Where is the US economy headed?

okie, It doesn't make any difference whether it hits 15,000 or 13,000. We gain both ways; a) already pulled our year-to-date gains outk, and b) if it goes up, we take out some more. Simple math.

Our past three year average gain is over 10 percent, past two year gain is over 9 percent, and for this year it's over 7 percent. What's to lose?

It's just another BUBBLE in the making...

By the way, some US stocks actually declined.

Duh.....

okie, Your statements are usually based on ignorance; you assume that the market can go up to 15,000, but completely ignore the fact that it can also go down to 12,000. Based on the reasons used for the market's bullish uptick over 14,000 on Friday shows you know very little about macroeconomics.

Not only ignorance, but a plain lack of education.

Since we are on the topic of the stock market..... I had the occasion, during my Graduate Assistantship, to do some heavy research into the machinations of the Stock Market in conjunction with some of my Finance Professors. This was in '86, bear in mind.

While our research findings were not statistically significant to hang one's hat on (or Academic Reputation, for that matter) at the time, I noted certain tendencies and have tried to keep a loose tab on those tendencies over the years to see how they would play out over time.

I offer the following postulates for discussion:

1) One of the biggest boosts for the stock market in recent years (post WWII) has been the introduction of the 401k (and other retirement) plans.

This had the effect of generating a considerable and consistent source of cash being constantly injected into the market.

A basic tenant of economics is when an unlimited amount of money is trying to purchase a limited amount of item (in this case, stocks), the price of said item MUST go up. Not only that, but the consistancy of the incoming cash flow insures that the prices of those stocks are constantly being inflated. Any downward trend (in the macro market) is generally the result of consumer confidence.

2) The big money management firms control an immense amount of money and stock and are under constant pressure from their customers to "show a good return".

This, in effect, makes the big money management firms, de facto, big stockholders in virtually every firm that trades stock. The pressure that these "stockholders" can exert on CEOs to "make their stocks look good" is immense. (I speak from "insider" knowledge on that one.) In fact, I suspect many a CEO has fallen over the past 20 years from exactly that pressure.

This pressure, combines with other factors, of course, forces CEOs no recourse but to make the company as profitable as possible, and the "good neighbor" concept of corporate operations begins to take a second seat. Any program a company takes on that negatively affects the "bottom line" (i.e. profit efficiency) begins to be looked at with a very jaundiced eye.

Since one of the biggest costs to management is labor associated in manufactoring, it becomes VERY cost effective, in a world of free trade, to export the labor and import the end items. Or to import less expensive labor. (So that's how a couple of million Illegal Immigrants got jobs!!!) :wink:

It could be said, in short, that our own efforts to create a retirement cushion for Middle Class workers has gone a long way to reduce the Middle Class jobs that can provide for such retirement programs. If that is not coming the full circle, I don't know what is.

3) Stock prices have so been inflated, they tend to show characteristics of commodities on the market rather than traditional stock trading.

For instance, the "run" of profits to earnings ratios used to be 5 to 20, with stocks in the lower range (with no other extenuating circumstances) considered better "buys" than those of higher ratios. Recent P/Es are well above that range. That is demonstrative of inflated prices.

If stocks are traded like commodoties, they fall prey to supply and demand. If there is a lot of stock available vis-a-vis money the prices will fall. If the money keeps "chasing" those stocks the prices continue to rise. That is exactly the situation I observe now. Since we have noted that "the money keeps rolling in", the price pressure is always up.

look at your Initial Public Offerings of recent years. Many times these stocks go completely crazy during the IPO period. Why? Boo-Koo money looking for a home. Bid that stock up, baby! :wink:

What does all this mean to you, the average investor, 401k holder, etc.? Just this: The single biggest demographic group for investing in the above scenario(s) are the baby boomers, they are beginning to retire, with them goes the money that their jobs provide the market AND they will start drawing off (read: selling off) their holdings. This will begin now and go on for another 15-20 years.

It's a double whammy, the money is no longer coming in and the money is being withdrawn. Effect on the market: Less money chasing a given quantity of stock (remember it's a commodity these days.) Prices MUST fall. How hard and how fast is anyone's guess, but it is inevitable.

I'm not even going to try to tell you when this may become more apparent. I'm just telling you it seems inevitable.

