Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

This Market Is Not Calm and Rational


Anybody know how the stock markets are up since March and rising?

Perhaps all this forms a backdrop for assessing the larger picture concerning East versus West, looked at as debtor versus creditor writ large. Most people assume without question that the danger for the United States is its vast debt to foreign nations, especially China. Does this make sense in terms of value contrasts and comparisons? I don't think so. The US consumer's balance sheet is already regarded as terrible; it's one of the few things we don't bother to argue about. But think what it would be if it were additionally burdened with the higher costs of embedded domestic labor in the absence of overseas alternatives. How much further would GDP be in the tank? How much higher would interest rates be? What would be the comparative rate of business failures and unemployment in the wake of entrepreneurship unable to handle those costs?

Indeed, the only reason the foreign debt issue even arises is the implicit worry regarding US debt quality deterioration and the specter of our not making good on borrower obligations, along with speculative implications for the already beleaguered dollar. But think about who's really gotten the better trade. We've got the cheaper goods and they've got our paper. It doesn't surprise me, therefore, that China is scurrying around on multiple continents to convert that paper into hard investments in mines, oil fields, other direct industrial investments, etc. But it's a daunting chore for China considering today's valuations for many of these assets over that ten-year time frame identified above in contrast to the shorter-term view currently relied upon more often than not.

History may have valuable lessons, but when in the past has there ever been today's mix of such unusual and extraordinary circumstances? That's a very hard call and, so far as I see it, about the only inference is uncertainty which markets generally don't like. Nonetheless, it's an uncertainty enshrouded in such vast complexity as to shield it from perceptibility, however colossal its eventual importance may turn out to be. So right now it may be just another brick in the "wall of worry" markets have been frequently known to climb.

Also hidden from statistical examination is what may be the largest factor of all -- the increasing political cultural and political chasm I like to call "buyers' remorse" regarding President Obama and the policies he champions pertaining to public options in health care and the cap and trade initiatives. The implications -- which may not be clear to the marketplace until the 2010 off-year congressional election campaigns get underway in earnest -- are enormous and have a lot to do with activity in the bond markets now and interest rates to come.

The persistence of the 10-year rate in holding below 3.5% is therefore a stunning number to me in the context of unprecedented US government deficits -- federal, state and municipal, with taxes and fees rising meteorically nationwide and existing program spending increasing, huge new spending programs in contemplation and government payrolls still burgeoning relative to the private sector's continued job-shedding. Keep your eye on that 10-year rate, and also keep your eye on the triple-tax-free muni market. The market fundamentals in those quarters have no historical guide whatsoever, and I find it difficult to envision "business as usual" if the pundits are right about near-term impending economic recovery, even if that recovery is confined to a corporate-earnings rebound and doesn't extend to a major improvement in employment in the private sector (the "jobless recovery" scenario). An addition of 100 basis points to the 10-year benchmark could well unsettle a stock market seemingly comfortable trading at today's lofty P/Es. But that scenario assumes an increase in credit demand that -- even with burgeoning government borrowing -- may not materialize if real estate activity and lending remains moribund, while the absence of any significant rise in capital-expansion spending seems likely to continue in the current context of capacity utilization.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos