money into the market, the stocks will go up regardless of their valuations (something which seems to be lost on ML's economist). The global financial markets are very interconnected and thus ironically, a great rise in Asian and European markets may come at the cost of US. I don't see this happening at the moment.
I recently witnessed a great debate between the "inflationists" and "deflationists". To summarize the debate, the deflation camp relies heavily on historical precedences and long-wave arguments. The inflationists answer (and it was a good one IMO) was that 70% of the US economy is service based and while there is deflation in commodities and manufacturing due to globalization, services are based on the local market and are still in an inflationary cycle. i.e it is different this time.
I think these two forces should counter each other pretty well for another 5~10 years. After that however, we may be facing serious deflation (not to mention one hell of a bear market) based on the demographics.
BTW, I don't see much room for corporate profit growth in the foreseeable future. In fact, if you look at the SP500 reported earnings (as oppose to operating earnings) they've been flat to down since 1996. But I think we threw away valuations in 1995 and liquidity will continue to rule.
thanks again for the post,
Sun Tzu |
