Leif Peterson

Four Reasons We're Headed Even Higher

If you plot the daily S&P500 return price over the last 20 years, you will notice that when unemployment spiked up the S&P500 rapidly dropped. In fact, in large measure the S&P500 is the inverse of unemployment. Because many corporations don't really "save" and most US consumers don't save (e.g. the negative US household savings rate of -2 to -3% before the subprime mortgage crisis), the majority of growth in the US economy is due to debt.

Now that debt is harder to come by, their are fewer jobs (corporate loans) and therefore a greater number of household mortgage forclosures. At present there is an interesting dynamic linking together Gov't debt, personal debt, taxation, credit, leverageing, etc., to the extent that the next bull market will likely be skiddish. The economies of the 50 states are wiped out, unemployment remains a large detriment to the economy, commercial real estate may worsen in 2010/2011.

If more debt and taxation are needed to correct things, then the expectation is that there is less certainty about the future. Right now investors should be long the markets but more vigilant about knowing when to leave the party, especially where to go once the party's over (bubble pops). The dollar is the current bubble that's bursting, so enjoy the ride while it lasts. I think a huge paradigm shift will be in store if things go south more than during Q3-Q4 2008.