August 17, 2010

The Economy HAS turned around, for good.

Stocks are going up…

Dow 25,000 is not out of the question.

I believe the bull market in Treasury Bonds is over.

Gold (the fear trade) has nowhere to go but down.

I’m sure that 25,000 number makes me look like some sort of maniac extremist, but aside from my general view that stocks are supposed to be bought now, I base that number (or even higher) on the 110 years of history depicted by the following Dow chart. As you look at it, I’d suggest you start by blocking out any of the conventional media opinion you’ve read or heard as to where the world economy, and stocks, are headed. Then do nothing more than look at the chart and ask yourself if what I’m supposing is a reasonable possibility…or not. Again. Forget all the economic babble that’s out there, and using these 110 years of what has been a LOT of diverse history (like several World Wars, the Depression, the birth and partial death of Communism, etc.), just visualize the possible ways in which this chart might develop…Up, down or sideways…because it will do something…and if it is going to be on the upside, to me, 25,000 just doesn’t look that difficult to imagine.

The world is in harmony…

Yes, the terrorist threat exists (and will), but I believe the world today is more at peace than any time in my 60 year lifetime. When I was a kid, we truly feared war with Russia and the threat of massive nuclear attack. We DID…China was the giant silent mysterious Communist enemy we knew NOTHING about, and with whom we didn’t even have the slightest of diplomatic relations…Half of Europe had been gobbled up, and held prisoner behind an Iron Curtain from which no one, nor any information, escaped, and the western world lived with the ever foreboding question of, “Where will the Soviet tanks show up next?”. The Cold War was real and it was global.

Today, even though the war in Afghanistan continues, and to a much lesser extent in Iraq as well, these are not world encompassing conflicts and definitely not wars between superpowers. And yes, the situation between Israel and its neighbors will continue to be “prickly”, but the international bottom line is the major “wars” now being fought are purely economic…The USA, China and Russia all have variously different political ideals and structures, but all three (and the rest of the world) are now immensely more interested in making money than in making war. In other words, Capitalism has broken out all over the planet as opposed to what was the case just 20-25 years ago…Think about it. In 1985, you still had several billion consumers suppressed by Communism, living under circumstances, for example, where factories produced according to government mandates (or quotas), not market demand, and making a quality product, or a profit, was rarely a primary consideration…But, how that has changed! Now, China has essentially become the world’s second largest economy, and their government, unhindered by the restraints of congressional gridlock and partisan party politics, is doing everything it can to turn their country into the world’s biggest Capitalistic machine…With China having 20% of the world’s population, this 21^st century version of Capitalism (State Sponsored) has become a  rising global force, and I believe, represents just as much of a dynamic influence for the planet as did  the advent of computers back in the mid-80’s…

But again, China is not alone in their “adoption” of Super Capitalism as a means of elevating the living standards of its citizenry. Though each government’s approach and degree of support may differ, when you get down to it, as I’ve said before, the whole world has become about business. Whether it’s just the old guard, well developed, Western style economies…or Southeast Asia, India, Arabia, Eastern Europe, South America and even parts of Africa, nations everywhere, even the old Communist ones, are now geared, MORE THAN EVER, towards expanding commerce, not ideologies…and in all of those “new” capitalist nations, the most important thing they are really producing is the massive growth of their middle classes. They are producing hoards of new wage earners and CONSUMERS, which in the final economic analysis, is what really keeps everything going.

Beyond that, when you combine these new aggressive attitudes towards capitalism with the still ongoing, still in-its-early-stages Technology Revolution/Computer Age, I firmly believe you have the prescription for a worldwide economic boom…And I’m not just talking about some two or three year thing.

Simply stated, I think the confluence of these two forces, the “introduction” of maybe 1/3 of the world’s population to Capitalism, and the still-just-getting-started Technology Revolution, will result in worldwide growth, maybe on a scale unseen ever before…And as a consequence, this suggests (to me) that the chart above does have nowhere to go but UP, and whether it takes 4 years, or 10, we WILL then see the Dow at 25,000…or, for that matter, even higher.
 

