what will drop u.s. equities?

[jk]

my nomination: tightening in china. recent chinese inflation figures were about 3.7% iirc, and more importantly food inflation was over 7%. food is 30% of the median chinese family's budget. for the chinese to tighten money supply they will have to reduce their dollar support. such moves would drop the chinese markets directly, and the dollar drop could set off a stampede.

any other nominations?

[Tet]

Re: what will drop u.s. equities?

my nomination: tightening in china. recent chinese inflation figures were about 3.7% iirc, and more importantly food inflation was over 7%. food is 30% of the median chinese family's budget. for the chinese to tighten money supply they will have to reduce their dollar support. such moves would drop the chinese markets directly, and the dollar drop could set off a stampede.

any other nominations?

How does China reduce their d0llar support? GM, Ford, Wal-Mart, Dell all decide to export their products into the US from someplace other than China? I don't believe China has a whole lot of say in their d0llar support.

I drove my son's high school track team to a meet a few days ago and his private school has a lot of Chinese kids attending. I was wondering if these were neuvo Chinese rich kids from the wonders of capitalism so I asked one of them what his parents did for a living. He said his parents were police officers, amazing, I think police officers here in the US would be hard pressed to send their children to this school and here Chinese police officers are able to send their children to a private school in the US. I would think if public servants can send their kid to a private school in the US the Chinese can handle some inflation.

[jk]

Re: what will drop u.s. equities?

How does China reduce their d0llar support? GM, Ford, Wal-Mart, Dell all decide to export their products into the US from someplace other than China? I don't believe China has a whole lot of say in their d0llar support.

i can think of a couple of ways china could reduce its dollar support. the simplest would be to have the central bank not buy dollars from chinese exporters. exporters would accumulate dollars, not usable for domestic purchases in china, and would have [to be allowed] to send them abroad for investment in, or purchases from, other countries. non-chinese companies with chinese operation would be allowed/encouraged to repatriate their profits in dollars to their own country. the other way would be for the pboc to still buy dollars from chinese exporters, sell more domestic bonds to sterilize the purchases and keep their domestic money supply from rising as quickly, and then NOT buy u.s. debt in any form, but buy assets and resources from other countries around the world. [e.g. brazilian soybeans] this would increase the supply of hot dollars balances and drop the dollar's value.

but my main interest in this thread is scenarios leading to a significant break in u.s. equities.

[fightthepower]

Re: what will drop u.s. equities?

my nomination: tightening in china. recent chinese inflation figures were about 3.7% iirc, and more importantly food inflation was over 7%. food is 30% of the median chinese family's budget. for the chinese to tighten money supply they will have to reduce their dollar support. such moves would drop the chinese markets directly, and the dollar drop could set off a stampede.

any other nominations?

I say it will be a liquidity crisis.

[jk]

Re: what will drop u.s. equities?

I say it will be a liquidity crisis.

what scenarios do you picture triggering that?

[DemonD]

Re: what will drop u.s. equities?

jk, my prediction is this:

Decreased sales and recession showing up in Q2 due to the housing crash. Erosion of fundamentals will be occurring all throughout the market, but will start to really be felt in stocks like GM, Alcoa, CAT, Boeing with decreasing business. I'm already hearing chatter about decreased travel, decreased truck shipments, etc. There is a lag between home equity extraction and when this shows up. A big slowdown in auto sales will be one of the if the not biggest symptom. It will probably take 2 quarters of bad news to knock down the markets.

Somewhat frustrating or odd at this point is that I'm not sure how much the markets will be tanking. Somehow the big banks are still making big money and not getting hit by housing as hard as I'd expected. The only explanation I have for this is direct infusion of money from the Fed through the Big Banks. Liquidity is still going nuts, it's just not joe sixpack using the liquidity to buy houses, it's KKR buying Nabisco or wal mart or canada with a side of greenland or whatever they are shopping for nowadays.

Probably the only way liquidity gets shut off is if/when foreign cb's get the stones to stop supporting the dollar, in which case it's look out below.

[grapejelly]

Re: what will drop u.s. equities?

Brian Pretti's excellent contraryinvestor.com service (a great value and one of the newsletters to which I have subscribed for a few years to great advantage and recommend to everyone here) reminds us of this Paulsen interview snippet from late 2006 Fortune, with his "ed." remarks annotating.

Brian points this out as clear evidence that the US government/Fed is purposely trying to inflate stocks to replace drooping residential real estate.

He points out that regular people don't leverage stocks. Pros do but normal people don't. Unlike real estate. So getting more "bang for the buck" here in terms of creating a new stock market bubble doesn't have the intended effect. But it does contribute to the private equity bubble that EJ has written about and discussed in his interview with Finkel.

Once again, as Marc Faber points out, the central banks can create money but can't dictate where it flows to...

