Take for instance the recent run up in stocks, up ~20% in the last year, and up a total of ~40% in the last two years. This stock run up in the financial economy is in spite of the dismal real economy which was (still is?) in the midst of the Great Recession. The classic explanation for this jump in stock prices is anticipation of strong economic growth that many were guessing was just around the next fiscal quarter or two.
But continued lackluster economic growth, high unemployment, and inflation fears have the stock markets retreating 4% in the last month. QE and QE2 have driven commodity, gold, silver, and oil prices up (and the dollar down to a degree). Low interest rates have also helped fuel the commodity boom. I don’t say commodity bubble, I say boom, because I don’t believe it is a bubble… merely a precursor to higher inflation.
Further the prospects of Congressional legislation past and present loom as large economy and business-dampening prospects.
- Dodd-Frank Act regulating all sorts of financial and non-financial items.
- Obama Care.
- The real possibility of tax increases as part of debt ceiling deal.
The danger of Dodd-Frank, which deals primarily with the financial economy, is that it may spill over into the real economy as well — a form of fiscal contagion. Obama Care hits right in the solar plexus of the real economy soon. Potential tax increases are a kidney shot to the real economy.
Also on the horizon is the debt crisis in Europe, currently centered around Greece, but with dominoes in Portugal, Spain, Italy and Ireland ready to fall.
So, why on earth would I be neutral to mildly bearish (long term) on US equities? The title “Wired on High Finance” sums it up.
- Wired, as is in connected, by wire, cable, fiber optics, or wireless. The continuing computational and connectivity revolution is only accelerating. This helps business productivity, which helps business (the real economy) and inevitably the financial economy (the stock market).
- High Finance. High finance in the US eventually finds a way. Take for instance GE which managed to pay zero income tax last year. Big money always finds a way. Call it industriousness, creativity, or greed… it gets things done.
Without all of the governmental fiscal and regulatory “headwinds” (as Bernanke has called them), my outlook would be bullish. Despite them, I believe that the power of a wired world of high finance will find ways to resist the government onslaught. Either through back-room deals (the new and no-so-new crony capitalism) or the ballot box (voters tired of 9% unemployment), these “headwinds” will be reduced, skirted, or avoided.
And while CPI stands for Consumer Price Index, most commonly, it also stands for Cycles Per Instruction — one measure of computer processing speed. So while the mainstream CPI may understate prices, the other CPI is very favorable to computation power. (In both cases keeping true CPI down is desirable.)
Notice I am neutral to mildly bullish on the US (and global) economy. That is why I, personally, am increasingly invested in investments that reflect that believe — namely covered-call market-index strategies. That is why I have switches some of my ETF investments from SPY (an S&P500 index EFT) to PBP (an S&P500 covered-call ETF). Inflation fears and low interest rates have continued to cause me to shy away from most bonds and bond fund… with the exception of high-yield (junk) bonds.
Disclaimer: These are my personal investing thoughts, opinions, and choices as of today. No one can reliably predict the markets (stock, bond, futures, options) or interest rates, certainly not me.