Incidently, a method of staving off the "Fall" is to get foreign money to invest in US firms. Since there are a lot of US Dollar IOUs out there because of trade imbalances....... Ooooops! Already being implemented via the "sale" of US companies to overseas owners.

Now...... I'm sure everyone with a vested interest toward keeping the ever upward spiral of US stock prices going is gonna lambast me to the high heavens. I'm no virgin to getting lambasted! I just ask that you take a look at it, see if the logic rings true and take the action you deem fit to take.

Halfback

So? More buyers will jump on the chance to buy these stocks...

Halfback, I give you credit for looking at the long-term effects on the macro level of economics. That's exactly what I also try to do, but as we all know, much of what happens to the stock market is based on emotion rather than the understanding economics.

Pundits talk about why the market is up or down for the day, but none is able to predict what will happen tomorrow, next week, or next month where it matters.

What I see in addition to your thesis is the simple fact that easy money during the past half a dozen years has created a debt load never seen in history, and most of the borrowings were made on home equities that is no longer sustainable - or available. Consumer buying will be depressed, because salaries have not kept up with inflation - maybe, barely.

The housing market is beginning to feel the pinch, and most of the large builders are hurting for cash - and dropping the prices on new homes they built during the past six months or so. The depressed housing market also hurts appliance makers, building materials producers, and the realty business. Those losing their jobs will have a more difficult time finding replacement jobs - if they're lucky enough to find it. You can be sure most will be working for a lot less money.

They still have to pay back their loans. It's going to be a big mess for millions of Americans.

"Pundits talk about why the market is up or down for the day, but none is able to predict what will happen tomorrow, next week, or next month where it matters."----C I
The best sensible sentense I read today.
Thank you C I

Here is a quote not from THE ECONOMIST but from American source


When Fed ignorance isn't bliss
The machinery for creating credit has gotten so complicated and powerful in recent years that not even the Fed may know what it's doing, writes bond expert Bill Gross in Fortune.
By Bill Gross, Fortune columnist
http://money.cnn.com/2007/10/01/news/economy/fed_gross.fortune/index.htm?postversion=2007100207
October 2 2007: 7:42 AM EDT

The ECONOMIST
has two relevant article about this subject.
http://www.economist.com/finance/displaystory.cfm?story_id=9894168
http://www.economist.com/finance/displaystory.cfm?story_id=9861591

Miller:

Yeah, somebody will. I think you are missing some of the nuances here. This won't be like what you hear on the Financial News: "Stock recovered from yesterday's slump because of bargain hunters picking up on deals.." and the like.

We are talking about Uncle BOB's retirement package (times 40 million or so). Let's say the first 10 million baby boomers have retired. Their employers are no longer "kicking money" into the markets, neither are the baby boomers. The pressure is off the market to find a home for all that money. (Buy orders.) Prices go down. You get some buyers, but the price is less than peak.

Next those same baby boomers start selling off stocks to enjoy that trip to Europe they have been putting off for years, more stocks available to buy, but the buyers are less in number. Ya gotta remember that capital preservation now is the primary concern of those who have built their 401k for all these years, not capital building.

The crux comes when Uncle Bob (times 30 million or so) begins to realize that the stocks are not gonna go up in the near future, he also realizes that he has six years to go to retirement and the value of his portfolio has dropped ten percent in the last year.

Whoops. Bob and some 10 million of his contemporaries start selling off their stock in order to keep that nest egg from falling off any more. This, in turn, further drives the market down (it's a commodity, remember).

Now we get into consumer confidence. Potential bargain buyers are now becoming a little hesitant about buying and take a wait and see attitude. How far can this go? They ask themselves. How far indeed? If 40 million baby boomers start seriously getting worried about the state of their investments, you might be surprised.

The crash of '29 was mostly about confidence in the market. Once that went, all else followed. The market "adjustment" of '87 was a near panic and we bankers spent late hours studying our exposure and coming up with "reassureing" statements to our customers. That was just a little one, 20-25% drop. I still hear retirees griping about that one, how they lost 30,000 in one day, etc.

How far will the prices go down. Hard to say, but I'd put my money on a P/E between 8-15 (but that's a guess, other perameters may be in effect that I have NOT kept up with), that is a reality check and then the market will go on. Which will do absolutely nothing for those who lost Billions in the interum.