Fortune: Aren't you concerned that GDP growth dropped to 1.6% in the latest quarter? That's kind of anemic, and we've seen a downturn in the housing market. Convince us we're not going to have a recession next year.
Paulson: "I can't convince you. But as I looked at the third quarter, I felt good because I saw a major correction in the housing market, and I knew that was going to take more than one percentage point off GDP. And then I'm looking at the rest of the economy - strong corporate profits (ed. this is now slowing) and investment (ed. slowing also), good growth outside the U.S. (ed. still true), strength in the construction sector away from housing (ed. this is now slowing), and then an equity market that has gone up and added $1 trillion in value.
I know how much people care about housing. But I would be quite hopeful that through 401(k) plans, pension plans, and elsewhere that the average American is feeling an uplift from the appreciation of the equity market that would be very offsetting to any potential decline in housing."

[jk]

Re: what will drop u.s. equities?

Brian Pretti's excellent contraryinvestor.com service (a great value and one of the newsletters to which I have subscribed for a few years to great advantage and recommend to everyone here) reminds us of this Paulsen interview snippet from late 2006 Fortune, with his "ed." remarks annotating.

Brian points this out as clear evidence that the US government/Fed is purposely trying to inflate stocks to replace drooping residential real estate.

He points out that regular people don't leverage stocks. Pros do but normal people don't. Unlike real estate. So getting more "bang for the buck" here in terms of creating a new stock market bubble doesn't have the intended effect. But it does contribute to the private equity bubble that EJ has written about and discussed in his interview with Finkel.

Once again, as Marc Faber points out, the central banks can create money but can't dictate where it flows to...

Fortune: Aren't you concerned that GDP growth dropped to 1.6% in the latest quarter? That's kind of anemic, and we've seen a downturn in the housing market. Convince us we're not going to have a recession next year.
Paulson: "I can't convince you. But as I looked at the third quarter, I felt good because I saw a major correction in the housing market, and I knew that was going to take more than one percentage point off GDP. And then I'm looking at the rest of the economy - strong corporate profits (ed. this is now slowing) and investment (ed. slowing also), good growth outside the U.S. (ed. still true), strength in the construction sector away from housing (ed. this is now slowing), and then an equity market that has gone up and added $1 trillion in value.
I know how much people care about housing. But I would be quite hopeful that through 401(k) plans, pension plans, and elsewhere that the average American is feeling an uplift from the appreciation of the equity market that would be very offsetting to any potential decline in housing."

whether inflating equities is a deliberate strategy or just the consequence of "pump and let fate decide where the dollars go," higher stock prices does tend to buoy confidence, and to some degree will lead to a wealth effect and increased spending. to the degree that it's successful it's a further step toward plutonomy, as it's the wealthy [stockholders] who get the wealth effect. [many people are indirectly exposed to equities via, e.g., pension plans, but i don't think they get much of a wealth effect from that.]

but, grapejelly, what [if anything] will pop the equity balloon? anything specific? exhaustion? or nothing? i.e. do you think the [nominal] balloon goes on forever? [or at least years more?]

[grapejelly]

Re: what will drop u.s. equities?

but, grapejelly, what [if anything] will pop the equity balloon? anything specific? exhaustion? or nothing? i.e. do you think the [nominal] balloon goes on forever? [or at least years more?]

But isn't it so that the equity balloon is a nominal balloon not a real ballon?

I look at the 1970s for a clue. Equities went up, they went down. Really they went sideways with a few bear markets thrown in, with essentially zero nominal gain in 10 years, but a large real loss.

Precisely what's been happening in the past 7 years.

Why can't this happen for another 10 years or so?

I'll tell you what. This is deliberate policy. No question about it in my mind. Generate a lot of asset inflation and it will depreciate the value of future retirees' claims. What other reason is there for this? It's the whole kit and caboodle and it has people completely fooled.

The boomers are who I'm talking about. And Dr. Hudson said exactly the same thing as I recall. The government inflates the stock market, gets everyone excited about it, gets everyone invested in it. The next step is more "privatization" of retirement and healthcare benefits (expansion of health savings accounts) and then the bubble pops but it doesnt' matter as much anymore.

The securities that a boomer has are just paper claims. The game is to make these paper claims -- especially stocks -- look more valuable. It is not real money anyway.

That's the long term trend. The shorter term could be quite dicey and end with a financial debacle but they will throw more money at it and meanwhile the dollar won't crash as it will get CB support and other currencies will be suffering proportionately anyway. Commodities esp. gold will show the truth in buying power. Stocks will recover to make new "highs".

[jk]

Re: what will drop u.s. equities?

you are absolutely right, grapejelly, that to date the 2000's look like the 70's. i think i'm focussing on the nominal right now because my shorts and puts are only going to pay off on a nominal drop in equities, and because i expect a nominal drop in equities to be accompanied by a drop in commodities including pms.

