I definitely agree with Don Hays that the monetary aggregates have been growing meteorically. I'm not sure if
I buy into this analogue of 1980 or not.
The Taskmaster
A Load of Bull -- for a Few Months at Least
By Aaron L. Task
Senior Writer
5/22/01 7:42 PM ET
URL: thestreet.com
NEW YORK -- Stocks took a slow ride down today, but given the recent run-up, most investors were content to take it easy. Volume was diminished from recent levels as the Dow Jones Industrial Average fell 0.7% and the S&P 500 shed 0.3%, although the Nasdaq Composite managed to rise 0.4%.
The relatively subdued action reflected the dueling forces of investors' fears that the rally is yet another "bear trap" vs. growing acceptance a new bull market is under way, specifically in beaten-up tech bellwethers such as Cisco (CSCO:Nasdaq) and WorldCom (WCOM:Nasdaq).
Don Hays of Hays Advisory Group in Nashville, Tenn., reiterated his ongoing support for the bullish argument (although not necessarily for big-cap tech) in a conference call today.
The new bull market is "not over yet," he declared. "We still have plenty to go."
As reported last night, Hays established some upside parameters for the major indices Monday, as follows: 12,600 for the Dow; 1,430 for the S&P 500; 2,820 for the Comp; and 13,500 for the Wilshire 5000 index. Those targets weren't repeated in the call, but the veteran strategist did provide some time frames (give time or price, but not both, right?).
If a repeat of the 1980 scenario continues to unfold, Hays said the Dow won't peak until sometime between August and October, and broader market indices not until November-December. The averages will then fall into a period of volatile, range-bound trading, he forecast, paving the way for another bear market beginning as early as next June. The next bear will be generated by growing evidence the economy remains weak despite the Federal Reserve's aggressive easing, he suggested.
There are "too many excesses" -- including public and private debt loads, and overcapacity in technology -- to believe another new "supercycle" bull market is under way, Hays argued. "As optimism returns, it will come back to haunt us in the next 12-24 months after we get the [current] bull market through with."
But because six months constitutes "long term" these days, let's focus on the similarities Hays sees between today and 1980.
Now, as then, the market rallied not due to economic improvements, but because of a huge increase in money supply, induced (in this case) by both the Fed and investors parking assets in the "safe haven" of money market funds. "But you can bet your bottom dollar that money is not going to sit there," he said. When there is "more money than the economy can eat, it [eventually] goes into financial instruments and feeds a bull market."
Earlier this month, the 13-week annualized growth rate of MZM money supply was at 28%, Hays noted with astonishment. The growth rate has more recently cooled, and he predicted it will continue to decline in the coming year.
As with the Nikkei-Nasdaq comparison, Hays views the 1980 scenario as a guidepost, not a precise road map. The most prominent difference he sees between today and 1980 being the inflation outlook.
Whereas inflation contributed to the economic (and market) downturn of 1981-82, "there is no chance -- zero -- of any significant inflation popping back up" today, Hays argued. "Inflation will peak in the next three months and come plunging back down again in the next 12 to 24 months because of [the deflationary forces of] globalization and the technology revolution."
(While I have been harping on the inflation theme lately (and believe the threat real), it would be disingenuous (and boring) to not share the views of someone whose work and experience I respect just because it differs from my own. Hays' short-term market calls haven't always worked, but his macro calls have been impressive.)
As for apparent inflation indicators, Hays called them "decoys." He believes long-dated Treasuries will reverse their recent swoon and yield less than 4% within the next two years (notably, last year he predicted they would approach 4% by October 2001). Lumber prices are too volatile for the recent spike to be taken too seriously, the strategist said, adding that while gold might rally to as high as $330 an ounce, that would still be "just a blip" on its long-term chart.
Finally, signs of economic weakness in Germany -- notably today's weaker-than-expected report on business confidence -- and continued deterioration in Japan, suggest the world economy will remain weak -- restraining pricing pressure, Hays said. Plus, as weakness in Japan and Germany extends, politicians throughout Europe and Asia will "welcome anything that helps exports," most notably weaker currencies.
Today, the euro traded at a six-month low vs. the greenback in the wake of the news out of Germany.
After the Gold Rush, Part 2
Hays' view that there is "no better place to keep your money" than in the dollar runs afoul of the conventional wisdom on Wall Street, particularly among gold's fans.
"The reason there's no inflation is because the dollar is elevated, but if that were to change -- for whatever reason -- our inflation rates would be substantially higher," said John Hathaway, senior portfolio manager at Tocqueville Asset Management.
The dollar is not terribly overvalued vs. other major currencies, Hathaway admitted, except in the esteem in which it is held and the willingness of foreign producers to take dollars. The fund manager envisions that situation eventually changing because of geopolitical developments, or just a shift in sentiment. (If so, Saddam Hussein might -- egads -- be viewed as "visionary" for his efforts last year to get Iraqi monies held by the United Nations converted to euros.)
Additionally, the Fed's solution to a string of problems -- from the 1987 crash, to the S&L crisis, to Long Term Capital Management, to Y2K, to the recent bursting of the Nasdaq bubble -- has been "to print money and [Alan] Greenspan has been a central player," Hathaway recalled. "Sooner or later he's only compounding the mistakes. When the chickens come home to roost, you can't put the toothpaste back in the tube. That's why you might want to have some exposure to the [yellow] metal."
Today, gold fell 0.1% to $285.50 amid concerns that Monday marked a technical break of its recent uptrend. The Philadelphia Stock Exchange Gold & Silver Index tumbled 4.5%.
Gold "ought to back and fill" after its recent advance, Hathaway conceded, adding the key is whether previous technical resistance at $275 an ounce now proves to be support for the metal. "The only reason gold would go rocketing up from here without backing and filling is if there were some serious shorts caught wrong-footed and had some urgency to do something about it."
P.S.
I had actually called the fund manager about that subject -- rumors of a hedged producer (and its broker/dealers) in a similar situation as Ashanti Goldfields faced back in late 1999. Hathaway had heard such rumors -- many coming out of an industry conference in Istanbul, Turkey, from which I'm trying to get some reconnaissance -- but had no specific knowledge.
Stay tuned. |
