Why SPY Could Be 20%-30% Higher by 2010 20 comments
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It’s a little disquieting to see the S&P 500 sell off by 5% when an $800-billion stimulus package clears the U.S. Senate and Treasury Secretary Timothy Geithner announces a new rescue plan for banks, homeowners, and the economy. Investors’ confidence in policy makers has ebbed again, and if the loss in confidence goes too far, it will contribute to the recession.
But it would be a mistake to see the government as powerless. As the recession deepens, it gives the Federal Reserve more scope to monetize debt and other assets. The amounts of new money created will be large, and inevitably will bring out louder prophecies of hyperinflation and other doom-and-gloom scenarios.
But before the wave of new purchasing power reaches an inflationary threshold, the economy has to experience an upswing and reach full employment. That could be another two years or so, given the customary lags – lots of time to make a good return in the stock market. The SPDR S&P 500 ETF (SPY) could very well be 20% to 30% higher by the end of 2010 or at least by mid-2011.
Presumably, as the economy approaches full employment, the Federal Reserve will act to withdraw liquidity from the economy. It won’t let the economy shoot off into galloping inflation, as many of the gloomy prognosticators seem to be overlooking. Granted, the ride will not be smooth.
As for a collapse in the U.S. dollar and soaring U.S. interest rates, they are not likely to happen while emerging countries continue to repress their currencies in efforts to boost exports to the U.S. and the developed countries. That means they should have accumulations of U.S. dollar reserves to recycle back into U.S. bonds and other assets.
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You write:
'But it would be a mistake to see the government as powerless. As the recession deepens, it gives the Federal Reserve more scope to monetize debt and other assets.'
You see monetizing debt as a good thing?! My question is how would that NOT create inflation? Increasing the money supply IS the definition of inflation! A currency is basically exchangeable for the goods a country produces, so, ceteris paribus, a country increases its money supply, that money is worth less.
The argument about other economies doing as badly is fallacious. What you are basically saying is every government on Earth could print as much as they want and it wouldn't affect the currency because all the others are doing the same! I mean come on, that's just ridiculous!
Again, you write:
'It won’t let the economy shoot off into galloping inflation, as many of the gloomy prognosticators seem to be overlooking.'
So basically you are saying that the government will raise rates as much as in the early 80s when inflation was a big concern?! There is no way this will be good for economic growth, and, therefore, the stock market.
Maybe SPY will end up going up 20%-30% as you say, but I sincerely doubt it will be for the reasons mentioned above.
The dollar will continue to be strong because deflationary pressures in the US will prevail due to increasing savings rate. Deflation will put a lid on economic growth. Investors will continue to "panic" and buy treasuries which in turn will support the US government's need for funds. The system will right itself. I'm not saying it's going to be pretty though. The UK very well might go belly up. And to say the stock market will rise 20%-30% from this level (S&P 826) isn't saying a whole lot because such a move is within normal noise of weekly swings in share prices. It's like saying it's probably going to rain 4 days next month.
a waste of time
the us dollar has become different. the usd is the worlds only true reserve currency. this is true for central banks, oil producers metal producers, but also everyday people around the world. this meaningful trust and faith makes the dollar different.
the dollar is almost like a new gold. printing dollars is almost like mining gold. so, increasing the money supply in dollars does not have to lead to hyper-inflation. only if world wide people change their behavior and start to act like they have lost faith and trust in the dollar and stop wanting dollars will we see hyper-inflation.
the author's premise is not hurt by the dollar because even though all people know the dollar is worth four cents, we behave like it is worth 100 cents. this kind of belief is what is money.
On Feb 11 08:06 AM Jason Lemire wrote:
> I'll have to disagree with the fundamental analysis presented in
> this article.
>
> You write:
>
> 'But it would be a mistake to see the government as powerless. As
> the recession deepens, it gives the Federal Reserve more scope to
> monetize debt and other assets.'
>
> You see monetizing debt as a good thing?! My question is how would
> that NOT create inflation? Increasing the money supply IS the definition
> of inflation! A currency is basically exchangeable for the goods
> a country produces, so, ceteris paribus, a country increases its
> money supply, that money is worth less.
>
> The argument about other economies doing as badly is fallacious.
> What you are basically saying is every government on Earth could
> print as much as they want and it wouldn't affect the currency because
> all the others are doing the same! I mean come on, that's just ridiculous!
>
>
> Again, you write:
>
> 'It won’t let the economy shoot off into galloping inflation, as
> many of the gloomy prognosticators seem to be overlooking.'
>
> So basically you are saying that the government will raise rates
> as much as in the early 80s when inflation was a big concern?! There
> is no way this will be good for economic growth, and, therefore,
> the stock market.
>
> Maybe SPY will end up going up 20%-30% as you say, but I sincerely
> doubt it will be for the reasons mentioned above.
> Federal Reserve will act to withdraw liquidity from the economy. It won’t
> let the economy shoot off into galloping inflation
If they know how to do that, why did their efforts fail in the 70s?
stock-market-club.blog...
