Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Wednesday, September 30, 2015

Stocks: Patient Bullishness

The volatility in markets these days is a big story.

What's all the to-ing and fro-ing about?  CNBC needs something to do.

Seriously, the case for a sour market outlook comes not from the ranting punditsphere, eg, the likes of Carl Ichan warning about a looming market catastrophe.  Watching CNBC is not good for one's health or wealth.

However there is one solid brief to be filed in support of a bearish view:  We are possibly entering, or in, a period of global deflation.  Reality setting in at China HQ is a contributing factor.

This chart is probably the reason the Fed did not tighten, and may not for a while.

Wait - we are worried about low inflation?  Many of us lived through '80's where inflation was the worst thing in the world.  But it's important to remember what inflations is:
Inflation is not just rising prices.  Inflation is a rising wage-price spiral.  Prices can't rise very far without a concomitant rise in wages.  Period.
Well, as a business, you can raise prices all you want.  Soon, without rising wages, nobody can buy your stuff.

Point is, deflation is bad and very hard to get out of.  It's much harder to escape deflation than to reduce inflation.


So.  I mentioned bullishness above.  Despite the latter I remain, not screamingly, but patiently bullish on the markets, for the following reasons.
  • The amount of cash on companies' books is vastly larger now than in my lifetime.  That tends to put a floor under the amount of damage that can be done by broad economic trends.

  • We don't have rising interest rates. We don't have an inverted yield curve.  We don't have an economy in recession.  More here on the latter points by David Kotok, a guy I find very clear and enlightening.  (Ok, a pundit.  Sorry).
  • Finally, the US is the safe haven of the world in times of economic stress - for both equities and fixed income.

No comments:

Post a Comment