You’d think it’s time to stock canned goods and sweep out the bomb shelter.
Oil is over $70 a barrel, Iran’s got nukes, and soon they’ll price gas per ounce. The Fed has jacked short rates up 15 times. Guys, you’re killing us. The yield curve is as flat as a subsidized Iowa corn field. There’s $1 trillion of teaser rate Adjustable Rate Mortgages about to burst all over Southern California and ’burbs everywhere. Gold is over $600, commodities are roaring, the dollar is dropping again, there are trade deficits as far as the eye can see and GM is on life support. Drunken sailors in D.C. are running a sea of red ink and every time it’s sunny, some antigrowth global warming nutjob wags his finger at your $100-to-fill SUV. It feels like the ’70s all over again, a blaze of malaise. Except . . .
The stock market is like the little engine that could, and seems to go
up everyday. The Dow is just shy of its all-time high, the S&P 500
is over 1300 and Nasdaq has doubled in three years. Yee-ha, bull
markets are fun, but something doesn’t add up. They say the stock
market climbs the Wall of Worry, but this is ridiculous—it’s got the
Wile E. Coyote Acme Jetpack 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.
It may also be saying that gold is dead, our economy is structured to generate a return on investment on even $70 oil, trade deficits are actually a good thing, innovation will resolve long-term health-care liabilities, and that lower prices for beach-front homes won’t derail the economy.
But make up your own mind. The time to load up was three years ago. The stock market is notoriously schizophrenic. Remember, it thought you could sell pet food over the Internet. But it’s more often right than wrong, especially when proving pessimists wrong and optimists delusional.
Andy Kessler’s next book “The End of Medicine” will be published by Collins in July.