Thoughts on the economy

[David1961]

I didn’t major in economics, and actually don’t have a very good knowledge of how the economy works, but I’m becoming increasingly concerned that the fed has to keep taking action to stimulate the economy. Don’t get me wrong, I love it when my investments go up (awesome day so far today), but part of me believes things are a lot worse that we are led to believe and the fed is artificially keeping our economy on life support. Does anyone share these concerns or am I just too cynical? Isn't it healthy for the economy to go in cycles?

 

[brewer12345]

Go get an economics degree or two and we'll chat...

 

[JOHNNIE36]

David, from everything I have read, there is no justification for the run-up in the market. There is no logical reason for where the market is today, but as I have always heard, the market doesn't follow logic. Except for the electronic sector, I see no "logical" reason for where the market stands. That being said, I haven't been in the market for quite some time, so what do I know. Maybe I shouldn't care but I do. I love to see the market make those gains as it's good for investors. It doesn't help me because I'm strictly into fixed investments. They aren't looking good.

 

[Finance Dave]

Oh I share them. Any time the gov't thinks they can control something so complex, it worries me...they can't even keep the darn post office in the black.

I don't know that I'd say cycles are "healthy", but they certainly are normal.

What worries me is that governments (not just ours...China recently announced this too) wants people to SPEND...yet that's what got us into the housing mess was too much spending on house.

IMO people need to learn to live within their means. Yes, in the short-term this will cause a slower economy...but over the long-term I think it's the best approach.

P.S. Don't think that because you didn't major in Economics is why you don't understand it. THere are many people with doctorates in Econ and disagree on things.

 

[sheehs1]

To me it means for the Fed to take continued action we obviously are not where they want us to be and some areas of measurement are negative, are stalling or are just not growing much above 1%. However we all know that. Based on "things", I agree with Johnnie that there is no good reason the market is up this high except for:
1. Companies hoarding cash to deploy later
2. Other countries investing their money over here because the U.S. is the less of all the evils right now.
3. Can not get any return on bank fixed income vehicles so those on the sidelines may have put some back to work in the market.
4. No chance any time soon that rates will rise. The government needs to be able to pay off it's debt...so...interest rates like the Fed Funds Rate will not rise any time soon.
5. There are but a few places to put your money.

But like others I am concern about asset price deflation, possible global recession because China is slowing, has it's own housing bubble ready to pop, China inflation is up, China continues to produce but their exports are way down so they are flooding the market, Germany may pull out of the euro along with a couple of others... etc.
We are almost back to the high before the bust on an economy on life support. Makes no sense whatsoever...but who am I? I just go along for the ride...and keep an eye out.
David..I'd say you are keeping good company. If the real economic gurus knew everything about economics......they would know how to fix it.

 

[MasterBlaster]

Japan tried a very similar approach and now look where they are.

Debt at 225 percent of GDP
sluggish to no growth
an ageing population at risk

Could this be us in a decade ?

 

[travelover]

I don't know, either.

 

[GrayHare]

Before the Fed there were more frequent ecomomic booms and busts. Busts, when allowed to happen naturally, though painful have the healthy effect of clearing out marginal and/or inefficient operations.

 

[Midpack]

I didn’t major in economics, and actually don’t have a very good knowledge of how the economy works, but I’m becoming increasingly concerned that the fed has to keep taking action to stimulate the economy. Don’t get me wrong, I love it when my investments go up (awesome day so far today), but part of me believes things are a lot worse that we are led to believe and the fed is artificially keeping our economy on life support. Does anyone share these concerns or am I just too cynical? Isn't it healthy for the economy to go in cycles?

What drives market indexes?

 

[MasterBlaster]

Place Your Bets

Midpack:

Your chart indicates that the S&P500 should be at ~1600 now. It also suggests good times for markets are near and that by the end of next year it will be around 2000.

- Party on !

 

[ducky911]

nice chart...looks to good to be true....but I like it

how are earnings up but employment flat?

thanks again for that chart...might have it tatooed on my arm.

 

[traineeinvestor]

I agree with Johnnie that there is no good reason the market is up this high except for:
1. Companies hoarding cash to deploy later
2. Other countries investing their money over here because the U.S. is the less of all the evils right now.
3. Can not get any return on bank fixed income vehicles so those on the sidelines may have put some back to work in the market.
4. No chance any time soon that rates will rise. The government needs to be able to pay off it's debt...so...interest rates like the Fed Funds Rate will not rise any time soon.
5. There are but a few places to put your money.

