I admit it: the current rally is perplexing to me. In an attempt to try and figure out what exactly is going on I'm going to present what I see as the bull and bear market arguments to see which makes the most sense.
The Bear Market
GDP growth is declining. According to the Bureau of Economic Analysis GDP growth for the last three quarters was 2.6%, 2% and 2.5%. Gross Private Domestic Investment was the primary reason for th decline. Residential investment has dropped 11.1%, 18.7% and 19.8% for the last three quarters. While nonresidential investment was positive for the first two of these three quarters, it declined 3.1% in the fourth quarter of 2006.
While personal consumption expenditures have increased, the consumer is heavily indebted. Household debt has increased from 97% of disposable income in 2000 to over 130% in 2006 (this information is from the Federal Reserve's Flow of Funds report). At some point these debt levels will constrain consumer spending, especially with a negative savings rate.
While inflation is not out-of-control, it is above the Fed's stated 1%-2% comfort range. Energy and agricultural prices are under upward price pressure which will prevent inflation from coming down. This in turn will keep the Federal Reserve on the sideline if GDP growth continues to slide.
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Commercial real estate...
http://suddendebt.blogspot.com/
Good stuff this morning, bonddad. For starters, just look at the Q4 2006 BEA breakout, ranked by strength:
National defense +12.3%
Real exports of goods and services +10.6%
Real federal government spending +4.6%
Real personal consumption expenditures+4.2%
Real state/local government spending +2.7%
Gross domestic purchases excluding food, energy +2.4%
Nonresidential structures +0.8%
gross domestic purchases +0.2%
private inventories -1.16%
Real imports of goods and services -2.6%
Real nonresidential fixed investment -3.1%
Equipment and software -4.8%
Nondefense federal government spending -9.6% percent
Real residential fixed investment -19.8%
Granted, this is 4-7 months ago, so it doesn't tell you about "bull/bear" market arguments, but it makes it pretty clear what is driving the economy.
You've alluded to 1 of them with your post re exports, and another in your post re liquidity.
This is an inflationary (in the moonetarist/Austrian sense) credit-fueled asset bubble. The debt-money gets created, it goes to foreign governments/corporations, and foreign and domestic financial players. The new money is used to buy up assets -- almost any kind of asset. 30% of the S&P 500 are now financials. I've also read that if you take financials out of the S&P, there's basically zero growth since about 2004.(BTW, this was one of the things predicted in the "death by inflation" scenario in "Bankruptcy 1995").
In 2001 we had a profit recession where the consumer didn't participate. We could just as easily now be heading for a consumer recession where (global) profits don't participate. Cheers.
I thought I was learning things economic. Coming along a little, with the help of sites like this. But I am perplexed about what is happening in the market. The bull charges forward.
Oh well.
Grandma Jo
Current rally is because of weak dollar. Good stocks are just repriced in new, cheaper dollars, so they "grow".
Current rally is because of weak dollar. Good stocks are just repriced in new, cheaper dollars, so they "grow".
However, if the expectation develops that the dollar will continue to weaken, then rather than attracting funds by offering bargains, the domestic market will see funds leave to markets overseas to wait out the slide and snap up even better bargains then.
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