The Real Reason for This Rally

The markets move up and down seemingly without rhyme or reason most of the time. The short-term is random. The long-term, however, is much more about growth and broad shifts in economic forces.

Of course, that doesn’t stop pundits from finding “reasons” why the markets move up and down. For instance, when the Dow opened up under 8,000 on Tuesday, swine flu was the natural scapegoat.

What swine flu, at its currently overhyped level, has to do with the markets is beyond me. But hey, it’s human nature. Everything has to happen for a reason. So there are countless folks willing to capitalize by providing a reason – regardless of how disconnected.

Frankly, that’s why we try to focus on what’s really going on here. We pay attention to things like money flows into and out of different assets (that’s what really drives markets – supply and demand) and market psychology over the short term. And we focus on broad demographic shifts and consequences of many different changes for the long-term.

It’s by focusing on those areas which gave me an idea of what the real cause of this rally is. Something not too many others have focused on yet. And it’s something demographer/economist Harry S. Dent told us would happen back in January.

It’s the stimulus money.

If you recall, Harry explained:

This level of stimulus is at the point that it’s like taking a bottle of Viagra and nothing happens.

Well, very little did happen back in January. And the “Obama rally” which anticipated what is happening now fizzled out completely.

This time around, it’s the real thing. All of the stimulus money, the Fed’s newly printed dollars, rock bottom interest rates, and a rising stock market have got businesses spending and consumers consuming again.

Only time will tell how long it will last. We continue to keep a close eye on which stage of the bear market rally we’re in. But all signs point to this one having plenty of gas left in the tank.

The thing is, stimulus packages and mass infusions of new cash won’t work forever. Eventually, the economies of the Western world are going to have to deal with the issues at hand. The biggest issue, of which Harry and I both agree, will be healthcare.

Again, Harry was pretty much dead on back in January:

We’re the ones who – Europe and the U.S. – have this downward demographic cycle from let’s say 2008 or 2010 to 2020 or 2023…

Healthcare is 15% of our GDP today and is supposed to go to 20% in the next decade.

That’s the big opportunity after our big crash and downturn. I think everything will bounce if we’re right in the stock market [hits a long-term bottom] bottom in late 2010 and maybe near 2012.

I know sometimes it’s tough to look out so far, but if you can, it’s easy to see what’s going to happen here in the west. It’s a fundamental issue and no government program is going to solve it all. This is demographics at work.

And if history is any evidence, we’re likely in for a few more rough years ahead. It happened in Japan in the 90s. Now it’s happening in Europe and the U.S. In the next decade or so it will probably really start having an impact on China’s economy.

That’s why I believe one of the best ways to stay protected from this long and drawn out period of change, “The Great Transition” if you will, is to be in the healthcare sector.

Comments

[socrateazz:]

Interesting belief. I agree demographics tells a good share of the story. But I say the demographics of the current leaders. They have seen the problems with supply side economics 1980 through 2008. They have seen the problems with demand type economics 1940 through1979. They have little experience with guard your wealth and redistribution type economics 1929-1940 . There needs to be a true ballance between all. Each will naturally lead to the next economic belief. The people of today aremuch like the people of the 1920's self centered and interested in what happens to themselves. Everything is related to what the self has, feels. expects and wants. The balance of wealth has moved towards few having most of the wealth. and many having little wealth. The foriegn deficit will compound the current problem. I expect a much worse situation will develop than the great depression because of that deficit. Down turns can be minimized by realizing economic principals apply based on the experience of the leaders. Roosevelt did what he thought had to be done. Ironically his spending probably prolonged the problem as it will probably do today. Demand for goods ushered in a new US economy. which flourished untill 1966 or so. Because demand waned, redistribution started by increasing minimum wage and welfare. That caused excess wealth in the hands of consumers. The consumers bought more exceeding production. When that happened; Inflation resulted. Reagan knew the demand was greater than the supply and understood the need to reduce demand. his actions were the right thing at the right time. About 1990 those policies needed to be reduced. Most actions taken were wrong in the 1990's The unbalance of wealth became greater. The policies caused tghe wealthy to become wealthier and the middle class to be squeezed So they borrowed. Putting off the inevitable but making things worse. Since 2000 The continuation of previous policies has just made the current situation worse. Obama's fixes are really like cocain to a junky. Little real good....But it feels good. The needed fixes will be like having an operation. It will hurt for a short time but improvement will begin soon afterwards. When will Obama realize?

May 04 05:24 AM

[damienhaas:]

Not really want to agreed to with comment from Harry S Dent. The guy predict Dow at 40,000 less than a century ago. However agree with you the comment about demographics. More will depend on whether how the economy will be through after 2010. Aging population that are retiring soon(heathcare and pension) will strain the government coffer even further. That will in turn pressurize the government to find ways to increase tax revenue and hence increase the tax burden of the working American even more. It will also discourage talented people from migrating to US that will bring more entrepreneur spirit and cash to buy our houses in the United State!

