Markets rally on wishful thinking

The last minute mini-agreement limiting some tax increases has goosed risk markets today with a celebratory surge. The fun is likely to be fleeting. The fact is that while higher revenue was needed, even the smaller tax hikes are forecast to be a 1 to 1.5% drag on US GDP in 2013. From a barely beating maybe 2% growth in 2012, a loss of this magnitude will be felt and likely to translate into further job losses and consumption weakness this year. And that is before any further negative impact from the next phase of debt-ceiling theatre set to undermine public confidence over the next couple of months. And before any government spending cuts have been introduced at all. Surely some cuts (even if miniscule in the bigger picture) will come into play over the next few months? Or have the Republicans given up all their big talk for no walk whatsoever?

If there are no cuts then the US will continue spending at least 1 trillion more than they take in each year and will surely deserve another debt downgrade which should prompt higher borrowing costs that would in turn further extract cash flow that has been promised in support of the real economy. A perfectly negative fiscal loop seems to flow either way here.

At the end of 2012, US stocks were the third most expensive market on the planet with the S&P 500 trading above 21 times the cyclically adjusted Shiller PE. See comparative chart here. Further algo price ramps only make equities even less attractive to investors.

For those who prefer facts over false hopes, some end-of-year review charts offer some big picture reminders of where the US economy is actually beginning the new year. See NY Times: America in 2012: as told in charts

Also see: Five years later some countries still lag for more reality on the global”recovery” since 2007. Accept it or not, our generation’s secular bear deleveraging cycle is likely to continue having its way with the world for a while longer yet.

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12 Responses to Markets rally on wishful thinking

  1. michael says:

    PALLIATE….”Make (a disease or its symptoms) less severe or unpleasant without removing the cause.”

    Systemic corruption…..psychopathic corporate socialism…..moral collapse…..indecent assault on sanity…..happy new year.

  2. Tony Hladun says:

    The drunks buy another round.

  3. Dave says:

    This charade has been going on now for 4 years. Who’s the say they can’t keep it going another 4 or 20 years as a matter of fact. Bernank will just keep the printers going and the house of cards keeps on standing. LOL We are the fools to fight the fed and govt

  4. stefanie says:

    The oldest saying in investing is “Do not fight the Fed.” Most of the the world’s central banks are pumping out money. It has to go somewhere. Buy stocks until interest rates move up substantially. Otherwise you are missing the big profits.

  5. dazzo says:

    “………….will surely deserve another debt downgrade which should prompt higher borrowing costs ……….”
    Except that Ben keeps printing money so they can buy their own debt, because hardly anybody outside of the US is buying that debt. So who or what is going to force rates higher?

  6. good luck with that Stefanie. A more useful saying in my experience is “don’t fight the business cycle.”

  7. It doesn’t take big moves in rates to cause this type of cash flow drain. Moving from 1.7 to 1.86 as it has done in the past few days is even a significant net drag when one is as levered as the Fed and as indebted as the Federal government.

  8. michael says:

    I guess Stefanie is a student of CNBC …..for a quick lesson in bear market exposure she may want to take the advice of the person who made that quote famous for the parrots to spew. I hope she is a good poker player.

    “A Forecaster Who Made Headlines and Moved Markets
    Martin E. Zweig, W’64
    As the stock market was pressing higher and higher in the summer of 1987, Martin Zweig had a feeling enough was enough. In the hedge fund he ran and in the Zweig Forecast, the newsletter he wrote, he turned to put options, the market device that allows their owners to sell shares at a particular price — a bet that that price will be going down.

    In October, the market collapsed, and while the big averages lost a quarter of their value in one day, Zweig’s portfolio rose 8.7 percent and 50 percent for all of 1987. The former finance professor at Baruch College and Iona University was certified a stock genius.

    One of Zweig’s major pieces of advice was never to hold stocks, even of the best companies, in a bear market, since even they could disappoint.

    In truth, Zweig had already been, and would continue to be, a well-respected analyst and investor. He had started his newsletter in 1971 and his hedge fund in 1984, well before those limited high-end-investors became the rage. While still a professor, his by-word was, “Don’t fight the Fed.” That meant, according to Zweig’s theory, that if interest rates were going down, stocks would go up, and vice versa. He also claimed the way to make money was to be risk-averse, rather than taking chances on the upside. He said he was a big poker player while at Wharton, but had stopped playing when he became a money manager because he hated losing, even at cards. One of his major pieces of advice was never to hold stocks, even of the best companies, in a bear market, since even they could disappoint.”

  9. stefanie says:

    I have followed Marty Zweig for years. I use to watch him on Wall Street Week (yes I am that old). The Fed has no intention of raising rates for at least a year. So please explain to me why it is smart to be a bear right now. Leon Cooperman was interviewed on CNBC (gasp) yesterday. I would advise people to watch the interview. If you do not know who Cooperman is you should check his record.

  10. Robert Lynn says:

    michael it’s not just “psychopathic corporate socialism” as that is the nature of socialism and all statist utopian schemes. The problem is statism.

  11. michael says:

    Well Stefanie, you seem to like Kool-Aid. As a part of your education you may want to consider the Law of Holes…..if you are in a hole stop digging.
    I wish you well.

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