This holiday season shopping prices were remarkably discounted at most stores. Sales of 50-80% off were the norm. I have never been much for shopping, but I have to say, I bought more retail goods over the past couple of months than I have done in a long time. It’s hard to resist a real bargain; and if you have the cash, buying can be a rational thing to do. I wish we could say the same about investment markets presently.
Stock, commodity and real estate prices (in many areas) are quite simply back to wacko-land coming into 2010. Government stimulus has provided injection-fuelling directly to asset prices. The stated goal was to re-inflate demand and the economy, but the actual result has been to re-inflate global asset bubbles that are just as unsustainable and economically menacing now as they were before.
This week several respected economists such as Stephen Roach, Paul Krugman and Martin Feldstein all said they see 30-40% odds that the US will enter a double dip recession in the second half of 2010. If the stock market is supposed to see these risks 6-9 months in advance, you would think it might have to at least acknowledge the risk at some point here.
Never mind double-dip, I still think there is a greater than 50% chance that the world has actually not yet left the 2007 recession. Remember that we will not know the final end date until probably another year from now once all the retrospective data has been calculated. But we must admit that so far after herculean deficit spending in 2009, at great fiscal detriment and cost to longer-term growth, the US economy only managed to clock a 2.2% annual growth rate in Q3 2009. If this is the US coming out of recession then that is a very poor start indeed!
A typical recovery quarter coming out of recession is a 5-7% annualized growth range. The stock market has so far priced in expectations for a 5% annualized growth rate in 2010. If we are looking at even half that growth then the stock and commodity markets are truly off in la-la land. If we are looking at some more negative growth quarters in 2010—then prices here appear to be in outer-space.
Meanwhile tax revenues across all government levels have continued to plunge with no bounce yet in sight. If growth is truly picking up, we should be seeing tax revenues reflect this. Where is the money?
The analogy that comes to mind most for me is the vision of a lock system on a waterway. Government intervention has served to place strapping around the outside of the lock, forcing water-levels (prices) to surge artificially high across all asset classes. The trouble is an artificial force cannot hold the weight of this indefinitely. 2010 is to be the year of government withdrawal, “exit strategies’ from quantitative easing and other extraordinary liquidity measures. As governments ease off pressure around the market system, prices will necessarily need to readjust down to their own “natural” level. Trying to figure out where the true level should be is virtually impossible until governments get out of the way and let the natural corrective mechanisms take over again. The only thing that seems quite clear at this point is that asset prices are too high here; probably by a lot.
Meanwhile the technical underpinnings of the stock market are still very weak. Volume is low. Distribution days are frequent, insiders and institutions are selling into strength while a smaller number of people who feel they have “missed out” the past few months are piling back in, forgetting once again that the price we pay is our greatest risk. Reckless people may well keep doing this for a while longer yet. We should expect it– that way we can't be annoyed or driven to emotional reactions.
All I am saying is that our visibility of where we are headed next is blocked at present, so it is impossible to rationally assess and price the growth. Without the ability to rationally assess and measure, everything else is speculation and wide-eyed optimism. We each have to establish our own rules about how much speculation we are prepared to wager. Most real people can’t afford to lose money. More still are not mentally prepared to lose it—again.
As we start 2010 there are many good reasons to reduce and limit market exposure to protect our capital. Cash and high quality (short) bonds are the rational park for now. Perhaps it will help to think of the 50-80% off sales at the mall as a point of reference. Sales are exciting, but are you happy to pay 125% -150% of fair market value?
Another point of reference for how crazy things have become again is statistics coming out of the Chinese real estate market. I know— China has been the beckon of hope for economic rebound through 2009— commodity and stock bulls are all talking about the “strong” Chinese economy coming into 2010. Well today a Bloomberg article gives us some stats worth contemplating on this:
“Millions of Chinese are pursuing property with zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high- rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand won’t flag. And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further.
And jump they have. In Shanghai, prices for high-end real estate were up 54 percent through September, to $500 per square foot. In November alone, housing prices in 70 major cities rose 5.7 percent, while housing starts nationwide rose a staggering 194 percent. The real estate rush is fuelling fears of a bubble that could burst later in 2010, devastating homeowners, banks, developers, stock markets, and local governments.
“Once the bubble pops, our economic growth will stop,” warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences’ Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that “property prices have risen too quickly…
“When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land,” says Andy Xie, an independent economist who once worked in Hong Kong as Morgan Stanley’s top Asia analyst. “No one talks about their factories making money these days.”
Read the whole article here: China property bubble may lead to U.S.-Style real estate slump
Consider that a typical 1000 foot apartment in hot areas in China is now selling for about 80 times the average annual income of the city’s residents. This would be equivalent to a typical 1000 square foot apartment in North America selling for about 4 million dollars. Sound reasonable??
Then again more and more intelligent folks are thinking the whole stock market is a giant con game
http://seekingalpha.com/article/181193-is-the-u-s-government-supporting-the-stock-market
Sprott is wondering whether US treasuries are a ponzi scheme
http://www.sprott.com/Docs/MarketsataGlance/12_2009_MAAG.pdf
An excellent overview of the problems ahead
http://market-ticker.denninger.net/archives/1793-Where-We-Are,-Where-Were-Heading-2010.html
Danielle,
I hold both short term Canadian government bonds and Canadian investment grade corporate bonds through ETFs (CBO & XSB). If there is another panic sell off would these get blindsided in a rush to raise cash? Thanks in advance for your opinion.
I doesn't look like oil is going to hit meaningful resistance now until it reaches 90 dollars per barrel. That equates to about 3 dollars per gallon in the US. But of course, every second analyst loves to say that the America isn't driving the bus anymore on oil ,so maybe we shouldn't worry about that and concentrate on China who apparently have and endless ability to subsidize their gas prices to keep their illusion of double digit growth going.
On irrational optimism and this is from 2003!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=476981