OK -- let's look at this from the bullish and bearish perspective.
Bull: Corrections are healthy and represent buying opportunities. That's all this week's drop-off was. The economy is slowing into a perfect Goldilocks soft-landing. While GDP growth has slowed, it is nowhere near recessionary levels. Incomes are rising. Manufacturing is showing signs of improvement. Unemployment is low. Housing damage has been contained to the housing sector. Consumer spending is showing signs of continued strength.
Bear: This is just the beginning. GDP was revised down. New home sales plunged. The inventory of new and existing homes increased on a months available basis. This will eventually hit consumer spending. The sub-prime market problems are just beginning. We still have historically high debt levels at the federal and household level and debt payments/disposable incomes are at records. The rally is long in the tooth.
I think housing continues to be the main wild card in both scenarios. Housing damage is still largely contained to the housing sector. I have no idea if that will continue, but the record so far says it can be.
Links for 05-22-2013
1 hour ago
3 comments:
Hey Bonddad - my jaw dropped this morning when I heard Joe Kinehan (sp?) on CNBC say, "Nobody ever accused us of being optimists." I guess the economic media is busy scrubbing its websites just like the the Bush administration is.
bonddad, here's a "back to basics" argument:
Over decades, stock price movements have correlated well with rates of inflation and interest rates. The market loves inflation rates between +3%/-1%. The further from those you move, the bigger the penalty. The market also loves lower "real" interest rates, and a steeply positive yield curve.
The appreciation in stock prices since July has correlated well with YoY inflation dropping from 3.5% to 2.0% in the last 5 months (thank you, Goldman Sachs).
The problem going forward is that created "tight" short term interest rates of +3.15% and a negative sloping yield curve.
The bull case is that the Fed will drop short term rates soon, so that "real" rates will be much more accomodative, and long term rates will follow, but hopefully with a positive slope.
The bear case is that rates will remain "tight", the negative slope may get steeper, and believe it or not the housing bust/mortgage lender shakeout may turn into a credit deflation.
There are some signs that housing damage has spread to manufacturing, autos, and lending.
So, we have to see how the accomodating Fed vs. the credit contraction plays out.
Cheers.
Very informative .Thanks
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