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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (16005)	11/18/2004 3:49:37 PM
From: GraceZ	Read Replies (2) \| Respond to of 116555

Grace or anyone have some thoughts on the ramifications to the stock market if privatization takes hold? Any odds on privatization? Would the money be significant and immediate, or slow over time? I took a day to think about this and I think I have a reasonable answer. First off, whatever happens it will happen slowly, be considerably watered down by compromise (mid term elections and no one, Dem or Rep gets re-elected on a promise to screw around with SS) and deployed in stages if there are changes. Maybe the effect on the market will be similar to how the advent of self-directed IRAs effected the market in the 1980s. You have more money going into broad indices leading to the same kind of split personality we saw in the late 90s where small stocks suffered in a bear while big caps prominent in the indices became wildly overvalued. This is happening a little now with dividend paying stocks, even those with crappy prospects are moving up if they pay a dividend with little regard for whether or not they can continue paying it in the future. I expect that there will be the same limitations placed on these funds that we now have in 401s, that few will feel confident enough to put their money into truly self directed portfolios. This favors the big liquid stocks, they become brain dead stores of money even though they have prospects for growth that are severely limited by their size. While money flows in it doesn't necessarily end up in price. During the large decline off the top money continually flowed into large cap DOW stocks. As to it making the market on the whole move up, perhaps there would be some small short term effect because it will be believed that it'll benefit the market, benefit the financials. The amount of money flowing in will be small in comparison to something like the huge amount of money which I expect to move out of bonds and real estate over the next few years (the 20 year bond bull is near an end and I expect real estate to retrench here- both have sucked up savings that would have gone into the market). This will have a much more immediate positive effect on the market near term. I know you didn't believe me that real estate has had a limiting factor on the economy, but real estate is a dead end for money, it has no future productive value. It doesn't kill money as much as having it flow into a bank savings account (see Japan for the last ten years), but close. That said, the hot money that had been flowing into RE and bonds may not wind up in US stocks. There is plenty of evidence that a lot of it will go to foreign stocks, foreign direct investment and funds which own foreign stocks even though there are plenty of US companies which will benefit and have been benefiting from growth in Asia. Bottom line is that SS reform is too far off in the future to use it to justify fundamental conviction in the equities market today. Over the long term the market follows earnings, if you can't make an argument that US companies will grow their earnings, then all the guaranteed money flow in the world will not raise stock prices. The good news is that any money not sent to the government and kept in private hands, available for investment, multiplies numerous times and is the stuff of which economic growth is made. Growing the US economy is the only way out of the SS dilemma. Needless to say, spending cuts would have to be implemented to offset the loss of those funds. You can't simply borrow or tax your way out, both tend to put a limit on growth. Growing the economy (and consequently tax receipts) is the only proper way to raise the money needed to fund the commitments already made.