The Economy HAS turned around…

 Buy the Stock Market

I swear, 98% of the current herd instinct economic commentary (which remember, IS just about always backwards) is talking “double dip”, or “not enough jobs being created” or “we’ll never overcome the deficit”, etc., and accompanying these almost universally negative prognostications is an even more negative attitude towards the stock market…Everybody seems to hate it and statistics show that the general public wants no part of it. By one reckoning at one brokerage house of which I’m familiar, during the first half of 2010, something like an INCREDIBLE 97+% of mutual fund investing by retail US investors went into Bond funds and fixed income, with less than 3% having gone to stocks…As I have stated over and over, ALL of the paper markets are nothing but a giant financial “game”…No value is fixed. All values are simply a function of mob psychology driving capital (by both professional and non-professional investors) from one location to another, and INEVITABLY, when all of the money ends up in one place, you’d better be looking for something else…Yes, the demographics of the baby boom do dictate that more monies are now seeking the security of bonds and other fixed income instruments, but we must not forget that, essentially, there are still only three real choices when it comes to paper investing: Stocks, Bonds & Cash…And as Equities have NOT just totally disappeared as one of those vehicles, and as the masses, right now, basically want NOTHING to do with stocks, and are, in fact either in cash (money markets paying almost zero percent) or POURING money into bond funds, does suggest that buying stocks IS exactly what everybody should be doing…Furthermore, some day, probably way down the road, and some many 1000’s of Dow points higher, I feel quite certain I’ll be noting that, “Beware! Everybody is now throwing all their money into the stock market”, but that sure as hell is not the case right now.

OK…the Great Recession (as the last few years seem to have been named) was the worst thing since the Great Depression…but it WASN’T another Depression, and it WON’T take decades, or another world war, to recover from it. In fact, I firmly believe we definitively turned the corner last year, and even though the economy is not zooming ahead, virtually every economic indicator I can find says we are headed back up…which, really, is the only thing that is important…The economy is a BIG ship…It does NOT have to take off like a rocket. We don’t have to know that every job lost during the downturn has been recreated before we can say we’re back on the right track (it NEVER happens that way). All the economy really needs to do is begin moving in the right direction… which, again, is exactly what almost every statistical measure I am looking at seems to indicate (charts follow a little later).

The Mortgage Debacle

The truth is, if you think back a few years, the only thing that really went wrong was extremely lax mortgage lending standards led to a bubble in the residential and commercial real estate market. That bubble obviously contributed to above average growth and consumption in many areas, but even so, what we weren’t seeing, outside the financial industry, was all of corporate America (or the world) being stupid about how they run their businesses. The downturn we had post 2000-2001 had already served as a “tighten up your operations” wake up call for businesses in general, and I’m pretty sure if you just run down a list of, for example, blue chip companies, and ask yourself, in 2007 (at the top), “We’re these guys at all the cause of what happened? Or were they just victims of the mortgage debacle like everybody else?”. I believe the answer is clear…They had nothing more to do with the crash than you did…And furthermore, I’m certain this Great Recession has only resulted in all of those still standing businesses having tightened up even more…I mean, ask yourself…Do you think, basic companies, just to name a few…like American Express, Boeing, Coca Cola, Disney, Exxon, GE, Home Depot, IBM, McDonalds, Merck, Microsoft, Proctor & Gamble, Verizon and Walmart…are in ANY danger of going down the tubes? Do you think any of those companies are being run by a bunch of idiots who have been twiddling their thumbs and doing nothing more than, “hoping things get better” for the past few years? Or are they, like every businessperson you know, doing EVERYTHING they can to promote their own growth? To improve their operations? Are ANY of those companies “in bad shape”? And more importantly, and perhaps too simplemindedly, don’t you think that 2,3 or 5 years from now, ALL of those companies will still be here? And that they will ALL probably be bigger and more profitable than they are in 2010? If your answer is “yes”, then I’ll tell you the stock market will ALSO still be here, and right now, what you are supposed to be doing…and nobody really is (believe me, ask any stock broker)…is buying stock in all of those companies, and NOT just as a trade. For the past ten years, “Buy and Hold” has been something of a losing proposition, and quite naturally, of late---AFTER the fact---supposed financial “advisors” everywhere seem to be saying “Buy and Hold is Dead”, exactly when this should now be everyone’s overall perspective as regards stock investing…It has nothing to do with my own ongoing and immediate recommendation to buy the stock index futures (take your pick…Dow, Mini Dow, Mini S&P ,Mini NASDAQ), but now IS the time to be buying quality stocks and holding them for the long term…that I believe the odds are now high that the equities markets are going to be going up, a lot, and for many years to come.

