- The widespread belief is that the equity market is woefully undervalued despite a 1.9% dividend yield and a 22x P/E ratio on a Shiller normalized earnings basis (versus a long-run norm of 16x). What has changed the most since late August has been equity market sentiment, not the economy — the various surveys are now showing twice as many bulls as there are bears. Buying the market at the highs is probably not a good idea, especially with S&P 500 testing the 61.8% Fibonacci resistance level.
- ...clearly the U.S. economy is not contracting. A few months ago I thought it would be. But it is still on very shaky ground.
- We have an economy on life support that is barely expanding. I find that [the barely expanding] worrisome even if the immediate risks of a double-dip have vanished. Real GDP troughed in the summer of 1932 and yet the whole decade was a depression. Japan has been in a 20-year depression but that does not mean it is constantly contracting. I explained the difference in the BNN interview last Friday. The U.S.A. is only out of depression when the government intervention pulls back and the economy manages to sustain itself in terms of posting trend or above-trend growth.
- while equity prices have roared, house prices are rolling over again. This is three times more important for the consumer spending “wealth effect” than equities. Why doesn’t the Fed just buy properties instead of mid-term bonds?
- ...it appears that the jobs landscape has improved somewhat for small firms. Hiring intentions have swung back to the positive, now at +1% in October, and aside from September (at -3%) this metric has been positive in five of the past six months. Job openings, however, remain low with only 9% of the respondents, down from 10% in September, saying that they have one or more current job openings.
- ...small businesses continue to see inflation as not a problem — only 4% of owners cited inflation as their number one problem. The net percentage of respondents raising prices did jump six points in October, but it is still in negative terrain, at -5%, which means more firms are still reducing prices. In fact, this is the 23rd consecutive month in which more owners are cutting average selling prices rather than raising them.
- For all the talk of QE3 and QE4 and the comment in the FOMC press release that the Fed will do even more in the future if the economy dictates such, Mr. B likely realizes that what he announced on Wednesday could well be the final kick at the can. And while $600 billion of new incremental bond buying over an eight month span is big, it may not be big enough because to close the output gap and completely limit deflation risks, a monetary package of $4-5 trillion is likely needed.
- Let’s learn from the Japanese lesson with its QE experiment. The day the Bank of Japan launched the program on March 19, 2001, the Nikkei surged 7.5%, from 12,190 to 13,103. It went on to make a fresh high on May 7, at 14,529 (just under two months after the announcement) — rallying another 11%. Fully three- quarters of the post-QE rally to the May highs occurred in the first four days. And that is all she wrote. Three months later, as it became painfully obvious that the real economy was not responding well to the shock therapy, the Nikkei index slid 16% to just over 12,000. Moreover, the day before 9/11 it had already tumbled all the way down to 10,500 (down 27% from the nearby post-announcement high and 14% lower than the day of the announcement itself!). [today]
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Notes to myself, possibly of interest to others.
-- Bill Northlich