The market has significantly outperformed the economy recently. It seems confusing because of all the headwinds making economic recovery so difficult. For example: housing and commercial real estate continuing to decline, an over-levered consumer, growing unemployment, etc. However, the market does not seem to be concerned about these headwinds (at this time) so what are traders and investors using to bid up this market? You see and read a lot about the recession being over or that we've avoided a depression or consumer attitudes are improving etc. But it appears there are five major reasons the market is outpacing the growth of the real economy.
1. The "economy" is assembled and dissected as a Statistical Model
Remember, most people see the market through the lens of the conventional, statistical model of Gross National Product (GDP.) This model looks at the economy from a consumption point of view: a dollar spent, no matter who spends it, represents a dollar of GDP. This of course is why many people see green shoots all over the place and hear so many declarations from politicians, economists and the media that the positive GDP growth in the third quarter means the recession is over. They don't seem to consider that a dollar spend today (increase in GDP) is a dollar that has to be subtracted (from GDP) through taxes later. Nor do they seem to consider that the dollar will be taken from someone who could probably use it more effectively.
2. U.S. fiscal policy is out of control
Government spending is out of control and congress has every intention of spending more and more. The government will pump in at least $1 trillion (above tax collections) this year and probably each year for the next ten years. That's a lot of GDP "growth." Add to that any new programs that might be enacted like health care spending or cash for clunkers. Also, the $800 billion stimulus package has not worked (business revenues still falling and unemployment has gone from 5% to 10%.) Yet, according to demand side economists (preferred by most politicians) like Paul Krugman at Princeton, we need another, bigger stimulus package if we really want to turn this economy around.
The government may not (at this time, be able to get another big, trillion-dollar stimulus package through Congress. However, they may be able to get a lot of "little, very targeted stimulus packages" through congress like: $11 billion more for home buyers, $33 billion for businesses on tax losses 3-5 years ago, $250 for each Social Security recipient at a cost of $14 billion, how about another "successful" cash for clunkers program because GM needs money, etc. All of this money will push up the GDP.
3. U. S. monetary policy is out of control
The Federal Reserve has reduced interest rates to 0-.25 percent (basically free money for banks); expanded its balance sheet by $1.75 trillion dollars and guaranteed the financial community $4.3 trillion to make sure banks will trade with other banks. The Fed, at its meeting last week, stated again that it intends to keep interest rates low (where they are) for an extended period of time (until the economy turns around or until they see inflation.)
This "liquidity" not only helps the banks recapitalize, it punishes savers and forces them to buy risk assets if they want to earn a return on their money (or simply spend it and help GDP.) All of this liquidity helps consumption, but it also causes malinvestment and the current "carry trade."
4. Stable, low-cost money encourages a Carry Trade
This simply means you capitalize on the returns you can get by borrowing money at low rates in one country and investing the funds in another country for a higher return. Remember reading about this when people were borrowing the Japanese yen at zero percent interest and investing in the U.S. at a higher rate of interest. Well, you can do that right now without leaving the U.S. We are now the carry trade. Banks can borrow from the Federal Reserve at zero percent and buy longer term Treasuries and make the difference. Or, some can short the dollar (it's down over 10 percent this year) and use the money to buy higher risk assets (equities, gold, etc) and make even more.
5. Global funds still streaming into the U.S.
This carry trade is not just being done by Americans, it's global. Countries around the world have more growth than ever and are taking advantage of the declining dollar and the rising assets like equities, commodities, etc. As we saw in the Technology bubble and the housing bubble, the world is awash in money looking for a place it will be treated well.
These are certainly not all of the reasons the market is rising faster than the economy is recovering, but they are some of the more significant reasons. Also they may stay in place until the headwinds become too strong.
Jim Zitek is an Investment Advisor with Feltl & Company. He is also a well regarded speaker on the topics of critical thinking skills and their application to the economy and other important topics. I learned years ago that you must learn how to separate good information from bad information if you are going to make better, more timely decisions. You can get more information at my web site athttp://www.zitek.net and at my blog http://www.paradigmadjustment.blogspot.com Article Source: http://EzineArticles.com/?expert=Jim_D_Zitek |  |
No comments:
Post a Comment