Re: Looming Disaster or Minor Correction?
Thanks to everyone for all the great responses. They were very interesting to read. So the consensus answer appears to be, Minor Correction." The three most popular reasons for this, in order of importance:
1. liquidity
2. liquidity
3. liquidity
Well this is certainly impossible to argue with. Yes, you can even buy stocks over the Internet using a credit card. And yes, they even gave that gangster free airtime on Cnnfn to push his website. I ask my neighbors what companies they are buying (they make their own investment decisions). They say, "We can't remember." I ask them how do you make the decisions? They say, "Oh we really don't know. We watch the TV and buy what they say." Ahh...okay. Then I ask a friend why did you just buy Lucent? His answer is, "Because they make the things that make things work." Ahh...okay. And yet, embarrassing enough, some of these people are doing better than I am. So liquidity wins, hands down. I guess it's pretty stupid to swim against this tide. When in Holland, buy tulips. When in America, buy stocks.
Speaking of liquidity, for all those that believe this is driving the current market (about all of us I think) the Barron's interview was highly focused on this. Albert Edwards forecast of what has happened, and may happen, to the world's equities markets was very interesting. A lot of his theory is based on liquidity. It took up at least a third of the interview. You know when Jimmy Rogers , and most doomsday prophets, jumps up on the table and yell, "The sky is falling," it's so easy to ignore them because they base their thinking on some many wild premises. That's what is slightly unnerving about the Barron's interview. It seems to be based on somewhat solid grounds. BUT his liquidity induced US stock market crash via banks scenario, is a little overblown (IMO). He focused a great deal on the L, which also sounds a lot like M3 to me, getting out of hand because of banks. He said banks were pumping up the equities asset bubble to the point of bursting. Equities may be being pumped up, but I'm not so sure it's on the back of banks?
I think someone mentioned they didn't quite understand Albert's money supply argument. Here is what I think he was basically saying. There is a rapidly increasing amount of "L" in the US economy (L=cash, checking accounts, money market funds, travelers checks, mutual funds, plus kitchen sink). And if consumers aren't buying junk (durable and non-durable goods), then where's it all going? Well Albert believes it's going into "asset inflation." Specifically, stocks. Where's it all coming from? Well Albert believes banks are the culprit, who Albert says have, "an unerring nose for the next disaster." Albert believes the banks will keep on lending until the bubble goes, "BOOM." And taxpayers have to bail them out again. It appeared to me he kept inferring we have not only a bubble in equities, but also real estate. As far as Florida is concerned, real estate appreciation has been zilch for eight years. I just can't see any indication that the fall of inflated (?) real estate prices is going to be a catalyst for a correction in the equities markets. He lost me on that one? Overall, just seemed like his argument concerning money supply, in general, wasn't super strong. But I may have misunderstood what he was saying. And there were a couple of other statements I either didn't get or it makes no sense either. But others have brought them up already.
I believe Albert Edwards missed a couple of significant points unique to this current market.
First, the Japanese (and others) foreign capital inflows to the US markets. This is only going to increase. It was $23 billion that flowed into the US in the month of April. Now remember April 1st was just the first day of Japan's slackened regulations to make it much easier to send savings offshore. Merrill Lynch has 2,000 employees there and I know what they are selling. The inflows should increase. It doesn't take a genius to figure out that, Rubin's lack of talking the greenback up, a very sharp increase in Japan's unemployment followed by a threat of interest rate cuts (it has to be a threat because they are almost zero), mean a further weakening of the yen will follow. My neighbors, if they were Japanese, would even be able to figure that one out. So knowing this, I bet a lot of Japanese head for the Merrill Lynch office real soon to send even more money to the US. Should be interesting to see the next few months of numbers. Lots of downward pressure on US bond yields. Of course, that translates to, "Buy stocks!"
Secondly, and even more important, Albert missed is the US Baby Boom phenomenon. There is an unprecedented large group of people who have no faith in the US government social security system and are taking matters into their own hands. This has been a well documented event. Isn't it something like 100 million people have a stake in US equities today. Didn't $38 billion flow into the market just in the month of April. I bet a large majority of SI members are in this category. There are unprecedented numbers of people who stash away a portion of their paychecks for retirement or putting children through college. He never mentioned this source of liquidity.
I'm glad I posed my question about, "disaster or correction." I was definitely reminded of the strength of "liquidity." It's a good place to focus. Good or bad it's here for now. Maybe the question is for how long can this prop up the market? And, is there a chance of the air being let out slowly instead of a loud, "Boom?" None of us know these answers, but at least we can make better guesses.
MikeM(From Florida)
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