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Market Outlook – Week Ahead 11/24/14

Nov. 23, 2014 9:33 AM ETDIA, SPY, IWM, QQQ
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Market and Meaning is my weekly update on market movements and their meaning for you as an investor. Market and Meaning is normally reserved for premium subscribers but is currently being offered for free to all our readers. As always, everything here represents my personal views and not official recommendations or advice, please do your own due diligence and come to your own conclusions.

Market and Meaning is broken up into three parts:

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***THERE WILL BE NO MARKET AND MEANING NEXT WEEK DUE TO THE THANKSGIVING HOLIDAY. I HOPE YOU ARE ABLE TO THE ENJOY THIS SPECIAL TIME WITH FAMILY AND FRIENDS.***

MARKET VIBES

Big things on my mind this week have been Japan and oil. I'm also continuing to wrestle with the idea of a strong dollar and its impact.

To start with, I am beginning to believe that the Fed will not raise interest rates anytime soon. The standard assumption has been that rates will begin increasing in mid-2015. It is possible that could happen, but even if it does, I don't expect it to be for any meaningful amount. The reality is there probably won't be any meaningful increase in rates for perhaps as long as two years.

Why does this matter? Low interest rates have lots of implications, the most significant being that they make money cheap to borrow. This can be a boost to the economy and is a big boost for the stock market. Rates staying low could potentially slow down the strong dollar, but should not get in the way. The real reason for the gains in the dollar are:

  • U.S. economy is the best among struggling developed nations
  • Currency concerns elsewhere drive people to the dollar for safety
  • Energy boom that is driving the economy offers stability
  • Overall stability of the U.S. from economics and resources to military strength

All of these help make the U.S. dollar a safe haven at this point. This means prices should continue to fall compared to the dollar for many things, including gold and silver.

I had a really great conversation on Scutify this week about Japan. The issue we are trying to tackle is, "How does Japan resolve its problems with massive debt and economic stagnation?" The reality with any debt is that eventually someone has to pay for it. Concerning Japan, I believe there is no way their economy can be stimulated enough to overcome their debt. This means that someone else will have to pay for it. This leaves three options as I see it:

  • International bailout
  • Default
  • Some form of internal debt forgiveness/intervention

The third option may actually make the most sense in theory, but it would also require an amazing sense of nationalism and idealism on the part of the Japanese people that borders on impossible. This option would essentially consist of the Japanese people coming together for a massive tax that would go to toward paying off government debt. This could possibly be the best option for the country in theory, but I don't see it ever happening.

Any of these options would likely cause quite the stir in global markets, particularly the first two. The first two are by far the most probable and would likely lead to another global financial crisis.

I wish I could say that I know what will happen. What I do know is that this is a nasty situation and the current path that Japan is on is not going to end well. These are some of the major obstacles:

  • Debt around 240% of GDP
  • Declining population (more people dying than being born)
  • Heavily dependent on energy imports that are getting more expensive as Yen weakens

Monetary stimulus doesn't fix these things.

A few other noteworthy articles:

Some thoughts on Germany's economic woes from Eric Parnell.

Have a great Thanksgiving!

- Brian

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