Finally after a bull run based on false assumptions markets are breathing a little easy. While sellers are watching closely for any move down, bulls have finally run out of any new pretence to take the markets higher. These are clearly the signs of era of free money being over at least in the near future in multiple ways. First and foremost, consumer that was the dummy engine for the growth in recent years is still far over stretched. Most of the people are scrambling to clear their existing credit card debts and even defaulting on it. Yesterday, credit card charge write off figure was still at 14% for the past month. Second, banks themselves are tightening the strings of their purse to avoid issuing credit cards to people with really low wages and credit scores. So all this will translate into lower earnings for pretty much every sector because inter relationship of the markets is very high. For example, low income implies less discretionary travel which in turn means lower income for airlines which reduces demand for aircrafts and oil thus reducing earnings for industrials and oil companies. That's one chain of relationships but you get the idea.
Now I personally don't really mind this prolonged period of stalled growth because as any trader knows that markets are zero-sum game. Senseless growth was putting a big strain on natural resources. This was also clearly reflected in commodities prices in late 2007 and even early 2008. And if we as a society were winning, nature was paying a huge price for it. We have to take a step backward, sit down and realize that in that frenzy of growth, endless printing of money to support it and nations competing to beat each other on GDP figures what toll we are exerting on our very limited natural resources. It is high time that we think about ideas of future and how we can grow while much more efficiently using our resources. In my opinion, focus of every government should be to promote industries of future rather than back stopping existing firms which really don't have a sustainable plan. Be it GM, Boeing, China Construction Bank or Air India in far-east. I don't think that with existing technologies many companies can run profitably for the next 6-8 years. And this view is or will be reflected in equity markets. Era of free money being over also implies that equities (which is essentially free money for corporations) will be on a down hill path. Most of the financing for firms will come through bonds or loans which will automatically act as a filter in segregating good companies from bad. Only very few companies have the ability to attract equity capital if we take away the emotional factor from markets. So while markets might trade side ways or make a move lower, I don't really see any big push towards the higher side. While bail-out is the latest source of funding for so many companies, bail-outs will start drying up as nations soon realize the negative impacts of printing money on their national currencies. And remaining natural resources will force governments to maximize the buying power of their respective currencies. So it will be quite interesting to see how economic dynamics plays out in the near future. I hope it provides a food for thought to start thinking along those lines.