How it will end.

[clifp]

I was in the middle of composing this reply when Rich (understandably) close the tomorrow's market thread.

Quote:

Originally Posted by Enuf My wife went to cash in mid-Oct, not peak, but close enough to be very smug right now in her refusal to openly gloat at my "all-index, Bernsteinian Portfolio" performance. So, I need a good positive scenario to make me feel emboldened to predict a glowing recovery for my portfolio that will surpass her performance. I'm down 19% since Oct and she is up 4%. I keep mentioning the ravages of inflation that are eating her alive but she isn't feeling my vibes. Can someone paint a less than 3 year positive scenario? For instance... .... I'm hoping for all that but can anyone tell me holding my VTI, VEU, VWO, BNDS port is going to be a winner over her CD/MM port?

I can't tell you when this will end, but I can tell you HOW it might end, and it does not involve world peace, or <$100 oil.

The Fed is doing everything possible to re-inflate the money supply and re-establish credit. This includes things (e.g. brokerage take overs, access to the Fed funds for non-banks) that most of us didn't even know they could do.

This cheap money is causing inflation, which we can see not only at the gas pump, or grocery store, but in most every commodity. The bond market also sees this hence the 0% coupon rates for I bonds.

So in an inflationary world what does the average American do? (after they are finished despairing.) Keeping money in CD or money market is horrible they only pay 2-3% well below inflation. The stock market looks scary.
Ok a few brave souls will purchase commodities, but the average American or even the above average affluent American (i.e. board members) is hesitant to buy an OIL or Corn future, or even an OIL ETF.

Many Americans will say screw savings I am going to spend. This isn't a bad thing for the US economy. However, a bunch of folks will invest in the one commodity that most Americans are comfortable purchasing, a house.
The logic for this is pretty compelling, historically houses do well in times of high inflation. (one of the crazy things about the housing bubble was the lack of inflation) As housing prices stabilize, foreclosures will decrease especially with the artificially low mortgage rates turning most ARM resets into non-events. Lower foreclosures obviously shore up bank balance sheets. Stronger banks will lead to a stronger market. Does this happen within 3 years? I think so.