The Market's Just Waiting for an Excuse to Rally

Aug.25.06 | About: SPDR S&P (SPY)

The market is looking for an excuse to rally. All it will take is one word, or phrase, from Bernanke. I've got my money on "Soft Landing" but maybe he has something new up his sleeve, something to place his stamp on.

If we don't get a positive reaction today, then we may be in for another week of pain, or a even a total meltdown so let's be real careful - but I have my finger on the buy trigger, just in case.

To do this right, we really need to kill the commodity bubble but perhaps it will have to "soft land" as well. That would be a really neat trick, one I hadn't previously considered, that oil can drift back below $60 against rising demand that will make us and OPEC happy.

Can the world really be that organized? Have the Central Banks really gotten a handle on the global economy this quickly? Japan is showing signs of it, with a booming economy and no inflation. Germany too. If you look at our economy without all the doomsayers chiming in you would have to say "Wow!" compared to pretty much any other time in history.

We have 2 nations of 1 Billion people each, on the other side of the planet, that are entering their own industrial revolutions, but with much less smoke than we had in ours. Just 200M Americans and Europeans industrializing 100 years ago led to 60 years of amazing economic growth around the world, there is no precedent for what is happening now.

Here is an excellent article that gives you a background on the situation.

Where the Dr Faber and I disagree is in the end-game. Like most highly educated economists, Dr. Faber has been taught by the best that the world is made up of nations that win or lose economic battles and that the American consumer is the center of the universe. This is simply no longer true.

Microsoft doesn't care whether a laptop boots up in English, Kanji or Swahili, as long as the windows logo moves across the screen. Nor does National Semiconductor really care what nation is buying chips today. Federal Express gets a package to Kuala Lampur as fast as they get it to Quincy, MA and the Simpsons are one of the most popular shows in China (written in New York, drawn in Korea (don't tell China) and voiced in California).

We never had a truly global economy before. Toyota will have more US workers than GM soon and already sell more cars than they do. Aside from being in Toyota cars, Intel chips find their way into ovens and washing machines these days too.

Don't even get me started on International money flows, we all invest in each other, sleep in each others cities and eat each other's food and we are truly morphing into a large global neighborhood.

In our large neighborhood we have several distinct groups.

* We have the Pepsi Generation, made up of the US and European cousins who want to buy the world a coke and live in perfect harmony.
* We have the Gen X countries, these are the rebellious former communist nations that want to hang with the Pepsi kids and imitate us. While our Gen X kids reject their parents, Gen X nations reject their former selves (or Daddy Marx).
* We have the Gen Y countries, India, China etc. who want what we have but think they can get it without compromising their national identities (good luck with that). They are new so we give them all the grunt work but they already think they can do our jobs.
* Unfortunately, we also have the grumpy old guy who wants all the kids to get off his lawn, turn down the music so things can go back to the way they were 5,000 years ago (radical Islam).

The grumpy old man is pissed, especially as everyone is having such a good time and no one invited him to the party (maybe because he doesn't drink or smoke and always calls the girls "whores") so he is doing his best to end the party.

Like any good party though, we may stop for a minute or two but then someone says something funny and someone else turns up the music again and we are ready to party on. Eventually the grumpy old man will learn to accept us and will stop calling the police (death squads) every time we get too loud - but it may take a while.

What keeps our global party going is not going to be the US consumer, we've been carrying the thing from day one and we are getting a little punchy at this stage. It's the new people, the Gen Y crowd that is 2 Billion people strong with 80,000 people turning 18 every single day and coming over to play with us.

That's 80,000 Nikes, 80,000 Swatches, 80,000 Toyotas, 80,000 laptops, 80,000 IPods, 80,000 frappacinos, 80,000 flat screen TVs, 80,000 other things they will consume in their lives as long as we can find a productive place for them in society.

They never taught us, not even in the 80s, that we could project 29M people a year turning 18, joining the global workforce and becoming consumers because we always assumed that Indians and Chinese would always be rice farmers. Neither Adam Smith, John Keynes or 100 years worth of other economists really anticipated the rapid pace of global change that is underway.

The global economy no longer rests on the back of the US consumer. We can dial it down a notch as our Generation Y friends in Asia will be more than happy to keep the party going long past midnight!