We could use more people like Paul Volker, the former Fed chairman who saved the U.S. from hyperinflation in the early 1980s. Hes not only got the track record as a policy maker but also one as a forecaster. Of note was his prophetic speechreprinted in the April 10, 2005 Washington Postunder the headline, An Economy On Thin Ice. Ive quoted from it beforeand it bears quoting from again:
Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks — call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.
Volker recently gave a speech in China on U.S. economic prospects, which a few media outletscovered. A long slog, with continuing high levels of unemployment, seems to be in store, Volker said. He went on to say the anemic pace of the upturn was likely to forestall the surge in inflation that some expect to be triggered by the huge policy stimulus. This is not an environment in which inflationary pressures are at all likely for some time to come, he said.
Valuations no longer a prop for the rally
Valuation played a role in boosting stocks over the past three months. In early March, stock prices had become quite cheap, inviting bargain hunters to go shopping. Now, that reason for buying has ebbed with stocks rising to either fully valued or over-valued levels, depending on the valuation yardstick used.
Paul Lim writes in a June 14 New York Timespiece, This Rally May Need a New Source of Fuel, that the price-earnings ratio of the S&P 500 based on GAAP earnings currently stands greater than 100. Based on operating earnings, the ratio is near 22, compared to the average of 19 over the past two decades.
But get this: Lim cites a Ned Davis Research study of bear markets since 1929 that found the markets P/E ratio tends to climb by about 10% in the first three months after bear markets. In the three-month rally from March 9 of 2009, the P/E ratio for the S&P 500 has soared almost 40%.
Chinese stocks for the long run?
Maybe buy-and-hold investing will work if one picks the right country to invest in. The U.S. has two centuries of stocks averaging 9% a year but its brand of capitalism now seems sclerotic, leaving one to wonder if the youthful capitalism of emerging countries is the place to be for the long run. Even noted bear David Rosenberg of Gluskin Sheff + Associates Inc. seems bullish on China, at least in the near term. In his June 15, 2009 commentary, he notes:
While exports seemed to have suffered a bit of a setback in May (-36.4% YoY versus -22.6% in April), it does look as though the government stimulus is percolating through the Chinese economy much more quickly than it is the case in the industrialized world. Retail sales are up more than 15.0% YoY; turnover in the commercial and residential real estate market has expanded 45.3% and investment spending has accelerated at a 33% YoY pace. No wonder commodity prices are booming again.
The pullback the buy-the-dippers were waiting for?
Stocks sold off sharply on Monday, June 15 but will any weakness in stocks at this point be seen as a pullback for sidelined investors to jump in? A MarketWatchpiece, Funds looking to pullback to get in stocks, thinks the answer to this question is yes. Funds that have been sitting on cash and looking to do a bit of window dressing for the end of the quarter are likely to be buyers, says author Nick Godt. But after June 30, what will the market do without the buy-the-dippers and window dressers?