All of the usual red flags are out there, let's list 'em: oil, trade deficit, gold, flat yield curve, fiscal deficit, real estate bubble, etc. So is the stock market just plain nuts for not crashing? Is there a disconnect as wide as the grand canyon between Wall St. and (yes) Main St.? Maybe, but maybe not. The "maybe nots" are always more fun. Andy Kessler tries to penetrate the mind of The Street to figure out what's going on:
So what is it? The stock market knows something and is predicting some future the rest of us can only guess at. I think it knows how the economy is now structured and is not letting on. It may have figured out that we’re about halfway through a transition from an industrial economy to a design economy. And all bets are off.
Banks don’t fund growth anymore, the stock market does. A flat yield curve is less important. Why borrow at 6% when you can sell shares to fund expansion. Those that have to borrow, like GM, are rightly starved. Those that can grow unabated (Google, Goldman and yes, financial firm GE) use the stock market for funds.
Perhaps here’s how the world works these days. No need to borrow billions and build big ethylene plants anymore. You invent something here (chip, movie, iPod, medicine, financial instrument), email the design overseas for manufacture in $1-an-hour factories (OK, not financial stuff), and then ship it back for consumption. Sure, this runs up trade deficits, and our precious dollars leave the country, but that’s only half the story. Those dollars come back and invest in the U.S. Most go into long bonds, 10-years and 30-years. That’s why Alan Greenspan left with a puzzled look on his face. Foreign buying is keeping long rates low; the yield curve is flat.
But maybe the stock market has figured out that we’re running out of long bonds. Maybe, just maybe, the surprise is fiscal discipline being voted into office in November and shrinking red ink in D.C. Marginal rate tax cuts and lower rates on dividends and cap gains might actually work and increase revenue. If we run smaller deficits, then there’ll be fewer bonds for foreigners to buy, so they have to buy something else with those dollars and the next big pot of liquidity is—hmm, let me think for a second, oh yeah, on Wall and Broad, the $15 trillion stock market. When bonds are scarce, foreigners are going to have to buy our stocks, or so the stock market might be screaming.
Interesting scenario, and a lot of it rings true. But does it sound a little "it's different this time"-ish? Maybe that's fine, sometimes it really is different this time. We're no big fans of using history as a guide, hindsight is nowhere near 20-20. Even when you think you see a pattern, it's probably wrong. On the other hand, it's really hard to imagine that people are buying stocks because they're predicting fiscal discipline in Washington, which would in turn make bonds scarce, which would in turn cause foreigners to buy more stocks instead of bonds. At some point, Occam's razor has something to say. Definitely read the whole thing.
Comments