Monday, October 19, 2009

Stocks: Full Speed Ahead

A good chart for seeing the stock market rebound is not over is presented here.

Take a close look at the rebound in real interest rates that resulted in double peaks in June of 1983 and June of 1984. The market had been crushed hard enough prior to lift-off in late 1982 that the sharp rise in real rates did not kill the rally. By June of 1983, small cap, high beta stocks did slow their assent. By June of 1984, long bonds were so attractive that leveraged bonds offered extremely high returns. From June 1984 until November 1986, non levered bonds threw off about 60% gains. From November 1986 until late summer 1987 stocks soared. Sharply higher interest rates, the third run, in September and October brought about Black Monday, October 19, 1987.

In recent weeks, real interest rates have risen sharply--the first run. Guess what happened to the price of gold after real interest rates soared in 1983?  Gold is currently at a 10-year high, but the real cost of holding it has just skyrocketed. Indeed, Australia has become the first nation to raise short rates in acknowledgement that central banks no longer have to lean so strongly against deflation.

Big profits are available in real estate and stocks. Real rates will probably not have to go as high as they did in  1983-84 to slow down the market but the most recent run in the market has been only a rebound to reasonable ground. The big market V was all about fear of a great depression that never happened. Now, the slower process of building a new economy must be played-out.

Great preparation for the "new economy" has already been made. The first internet run went as far as it could go on the infrastructure in place in 2000. Now, a whole new infrastructure is in place with much more finish work scheduled.

With infrastructure in place, the adoption rate for high speed, mobile, internet connected computers is about to accelerate. Early adopters have already had their fun with expensive iPhones and Blackberrys. The price has fallen to levels the masses can afford and the price is still falling. WalMart sells a phone that gives you unlimited voice and data for $45 per month. Within a couple of years, the price will be down by half.

Super fast economic growth has once again taken root in emerging nations. The current alarmist WOW (wall of worry) is that the US dollar is falling. Ironically, the reason it is falling is because the world is making the switch from FEAR to GREED! Instead of cowering in the safety of the dollar, people around the world are investing to expand their businesses.  One of the many positive effects on the USA will be rapid increases in sales of computer chips, our number one export to the world. Of course, Microsoft is preparing to export many billions of dollars worth of Windows 7 software.

The other WOW is that government printing presses are going to cause hyper inflation. It is amazing how quick the worry warts can go from fear of depression to fear of hyper-inflation. With recovery, business profits are going to soar, taxes paid will soar and government deficits will be lower than what they would have been. Chances are good that the Obama big tax and spend health care program is going to be dramatically cut back or it will fail to pass.

Put another way, resources supplies are abundant, every thing from unemployed labor to unused factory capacity. The risk of hyper-inflation will not be real until rapid growth has absorbed most of these excess resources. We have just begun a time of rapid growth. China is leading the way with GDP growth of 7 to 9%!

It is still time to buy stocks. While a pull back would not be a great surprise after the recent 60% run, in general, it is appropriate to add money to equity markets in anticipation of full speed ahead.  


blog comments powered by Disqus