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Crash?

November 17th, 2009 · No Comments

It’s that economist again…

Not happy with just predicting a default of the US government (albeit “after 2019”..), Samuelson now expects the US stockmarket to crash. First his thoughts, followed by ours.

Samuelson: Stocks Set to Crash
Monday, November 16, 2009 10:00 AM
By: Gene J. Koprowski

Asset prices have risen dramatically during the last six months, much like housing prices appreciated during the last decade, raising alarms that a crash could be coming in the equities market, writes economist Robert Samuelson.

Writing in Newsweek, Samuelson reckons that since March 9 the U.S. stock market has climbed by more than 50 percent. This is nothing short of a speculative frenzy, not based on underlying economic fundamentals, he says.

“An index of stocks for 22 emerging market countries — including Brazil, China and India — has doubled from its recent low. Oil at about $80 a barrel has increased 150 percent from its recent low of $31,” he writes.

“Gold is near an all-time high around $1,090 an ounce. Meanwhile, the dollar has dropped against many currencies. Haven’t we seen this movie before?”

There now appears to be a thin line between maintaining a sound economic expansion and cultivating bubbles.

“With hindsight, lax Fed policies contributed to both the ‘tech’ bubble of the late 1990s and the recent housing bubble, though how much is debated,” writes Samuelson.

“How deftly the Fed navigates from its present policy matters for the world as well as the United States. If it’s too fast, it may kill the economic recovery; if it’s too slow, it may spawn bubbles — and kill the recovery.”

Around the world, economists concur.

Bloomberg News reports that Brazil’s real is now deemed overvalued, and the stock market in Brazil is soaring based on economic growth figures in China — trends that are not exactly rational.

———-[End of article]———

What we think is this:

  1. Considering the record low interest rates, stocks do not appear to be extremely overvalued, and profits are actually surprising on the upside (due to strong productivity growth and low wage pressure)
  2. Yes, they ran up a lot from the March lows, but in Februari most of us thought that the next great depression was near unavoidable..
  3. Yes, at some time we will get some correction. How deep that will be will depend on what triggers it. Bad economic news is the likely trigger, although there is a non-zero chance that it might actually be very good economic news, which would signal the end of the record low interest rates..
  4. We see one thing we really don’t like though. That is credit levels to consumers. We think there is still a long way to go downward on that. Just to give you some idea: household debt to disposable iincome rations were in the 35% range in the 1950s. Last year, they peaked at 140%. We think they have some way to go down still, which is why the Government has to keep on spending to make up the fall in demand and keep the economy afloat.

Tags: The Markets