But these are the state of play at the moment. I'd also add that the multinationals are also benefitting from (i) a weaker USD which inflates overseas earnings and (ii) increased penetration into developing markets which is also helping their earings.

It's also worth remembering that markets are supposed to be forward looking - prices should reflect expectations of future earnings (putting it rather simplistically). Maybe the market is trying to tell us that the economic future is going to be better than the "experts" with all their economics degrees are telling us?

 

[Fermion]

How sure are you about the slope of those earnings going into 2013? If you extend that line to 2015 or 2016 with the same slope, then we are looking at S&P in the 3000 range then? 10,000 by 2020?

 

[Gumby]

how are earnings up but employment flat?

Increased productivity. See the chart in this paper http://www.epi.org/publication/ib330-productivity-vs-compensation/

 

[sheehs1]

But these are the state of play at the moment. I'd also add that the multinationals are also benefitting from (i) a weaker USD which inflates overseas earnings and (ii) increased penetration into developing markets which is also helping their earings.

It's also worth remembering that markets are supposed to be forward looking - prices should reflect expectations of future earnings (putting it rather simplistically). Maybe the market is trying to tell us that the economic future is going to be better than the "experts" with all their economics degrees are telling us?

Wish I was confidant enough about that to bet on it. (oops - invest more!)

 

[ejman]

I think the dilemma now is: are we into a Japan like period of long stagnation or are Mr. Bernake's prescriptions (who after all has been a long time student of the Japan case) really going to cure the patient? Who knows? From a personal stand point I'm at the upper range of my wide 10% reallocation band so another significant up move and I'll have to wake up from my long slumber and reallocate. A down move and I can go back to my nap.

 

[winger]

Lets see... Is it to anyone's advantage to tout how terrible the economy is this year? Hmmmmm.

 

[heirloom]

P.S. Don't think that because you didn't major in Economics is why you don't understand it. THere are many people with doctorates in Econ and disagree on things

Isn't that the truth. All week different analysts had different opinions cc how QE3 would affect the mkt.

But today Ben even said that it all depends if the fiscal cliff occurs. If it does he said the Fed doesn't have the tools to offset it and tgere may be a recession.

Congress AND Obama will have to do more negotiations and frankly, do what they are getting paid for.

 

[Nemo2]

I didn’t major in economics, and actually don’t have a very good knowledge of how the economy works

Send in your resume, there might be a Fed Chairman's position available soon.

 

[clifp]

nice chart...looks to good to be true....but I like it

how are earnings up but employment flat?

thanks again for that chart...might have it tatooed on my arm.

The US market is increasingly less important, growth for multinational is in emerging markets. Consider a few "US" companies. Pepsi CEO is an Indian woman, Coca Cola CEO is Turkish Man, US sales are well under 50% and profits less than 30% for both companies. The largest car market for GM is China, same thing is true for Kentucky Fried Chicken (Yum Brands). Intel despite making almost 75% of their chips in the US, sells 75% outside the US

Many S&P 500 companies could shut down their entire US operations (sales, manufacturing, and R&D) and after dealing with disruptions to the supply chain still remain highly profitable.

The US is still the #1 economy but no longer the driver of growth.

 

[teejayevans]

Lets see, recessions in 1994, 2001, 2008....hmmm...2015 here we come, perfect timing for the next election cycle.
TJ

 

[rbmrtn]

And also the 1980 recession and the '87 crash... nice 7 year cycle there!

 

[Finance Dave]

Japan tried a very similar approach and now look where they are.

Debt at 225 percent of GDP
sluggish to no growth
an ageing population at risk

Could this be us in a decade ?

Remember back about 15-20 years when everyone said the Japanese were going to own America? They were buying everything in sight, running our car companies out of business (well, that actually almost did happen last year lol), etc. Well, no one is talking about Japan today as an economic superpower.

 

[Independent]

5. There are but a few places to put your money.

We can see this one right on this board. Lots of our members have both stock funds and long term bond funds. They also have target asset allocations and re-balance periodically.

Falling interest rates => increased bond prices => over-weighted bond funds => selling bonds and buying stocks.

Many people who aren't so mechanical about it make the same decision.

Or, we can say that the theoretical stock price is some discounted value of future profits. The discount rate is typically a "risk free" bond. If the yields on those bonds fall, the theoretical stock price should go up, even if there is no change in anticipated profits.

 

[HFWR]

Remember back about 15-20 years when everyone said the Japanese were going to own America? They were buying everything in sight, running our car companies out of business (well, that actually almost did happen last year lol), etc. Well, no one is talking about Japan today as an economic superpower.

Japan is still the third largest economy, though...