[friendly_jacek]

Re: what will drop u.s. equities?

The securities that a boomer has are just paper claims. The game is to make these paper claims -- especially stocks -- look more valuable. It is not real money anyway.

I agree to great degree but not all inversors are stupid. As it is now (2006-2007), at least 2/3 of money inflows go international/global. Are we saying that baby boomers inflate all paper assets everywhere? If so, commodities icluding oil and PM are all affected by the asset inflation.

Now, the truly important question, what asset then will be boomer bust resistant?

I have some doubts about healthcare as the medicare /medicaid reimbursment rates can be easily slashed in the face of crisis.

[grapejelly]

Re: what will drop u.s. equities?

I agree to great degree but not all inversors are stupid. As it is now (2006-2007), at least 2/3 of money inflows go international/global. Are we saying that baby boomers inflate all paper assets everywhere? If so, commodities icluding oil and PM are all affected by the asset inflation.

I'm sure this is true except for commodities. Commodities may be affected by short term private equity flows but I don't think commodities are in the longer term fundamentally affected by the asset inflation. That's because commodities *aren't* paper. I know futures are, but commodities themselves are not.

They may drop temporarily in a "liquidity crisis" or "end of the carry trade" hysterical reaction, but oil and gold and other commodities will tick higher quite rapidly thereafter.

Yes, when there is a true financial crisis, a lot of loans get called. And the private equity will liquidate commodities positions. But after the dust has cleared, this will be where the money continues to flow. The real money.

Now, the truly important question, what asset then will be boomer bust resistant?

I have some doubts about healthcare as the medicare /medicaid reimbursment rates can be easily slashed in the face of crisis.

Commodities. But that won't help the Boomers.

[Finster]

Re: what will drop u.s. equities?

I agree to great degree but not all inversors are stupid. As it is now (2006-2007), at least 2/3 of money inflows go international/global. Are we saying that baby boomers inflate all paper assets everywhere? If so, commodities icluding oil and PM are all affected by the asset inflation.

Now, the truly important question, what asset then will be boomer bust resistant?

I have some doubts about healthcare as the medicare /medicaid reimbursment rates can be easily slashed in the face of crisis.

The boomer phenomenon is vastly over-rated. Inflation comes from printing money. Blaming demographics is a common government excuse for its own malfeasance.

Take Social Security for example. People are living far longer these days than they did when the benefit eligibility age was set at 65. Congress adjusted it upwards a measly two years in the 1980s. It was like putting a Band-Aid on a severed arm.

So we hear a lot of talk about a demographic crisis supposedly threatening the solvency of Social Security. But think about it. Is people living longer really a problem? Or is the real problem that politicians put in place a rigid, inflexible system that failed to adjust to reality?

So be skeptical - very skeptical - any time you hear blame for one problem or another being placed on demographics. Politicians love to talk about problems in such terms because it imparts an air of unavoidable natural disaster to them, diverting attention from the real cause. Nothing will get solved that way, so we need to tune out the political propaganda and think clearly for ourselves.

[grapejelly]

Re: what will drop u.s. equities?

The boomer phenomenon is vastly over-rated. Inflation comes from printing money. Blaming demographics is a common government excuse for its own malfeasance.

Take Social Security for example. People are living far longer these days than they did when the benefit eligibility age was set at 65. Congress adjusted it upwards a measly two years in the 1980s. It was like putting a Band-Aid on a severed arm.

So we hear a lot of talk about a demographic crisis supposedly threatening the solvency of Social Security. But think about it. Is people living longer really a problem? Or is the real problem that politicians put in place a rigid, inflexible system that failed to adjust to reality?

So be skeptical - very skeptical - any time you hear blame for one problem or another being placed on demographics. Politicians love to talk about problems in such terms because it imparts an air of unavoidable natural disaster to them, diverting attention from the real cause. Nothing will get solved that way, so we need to tune out the political propaganda and think clearly for ourselves.

Finster, how can so much wisdom come from one person? On the Internet, yet? Another great post! Thank you!

Dr. Hudson said he expects the US government to privatize benefits, create a stock market bubble, and leave people holding the bag when the bubble pops. It really isn't a big deal as far as retiring goes because where is it written that people have to retire? For health care it is a bigger deal, but even that can be taken care of I am sure.

There has never, ever been a shortage of impending disasters since I was a wee tyke. An endless supply. And used to justify present "solutions" that are not all that great

[friendly_jacek]

Re: what will drop u.s. equities?

Commodities. But that won't help the Boomers.

Call me paranoid, but I don't believe commodities is the silver bullet. If the boomer bust will really happen, the global bust will pull any commodities under.