Follow The Bottom Violation
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Mar
11
Stocks Are on the Fence Waiting for Inflation and/or Earnings (Tech Analysis Video)
This technical analysis video of the Dow Jones Industrial Average suggests that the stock market doesn’t know exactly what it wants to do, and is poised to make a substantive move in one direction or the other. How’s that for a commitment? Welcome to the wonderful world of charts, graphs, and moving averages!
As always, I am not so ambivalent; I do believe the Dow could trade lower in the short-term — it has certainly gotten ahead of itself. I’m especially worried about the long-term primary driver of value — earnings (or, more accurately, free cash flow). But here’s the rub: I actually believe stocks will go higher — and probably much higher.
How is that possible? If I’m worried about earnings, and I believe earnings are the primary driver of long-term value, then why would the stock market go higher? The answer is simple: inflation.
The global policy of zero interest rate policy (ZIRP) is conspiring to ensure that prices of all assets are going to explode — once the overwhelming glut of currency, and the effects of ultra-low rates hit economies. Stocks won’t be any exception to the rule. The worst part? It will seem like the biggest bull market in history, and investors will be patting themselves on the back all the way to the top. At some point, however, people will realize that the run was phony, and that’s when the next phase of the crisis will begin.
In the meantime, remember that the American consumer — who has led us out of every major economic crisis of the last century — won’t be back soon. And without the consumer, earnings dry up, and without earnings, value can’t be created. Any appreciation in equities will therefore be a phantom phenomenon, and no matter what the technicians are saying, the wise investor would be leery of any powerful moves to the upside.
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Disclosures: Paco is long TBT, UCO, and gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.
You can buy his novel Discipline wherever books are sold.
2 Comments so far
Partners
Paco, I know you profess to be apolitical, but most conservatives, I believe, are more aligned with Austrian than Kynesian economics. That being said, do you think Bernake and Geithner can hold this stock market house of cards together for three years, then let it crash around the feet of the next arministration?
My understanding is that the meltdown caused a huge destruction of money. If that's the case, wouldn't the unprecedented money printing/creation by the government and fed simply be replacing that which was destroyed? Do Keynesians consider it a "wash"?
I'm still learning, and I wonder if Austrians have the proper tools to analyze a system so far removed from a free market?