So, we’ve seen the stock market continue to rally in the face of all sorts of should-be lousy news ranging from the re-election of “anti-biz” Obama to the end of the world sequestration that we have somehow survived thus far. This momentum and continued rally in equities has many investors and analysts scratching their heads and has bears and gold bugs irate. It just doesn’t make sense! But it does. Here’s why:
- To Critical to Fail – It’s abundantly clear that if the market were to crash to where many people think it belongs (roughly half of current valuations or worse), we would truly be in some dire straights. Why? It’s not just that there’d be angry Americans complaining that their 401(k) turned into a 201(k) again, but there are so many tangential issues tied to the success of the stock market that the country would truly be facing epic consequences. Let’s take all the pension promises and unfunded liabilities out there. Trillions. It makes our national deficit look like nothing. If pension plans can’t meet their wildly aggressive 8% targets, there’s no way they can fund the lavish pension and health care they’ve promised their workers over the decades. This is at the federal, state, municipal and corporate level. These liabilities are north of $100 Trillion (yes, hard to believe) and in most cases, nobody’s counting the present value; they only look at expenses on an annual basis, so the magnitude of the problem is masked. Should the market crash and pension funds return say, 2% or even lose money? The country would implode. So, their private equity, bonds, hedge funds and equity allocations must continue to return the artificially induced high rates of return they have over the past several years. The Fed has done everything possible to inflate the economy with so much cash that there’s nowhere left to go but the risk trade. Treasuries are so inflated they are, by virtually all accounts, a horrible “investment” right now (see what to do about Low Treasury Yields). Income investments are losing money to inflation. So what’s left? Housing and stocks. I’m game. I made my real estate investment and I’ve been 100% long stocks for several years – and proud of it. It’s been several years of this and it will be several more now that the Fed is projecting an end of this paradigm being tied to sub-6% unemployment which we may not see again until enough disability fraud and government assistance can finally drive the denominator down low enough that there’s barely anyone left to count as an eligible worker. We know jobs aren’t being created at nearly the rate that’s normal for a “recovery”; it’s a joke. It’s just that millions of Americans have left the workforce and are no longer counted in the contrived government unemployment rate (here’s how to see the REAL Unemployment Rate).
- Corporate Profits Have Nothing to do with Layoffs – The typical lib rags like HuffPo and MSNBC constantly love to contrast corporate profits with jobs. The whine about why US corporations aren’t hiring more Americans if their profits are so strong. This is an idiotic notion and nobody running a business themselves would waste their money hiring people they don’t need purely out of altruism, yet they want to impose this absurdity on US corporations. Let’s say you get a huge promotion and raise at work and you’ve been paying a guy to mow your lawn. Are you going to start paying 2 guys to mow the same lawn? Come on buddy, throw some money around, share the wealth! Duh – if you don’t need someone, why would you hire them? Clearly the people regurgitating this screed have never run a business themselves. It’s simple, companies continue to cut, outsource, automate and replace workers to drive productivity. The consumer spending side is weak and they require fewer employees to do the same work they did a few years ago. So why the heck would they shackle themselves to all the constraints that come with hiring a new worker? Higher costs, likely a higher minimum wage (horrible idea), health care costs forced upon them, inability to fire people without constant fear of reprisals in the form of lawsuits and bad publicity, and more. The only reason a company hires an American right now is because they simply can’t get by with any other option – automating, using a third party contractor or hiring someone overseas. So, in summary, the jobs situation could continue to be less than stellar and we could surely continue to see corporate profits continue to beat expectations, which drives share prices.
- There’s No End in Sight – We’re probably going to see corporate profits continue to improve or at least stay stronger than consensus for some time. Why? Even though the consumer spending site leaves something to be desired, the government will continue to tinker with redistributionism, handouts, stimulus (for a good laugh, check out what your government spent your money on) and other hair-brained schemes meant to “jumpstart” the economy (we’ve been hearing this for 5 years now) all at a cost to be paid back down the road (our children will someday have to inherit our profligate debt). Yes, someday this will end badly. It may be a slow death by a thousand cuts (continual downward spiral in standard of living and higher taxes) or it may be forced upon us when the bond market finally drives our debt servicing costs so high we can ill afford to continue on our current trajectory and must embark US Austerity. But regardless, that is years or possibly even decades away.
What Are Your Thoughts on this Market Rally and Whether It’s a Bubble or Not?