Do you just want to make yourself feel good by a perceived rise in notional value, go right ahead.
The 800 pound gorilla in the room is the monetary policy. The central bankers of the world are broadcasting a race to the bottom. They will melt down all asset classes & then buy up everything for pennies on the soon to be worthless dollars and we collectively cheer them on.
Pathetic. When you are ready to get real & get back onto a gold standard, let me know. Until we have sound money, no index will mean anything to me.
Peace!
We ARE in a despression and we are losing jobs at the same rate as in the depression and our funemental problems are WORSE. Housing continues to deteriorate and will do so for a year or two, according to the best minds in the business; the same people who have been right againa and again and again.
Reasearch the stock market and explain why a PE of 20 (for all major indexes) with falling earnings is undervalued when there is little hope of earnings increasing, possibly for years?
Research long term trends not just back to 1980 or 1950. We are in a generational unwind that will keep us in a secular bear market for another decade.
Exlplain how, with a generation of aging baby boomers, our economy will grow given the lack of savings and falling wealth effect?
But here's what I think is his most interesting statement:
"As for a collapse in the U.S. dollar and soaring U.S. interest rates, they are not likely to happen while emerging countries continue to repress their currencies in efforts to boost exports to the U.S. and the developed countries. That means they should have accumulations of U.S. dollar reserves to recycle back into U.S. bonds and other assets."
To me, the future value of the dollar (and if it retains any) is the most pressing issue at stake as we try to engineer our way out of the current crisis.
"this meaningful trust and faith makes the dollar different.
the dollar is almost like a new gold. printing dollars is almost like mining gold. so, increasing the money supply in dollars does not have to lead to hyper-inflation."
Paper money is not gold, despite widespread irrational faith. Gold can only be mined at a measured rate, whereas fiat currencies have infinite supply growth potential. There will always be an upper bound to which faith is supplanted with reality.
On Feb 11 09:25 AM User 17459 wrote:
> the original author did not say this, these are my comments only.
>
>
> the us dollar has become different. the usd is the worlds only true
> reserve currency. this is true for central banks, oil producers metal
> producers, but also everyday people around the world. this meaningful
> trust and faith makes the dollar different.
> the dollar is almost like a new gold. printing dollars is almost
> like mining gold. so, increasing the money supply in dollars does
> not have to lead to hyper-inflation. only if world wide people change
> their behavior and start to act like they have lost faith and trust
> in the dollar and stop wanting dollars will we see hyper-inflation.
>
> the author's premise is not hurt by the dollar because even though
> all people know the dollar is worth four cents, we behave like it
> is worth 100 cents. this kind of belief is what is money.
Congress should take the responsibility given to them and control the whole process of money creation and supply and the interest rates that follow their policies. Likewise, they should be responsible for the budget, not the President.
I know the concept of that is scary. But after all, we are suppose to be a democracy and follow the structure developed in the Constitution, not having elected officials constantly abrogate the Constitution by delegating authority to non-elected agencies that sometimes aren't even government bodies.
If we don't like elected official being in control we should think twice about who we're electing.
Another assumption by the Austrians (Schiff, Rogers, Faber, etc.) is that other countries whose lifeblood is exports will allow their currencies to go through the roof vis a vis the dollar. For all the talk of Asia growing a consumer economy, that's going to take at least a generation. Thrift is in East Asian's culture. Between now and 10 years, they simply have no choice but to maximize their exports for all they can. That's why I was not surprised to read in the Financial Times today that China will continue to buy Treasuries. It's the lesser evil for them.
Even if at one point there would be a dollar scare (markets do what they do, so it's always possible), it would be short-lived as the US for all its faults is still the most dynamic and innovative economy. If the US got really cheap, purchasing power parity would quickly do its work. I, for one, would be in the market for a pad in Manhattan or Miami if the bottom were to fall out from under the dollar. As for the Austrians' favorite hedge, gold, if it ever really goes to $3000, maybe even $5000, it will be as stable as nitroglycerin at that level. The only demand at that level will be speculative, and we know what happens when the trend starts to turn and people all at once wake up to find that they Greater Fool was themselves. In the same vein, gold bugs like to point out that gold went to $850 in 1980, but what they forget to point out is that it fell off a cliff after that. How many people actually got out with good profits? Look how now the commodity bulls are saying now is also just a correction in a long-term bull market -- good traders they aren't! If they couldn't time the commodities market or the China crash, why think they'll be able to time the gold crash when it eventually comes?
Sorry for the rambling post -- just thought it's time that the Austrians get challenged a little. They've been doing too much of the running. I actually do respect many of those guys, and always feel a burst of anticipation when Marc Faber's newsletter arrives in my inbox at the turn of the month. I just don't buy into all of it, and think it's crucial to overlay their recommendations with some trader mentality -- this goes especially for Rogers and Schiff (Faber is pretty good with the short-term stuff as well).