Why This Isn’t The 2003-2007 Rally $$
2003-2007 rally:
- had volume to accompany it
- wasn’t accompanied by massive banking losses which are presently hidden
- U.S. deficit wasn’t so large
- FED was not out of bullets
- was not preceded by the bear market trifecta…real estate, stocks and commodities
- was on the front end of the worldwide economic growth curve, so that the U.S. could export inflation
I’d love to hear why this IS like the 2003-2007 rally. Anyone?
Excellent points. I agree, and will remember to cite your checklist next time compares now to 2009 to 2003!
You might as well add that this time, there is no asset bubble to foment growth. (Not sure whether a “bubble” in Treasury debt counts for or against the case!)
Kat,
Because interest rates [FFR] are at 0.25%
This raises the PV of capital, hence a surging market
Lowers the PV of labour, hence high unemployment
Government is expanding debt/credit rather than the consumer. Thus the inflationary pressure is present.
All the points you mentioned can be accounted for by a credit expansion fueled by artificially low rates
jog on
duc
while i don’t too often agree with robert reich… i’ll shut up and agree this time (and i agree with duc above).
“The great consumer retreat from the market is being offset by government’s advance into the market.
Consumer debt is way down from its peak in 2006; government debt is way up.
Consumer spending is down, government spending is up….
Consumer spending is falling back to 60 to 65 percent of the economy, as government spending expands to fill the gap.”
It’s a reflation trade for the rest of the year. Which like all things with the letters “flation” in them…. POP!
@All
I get what you’re saying, yes, government spending is one of the major components of GDP.
They can probably spend enough to show GDP growth even if consumption and investment stall.
The bright side – at least an average person can invest, and hopefully protect themselves against inflation.
But now they’re talking about this new currency. I make an effort to stay away from conspiracy nuts and forums, but can’t completely disregard that, it’s even on Bloomberg. I’m terrified. Having lived through that, I’d hate to see the results of my work go up in smoke AGAIN. If they do change the currency, that’s exactly what will happen.
It’s so complicated, my head hurts.
What if equities and commodities continued their rallies and T-bill money started to chase higher yielding assets, en masse?
Do markets always go up during inflation? I remember reading about it and the answer was “no”.
How is this government debt supposed to trickle down to the people? in what shape or form?
@Myke, I haven’t heard of Robert Reich until you mentioned him.
Kat,
Trickles down via Welfare State.
Do markets always trend up during inflation – no.
They trend up until the cost of capital inhibits it’s PV, driving the PV of labour up.
Additionally the higher the interest rate [risk free rate] the less incentive there is to buy risk.
Obviously this is a rather gross simplification, but that’s the basic idea.
jog on
duc