May 04 07:18 AM

[Obi-Wan:]

In the here and now, the x-factor to me is unemployment. If people don't start getting back to work, there can be no recovery with reduced consumer spending. Consumers drive 70% of this economy and you just can't buy homes, cars and much else without income! Seems like people overlook this. The market will gyrate however it will, but it can't sustain the rosy outlook unless unemployment begins to subside, and I would venture to say it's gonna get worse before it gets better. Can you say '5 Chrysler plants gone'? Poof! And if GM goes under?? Triple poof.....

May 04 08:22 AM

[carey_jim:]

Sometimes I think the recent rally in stocks comes from the simple belief that inflation is coming back.

After all, if housing prices rise again by 25% and most other prices as well, why shouldn't stocks rise by the same level just to maintain their 'real' value?

But that's too logical, of course.

As far as demographics go, I'll just chant my mantra again, 'can't predict the future, can't predict the future, can't ..... '

Napoleon remarked once, when looking over a very bloody battlefield, covered with dying and dead bodies, 'it's nothing that a night of love making can't replace.'

The health problems of Americans, including old ones, are social and can't be solved with machines and drugs.

If you eat pizza, smoke cigarettes and are 50% overweight until you are 65, your grandchildren should be under no moral or economic obligation to keep you on life support until you are 90.

But that's too logical. Of course.

May 04 01:35 PM

[Steve in Gr...:]

Thanks, Mr. Haruni, for the article.

You conclude: "... one of the best ways to stay protected from this long and drawn out period of change...is to be in the healthcare sector."

Question: Which parts of the healthcare sector do you expect to escape the destructive impacts of nationalized healthcare? Or do you expect us to dodge that bullet?

May 04 05:38 PM

[Alphameister:]

Obama will do his best to create profitless prosperity in the health-care sector. He believes that health-care companies exist to fulfill a public need, not to earn profits for their shareholders.

May 04 06:27 PM

[Old Trader:]

I agree with the author that in the longer run, demographics will be the underlying cause of various trends, but I share the concerns that overly liberal administrations may cause difficulties for companies to bring bring dollars from robust sales down to the bottom line, going forward.

One of the reasons that I hold JNJ in my core portfolio, and have done so for a while, is the fact they're well-diversified across the healthcare spectrum, from the mundane like BandAids, to artificial joints to drugs. Additionally, they have good international exposure.

The same sort of thinking causes me to stay long oil/NG, via Canroys, with additional midstream exposure via pipeline MLPs.

Full disclosure: Long JNJ, KMR, MMP, PWE, CVX

May 04 07:06 PM

[Gtarras:]

Hold on a sec, who's really the author of this article?:

seekingalpha.com/artic...

May 04 07:22 PM

[MarkitWacha:]

You're long energy, however you overlook disruptive technologies.

Fluorescent spiral bulbs, while ugly, are going to disrupt energy use downward by at least 1%. That's enough to start a bear market in natural gas, if it hasn't started already.

Also, these guys just completed their second round of funding, and deserve a look: generalfusion.com. My prediction is that they will succeed and have a viable plant design (if not working) by 2015. There's too much gray matter on their board of directors for them to fail. They have a working prototype.




On May 04 07:06 PM old trader wrote:

> I agree with the author that in the longer run, demographics will
> be the underlying cause of various trends, but I share the concerns
> that overly liberal administrations may cause difficulties for companies
> to bring bring dollars from robust sales down to the bottom line,
> going forward.
>
> One of the reasons that I hold JNJ in my core portfolio, and have
> done so for a while, is the fact they're well-diversified across
> the healthcare spectrum, from the mundane like BandAids, to artificial
> joints to drugs. Additionally, they have good international exposure.
>
>
> The same sort of thinking causes me to stay long oil/NG, via Canroys,
> with additional midstream exposure via pipeline MLPs.
>
> Full disclosure: Long JNJ, KMR, MMP, PWE, CVX

May 04 10:13 PM

[Missing_Link:]

On May 04 10:13 PM MarkitWacha wrote:
> Also, these guys just completed their second round of funding, and
> deserve a look: generalfusion.com. My prediction is that
> they will succeed and have a viable plant design (if not working)
> by 2015. There's too much gray matter on their board of directors
> for them to fail. They have a working prototype.

HOLY CRAP!

I strongly disagree that there's "too much gray matter on their board of directors for them to fail." Any company can fail, especially one that thinks it's full of geniuses.

I will, however, be paying VERY close attention to this company. If there's any real chance of success, they're well worth investing in.

May 05 12:14 AM