Sunday, December 6, 2009


Symbols or letters carry a lot of assumptions and emotions. The most feared letter right now is “W,” referring to a chart pattern not to a former President. Depending on who is asking the question, it either refers to the economy or the market, and for some both. Those that fear the “W” pattern in terms of the economy, acknowledge that we have already hit bottom in terms of GDP or similar measures, not unemployment. They fear another decline, or perhaps a series of saw tooth moves that introduce the “Japanese Disease” into the US economy. According to John Mauldin, Japan has not added any jobs since 1989, and what is worse is the fact that Japan’s nominal GDP today equals its 1982 total. Mauldin contrasts that statistic with the US, where our jobs are approximately at the 2000 level, with our nominal GDP at the 2004-5 level. He and others are fearful that tax increases will kill job creation and will lock us into very slow growth and perhaps stagflation. But on the other hand, securities analysts and most portfolio managers are not professional economists, but are often forced to have their own thoughts on the economy.

All of those who got out of bed this morning, including me, are optimists. My view is that those who are fearful of the “Japanese Disease” are somewhat like those who believed in the flat earth centuries ago. All of their learned thinking was based on what was known at the time. They were dealing with a closed system that was not open to new inputs. The new inputs that I am counting on are technology, rising consumer demand from emerging economies, and the output of our educational institutions (students who want and will change the world). Unlike Japan, I foresee a growing population in the United States, not an unmixed blessing, which will increase the demand for goods and services sold here. One hopeful example is that a German auto producer is switching jobs from Germany to Alabama. Bottom line: I believe we will see some forward progress for the US in the years and decades ahead.

The “popular press” and many others want to believe that there is a tight correlation between the movements of the economy and the stock market. For many years, there is little in the way of correlation and there are periods of inverse reactions. The followers of known data on the general economy are somewhat like the “flat earthers.” The stock market is an auction of expectations. When the market has steep declines it is usually after a period of excesses. I do not see much excess currently, except in some commodities and in some fixed income securities. Credit has not expanded, with the exception of margin debt, however still below the 2007 peak. Thus, I believe the inevitable stock market correction will be limited to a 10-20% decline, not a 25% fall opening a new bear market.

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