Maybe I'm being paranoid, but am I paranoid enough? :wink:

Halfback

P.S. I am retired and my money is in Money Market and Treasuries. I heed my own advice. Bye the bye, I am the first year of what is considered the baby boomers. Born 1945.

Nice post.

One of the good things about A2K is the variety of viewpoints; Born 1979.

Cycloptichorn

For those who wish to read this response unconnected with the topic of this thread.
Rama

Let the passions and bonds pass-by
Who has lived in this land forever?
Path of arrival is known - but
Path of departure and the route unknown.
If all who came opt to stay
Where's the space in this sphere?
Life is just a business -in which
the birth is credit and death is debit.


Though born without a dress,
did we come without passions?
when we complete the merriment
can anyone carry their possessions? "


A tamil non-entity with the name Kannadasan

I follow your views without regrets

Cyclo:

You would be perfectly positioned, at your peak earning years, to buy after the market hits bottom.

Use the consolidated index, not the DOW, watch the ups and down swings, do the Calc to find the inflection point on or just before the bottom and start buying at that time.

Ooooops! I gotta stop reverting to form. I was once a Certified Financial Advisor up in Ohio and despite the fact that I have been out of that racket since '91, I do keep blathering.

Besides, I could be dead wrong! But, the logic follows, it does not violate any economic principles, and I have put my money where my mouth is. :wink:

Halfback

Investing is never the same from year to year or decade to decade because the world economy is dramatically changed during those periods. What may have been good advise 20 years ago may have some grain of truth, but I'm leery of using the same methods after so much change.

It's no longer just looking at the US DOW and Nasdaq, but to be aware of the macro-ecomomics of trends in debt levels, circulation of money, liquidity, p/e ratios, interest rates, the value of the US dollar, the increase in bankruptcies, inflation, and how the other developed countries are faring.

It's never good when our economy begins to have the threat of a recession while fighting a war that increases public debt.

the "big" picture doesn't look too good right now.

C I
Please excuse me.
World economy is a new term which was not as popular as it is today.
In 1940 or 1960 the world is different without any combined Economy.
Am I wrong?
The Global economy which torures all the people around is due to the faulty
potatoes who sit somewhere in the bar and try to manipulate the economy.

We need a radical different system to share our wealth and woes.
Untill then we have no tranqulity or peace.
13 percent of the transactions in London is being done by the ex-slave country India.
China ( refer my previous Economist link) is up and vivid.

Oscar Lafontaine was once a finance Minister in Germany and Party leader as well.
He had thrown his towel ( power)
He had said once.
Das Herz schlägt links.

Capitalism has many faults, but it's still the best economic system man has devised.

Yes.
So far.
But slowly it is facing the natural death like the brutal system in the name of communism.
If Iwere in Abuzz I will post my critical views without any inhibitions.
But I am here in A2K and I have to learn to unlearn my past

Imposter, good post, but the commies are still looking for a way to get it right. They will claim it was just done wrong or the wrong people were in charge or something. They will keep trying communism because the college professors just can't seem to get in through their heads that even though it looks good on paper, it isn't practical because of the realities of human nature. You see, professors do not reside in the real world. They study books, write books, and forever are looking for utopia. These people continue to teach young people the evils of capitalism, and we oldsters will continue to have to fight this nonsense, and probably will continue to have to see cultures suffere the same old mistakes over and over.

We now will be treated to seeing Hugo Chavez drive his country completely into the ground. He is only getting started and it will take a while.

When will people learn that the world is imperfect, human nature is imperfect, and you will never eraducate poverty, laziness, or irresponsibility, but capitalism serves to minimize it as much as possible. Communism only leads to shared misery, not shared prosperity, which seems to be the hope on paper, but in reality will never happen.

Ramafuchs is apparently an example of what I am talking about, because he replies to your post "so far." He apparently thinks there is some non-capitalistic way to prosperity. Those that do not learn from history are destined to repeat the same old mistakes over and over.

okie, 100 percent communism will never work; it takes away the motivation to work, depresses the development of new technologies, eliminates the benefits to find methods to increase efficiencies, and removes the profit motive from one's labor.

Otherwise, communism is fine.