In Barrons recent cover story (see Barrons article), roundtable members were once again interviewed about their thoughts on the economy, the markets, and select stocks. While there was varying opinion about the short-term outlook, many believe that the market has gotten ahead of itself, with some expressing longer-term concerns - even if the a short-term rally continues. As a hedge against the recent government spending spree and potential coming hyperinflation, some have stressed their continued interest in gold (one analysts with a $850/ounce entry point). The short-term stimulus / long-term worry perspective was articulated by Felix Zulauf, stating that:
"The U.S. economy will look a little better in the next two to three quarters, due to inventory restocking and fiscal stimulus. But the improvement won't continue after mid-2010, when the economy turns bumpy again."Zulauf goes on to state that:
"The market undershot into March, and will probably overshoot in the first half of next year. The first rally is just about done. The market might climb into July, but it will correct in the fall, with stocks retracing maybe 50% of the recent advance. That will provide an opportunity to buy for a rally next spring or summer. That's the whole mini-bull market. Economic conditions won't support more than that."Fred Hickey goes on to mention that while there are similarities to the 1930s, the current situation is different in that by adding liquidity, we may be recreating the very problem we were trying to solve. As mentioned by Hickey:
"The situation is reminiscent of the past 14 years, when the Fed primed the pump and created bubbles everywhere."In a different Barrons article (see second article), Michael Darda, chief economist at MKM Partners, is more optimistic short and long-term, and expects the market to bottom this summer. As evidence, Darda points to the money base, measuring currency-in-circulation, bank reserves, and vault cash (see second Barrons article). The money base is now near a record high of around 2.9 times the stock market's value, a value that is slightly below a higher value in February (right before stocks took off), but below the average of 1.5 over the last 20 years. As Darda points out, the value was below 0.9 times as the stock market peaked in 2007. And while rising yields on the 10-year Treasuries have reduced refinancing, and threaten to lower home prices, Darda points out that what is important is the spread of the yield curve. The current slope is signaling strength, and not giving an inverted slope recession prediction.
But Darda does concede that while futures are pricing in a 50 bps increase in short-term rates by the end of the year, he expects unemployment levels and politics will keep the Fed from raising rates - in what could be a choice of risking a "repeat of the 1970s than a repeat of 1937-1938." This perspective of short-term moves followed by long-term concerns is in line with Arthur Laffer's recent higher inflation / higher interest rates op-ed piece in the WSJ (see previous post). In the article, Laffer highlighted that in:
"shorter time frames, the expansion of money the expansion of money can also result in higher stock prices, a weaker currency, and increases in commodity prices such as oil and gold."Of course, over the long-term, such effects are much more negative, not only for the economy, but the market as well. Therefore, while good economist seem to vary somewhat on the short-term outlook of the economy and market (not unexpected), most agree that the longer-term consequences of the 2008 credit crisis and subsequent spending will provide a challenging environment at best going forward, especially long-term. As mentioned before (see previous post), plan accordingly.