FYI | Mar 11 2015
By Peter Switzer, Switzer Super Report
I am expecting a bit of negativity on our stock market, following the great news out of the US on Saturday morning. In case you missed it, the Dow was down 278 points, following unemployment falling to 5.5% from 5.7% after 295,000 jobs showed up rather than the expected number of 240,000.
The wisdom of theory
Until I saw this terrific figure, that confirms the wisdom of believing that the US economy is recovering and that the Quantitative Easing program has worked, I was a little concerned at some recent predictions from the team of doomsday merchants, who have been wrong for many years.
I won’t name them but they are well respected, excessively quoted, collectively, they have conspired (via their philosophical opposition to Keynesian economics and too loose monetary policy) and have worried a lot of people out of a chance to make money since March 2009.
It may be something about me as an economist, and maybe as a human being, that I’m not a believer in one kind of economics. I’m an economic rationalist and supply-side economist when productivity and silly government budgets are breeding excessive inflation and high interest rates, like in the 1980s.
But when a depression threatens, as it did in 2008, I thought the line “we’re all Keynesians when we face a Great Depression re-run” was a ripper, even though I was the one who wrote it!
Keynes was right for the 1930s but wrong for the 1980s and that’s why Hawke and Keating killed budget deficits, introduced microeconomic reform and got the unions to play fair and link wages to productivity.
It was the right economics for the time.
The theory of now
Okay, that’s enough theoretical stuff. Let’s deal with this great news that has sent stocks down and could continue to do so.
On the flipside, given my analysis that follows, there will be a pile of smarties who’ll be thinking the same as me.
The QE gamble is only successful if it creates economic growth. The big problem with excessive monetary policies is that it could hit what economists call a liquidity trap. That’s where rates are cut and no usual, positive economic response happens.
The sight of bond yields falling last year to ridiculous levels indicated that many were betting that the QE program would fail and deflation would result and we’d be looking at another serious recession, maybe a depression!
Of course, we’re not out of the woods yet, but we’re on the right path. The Yanks’ achievements have done a lot to make someone like me support the initiative of QE in Europe. Japan is well into QE as well and China, like us, is trying simple rate cuts because they’re not at virtual zero official interest rates, but it still is loose monetary policy.
On Saturday I talked about Albert Edwards, who is known to be a big bear and works for Societe Generale in the US. Right now he’s questioning the economic recovery of the US and argues it will cause markets to nosedive this year.
CNBC ran with Edwards’ negative view but did point out that he has been bearish and wrong before. His research note says US profits are showing that a recession is coming but these job numbers on Saturday surely raise some question marks over that analysis!
This chart he provides shows profits and GDP growth have a pretty close correlation and there has been a downturn in profits on his estimation.
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The wisdom of time
This is interesting but it doesn’t prove anything yet. I reckon if it went on for six months, then Edwards would have more supporters. US economic data has been softer and it was also softer around the same time last year. It was really cold around the same time last year as well. In the second half, economic data then played catch up and I expect it will happen again this year, unless US employers are on mind-bending medication.
Sure, we’ve not had US profits for this current quarter yet but I think this jobs number has to be a good forward indicator for profits. The US is now coping with a higher dollar, which hurts the economy, but the consumer is coming back and 295,000 new jobs should say something about future consumption.
So, that’s what I want to see improve over the next two quarters — stronger profits — and if I do, I’ll be even more bullish that we’ll have at least two good years left playing stocks.
One day guys like Edwards will be right but these low interest rate policies and this staggering of QE from Japan to Europe makes me think that my contention that this will be a long, drawn out economic and stock market cycle still has a lot of credibility.
I think the Yanks will go negative on the belief that the Fed will have to raise sooner, rather than later, but it will create another buying opportunity.
The big sell-off will happen when rates actually are hiked up but again it will be a buying opportunity.
I reckon there’ll be about four rate rises before markets get seriously spooked and that will be a job for late 2017, I suspect.
My job is to keep vigilant and right now I can’t see any clear or present danger!
P.S. Clear and Present Danger was a Harrison Ford film and on the weekend he crashed landed his single-engine plane on a golf course with minimal injuries! That has to be a good omen for my call.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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