What are the facts?

I’m not just sitting here saying, “I have a feeling the economy is improving”.  What follows are a number of charts of various economic indicators, in which, as stated above, virtually every one of them HAS turned back towards the positive. Yes, you have all these guys talking about a potential “double dip” recession, meaning all of these now positive leaning indicators will then turn towards the negative, but the truth is, the overwhelming majority of those people who are jawing about the economy going back down never saw the almost 8,000 point crash in the Dow coming (even after it was well under way), none of them saw the stock market as a buy in March, 2009, and all of them were basically screaming, just THREE MONTHS AGO, that Europe was about to go out of existence.

The point is, if you want to buy into all the pessimism, go ahead. Are things great yet? No…But they ARE improving, and moving FORWARD again, which is really all we need to be happening…And virtually every chart you are about to see, covering a diversity of indicators of the US economy going back some 60-90 years, should show you that growth is absolutely back on track again…and that all of the chatter about “double dip” and “jobs not being created fast enough” are just typical economic babble from the talking heads and perpetual band wagon forecasters who generally ARE always on the wrong end, or tail end, of anything that is happening…I’m not just singing a happy song here…What I want you to do is check out these charts and then tell me they are not ALL headed in the right direction…And I’d also add, as you look at them, consider the possibility we have begun the 21^st Century with a tremendously different economic climate than was the case for a major percentage of the 20^th…that relative peace is a reality, political ideology is secondary, and the world is now more interested in commerce than anything else…And, finally, that it is quite possible, that from here, supposedly still in the depths of potential recession, where we really might be, is at the inception of one of the biggest global expansions in all of modern history.

Start with this…GDP, the broadest, most basic look at whether the economic picture is positive or negative…

And make no mistake, when businesses are making money, they do try to make more money…And to do that, they DO have to add new employees…new jobs…by which I mean, JOB GROWTH WILL COME…MAYBE IN GIANT LEAPS…AND MAYBE NOT THAT FAR OFF IN THE FUTURE.

Those last nine charts do not cover every minute aspect of the economy but I do think they represent enough of a cross section to be meaningful…And yes, there are other factors to consider, like…
 

JOBS

To that major media worry you see everywhere, “we’re not producing jobs fast enough!”, the next few charts tell me we are right on schedule for typical job growth when coming out of a recession…

As for this whole “double dip’ theory, for the record, there has been only one such occurrence on the charts above. This happened between 1980 and 1982, which is precisely when Paul Volcker’s Fed, in their battle to defeat the inflation generated by the 1970’s, had raised interest rates to the highest levels EVER seen in this country…To put it mildly, this is  hardly the same backdrop we are facing today.

Along those same “double dip”  lines, here’s something else to consider…Have you EVER seen the economic forecasting crowd predict a recession before it actually happened? Yes, there is always that 1% of analysts who see the bad times coming before everybody else, but my 30 year experience has been that when the economy is rolling along, and about to hit the skids, you NEVER have 9 out of 10 economists/analysts predicting it. EVER. Yet right now, even though everything I see indicates we are definitely moving forward, all I seem to hear, from EVERYBODY, is, “Beware! Bad times a-coming”.