Is a Big Rally Really Coming?

A 30% rally coming?

That’s what Burkhard Varnholt, CIO of Zurich-based Bank Sarasin is betting on. At a meeting in Hong Kong yesterday Varnholt expressed his optimistic outlook:

“If the next six months of the reaction to this turbulent crisis continue to follow the book of history, which is more likely than not, then that will suggest that equities globally still have another 20 to 30 percent upside from here onwards.”

Varnholt says investors are shifting back to real assets as paper assets continue to be devalued by money printing:

“We are witnessing secular real-asset inflation over paper assets that will last two to three years.”

They are underweight government bonds and overweight metals. Although Varnholt says real assets are likely to outperform he says the dollar is unlikely to fall much further:

“Fundamentally [the dollar] looks oversold. For it to decline further, we will need to assume, which we think is unlikely, that there will be coordinated dollar sales, or even a dollar crisis.”

These are fairly reminiscent of the Larry Fink comments from yesterday. The dollar has bottomed, money printing will continue, but you should buy real assets and stocks. Something just doesn’t add up there….

Comments

[logicalthought:]

>>The dollar has bottomed, money printing will continue, but you should buy real assets and stocks. Something just doesn’t add up there….<<

It's conceivable (albeit, not likely) that the dollar has "bottomed" relative to other currencies (even if it doesn't go back up again so fast), assuming that going forward, "money printing" in the U.S., the UK and Europe is about the same. In that case, all three currencies could continue to go down TOGETHER against "real assets" (and stocks backed by "real assets") which, in turn, could theoretically increase the nominal prices of those stocks and assets. If this were to happen, that statement wouldn't be self-contradictory. The reason I think it's unlikely is that the ECB seems to be much more anti-inflation than the HBFR (Helicopter Ben Federal Reserve).

Nov 11 04:31 PM

[bob adamson:]

The question must be asked why there wasn’t a mild correction last September as many predicted why the recent pause was so mild and why a good case can now be made for further gains as described in the useful article for which The Pragmatic Capitalist is yet again to be thanked. To try to answer this question, let’s look at another factor (market sentiment) in the equation for calculating the near term future course of the stock market. Some would employ technical analysis to this end; I’ll try a brief overview of the impact of recent events.

Try to visualize any eight month period in living memory except that since March of this year and ask what the general mood would be if the S&P 500 had increased from 666 at the beginning of that period to 1100 at the end. The general mood would be extremely buoyant and the market consequently overbought. What is going on now, therefore?

Arguably the answer is that the back-story we all focus on now is not the eight month dramatic recovery of stock market prices but rather the traumatic drops preceding March of this year (particularly the plunge of October 2008). This pessimism is simply an expression of an unfocussed anxiety within the population generally in response to the unsettling events of the past couple of years that are unique in their lifetimes. Might not the nature and depth of this pessimism (unique as it is in comparison to earlier states of market sentiment) mean that it and the current recovery in stock prices will last longer?

Arguably, one should be keeping a close eye on day to day developments because the current public mood of unfocussed anxiety can fuel stock market swings in either direction should some future unexpected event (it needn’t be major in its own right) becomes the focus of that anxiety or the apparent basis for it to lift somewhat. Paradoxically, the fact that some are now starting to predict that significant further stock market gains are just around the corner sounds a note of caution for me.

Nov 11 04:48 PM

[dingding:]

Another article based on reversion to the mean. Let us not forget that we are not living in normal times, with the world financial system greatly impared by the reckless behavior of the past decades.

Nov 11 09:35 PM

[Moon Kil Woong:]

With the Federal Reserve under political pressure (awww no more QE. Why not?) I would think that QE rollbacks and possible hints at tightening in Q1 of 2010 may put a damper on this rally. In the meantime, they will reassure the otherways hoping people will run themselves further into a rut this Christmas with increased debt. The Federal Reserve has such wonderful merry wishes for the consumer it makes me want to puke.

New homeowners are liable to be the new forclosure victims once again when inflation and rates rise.

Nov 11 11:07 PM

[basset:]

Betting against Buffett makes as much sense as betting against the price of gold. mike

Nov 14 02:49 PM