I've been traveling for the last month, and while in London at Sunday brunch with my friends, I read an commentary in the Times (UK newspaper) that struck me. And I warn you, it's as gloomy as the title of the article. It starts off with an interesting introduction:
"It has been a long time since the economic data have been flashing positive signals, and an equally long time since consumers, businessmen and occupants of the White House have been so gloomy. It’s worth considering why this disjunction of fact and perception is dominating the economic news."
- Irwin Stelzer
Link to the Article
It’s exactly the same thing that I’ve been thinking about lately. I have to confess that it’s been hard following the markets as much as I did before over the summer. However, I’ve been following the big trends, which is arguably good because I don’t get caught up in all the “noise” of the media. And this is one of the big trends that I have been following/thinking about: the disconnect between sentiment and the rising stock markets.
Stock markets are generally forward looking. I say generally because, c’mon despite all the academics saying markets are efficient, blah blah – they can be occasionally slow to realize things. The reason I bring this up is that this recent stock market pullback can be attributed to a less than optimistic outlook for the future. And that’s precisely what this article writes about:
“Businessmen tend to look further ahead than most participants in the economy — consumers worry about paying the rent or the mortgage next month, and politicians worry about tomorrow’s opinion polls. Company executives know that the profits picture is improving but they worry that much of the improvement comes from cost cutting rather than increased demand.”
Essentially, the article is saying that businessmen are still worried about the future because despite companies reporting decent earnings recently, they fear that it’s more because of cost-cutting and less because of revenue increasing. And obviously “consumers” are not happy because they are part of the cost cutting – getting laid off.
This paragraph slowly leads to the climax of the commentary, a forecast of the future that sent chills throughout my body. Certainly woke me up on a lazy Sunday afternoon:
“[Businessmen] They see an administration and a Congress that are spending America into such deep debt that the dollar will continue to decline, forcing the Fed to raise interest rates to prevent a collapse of the currency.
Some executives expect the price of gold to double or triple in the next five years, interest rates to climb from their current level of close to zero to perhaps 8%, and taxes to soar to bring the deficit under control.”
It’s a doomsday prediction, but actually quite realistic. It sounds like a similar situation to the recessionary period of the 70’s, of the Volcker reign at the Fed. It’s completely possible, even though most people right now could not even imagine double digit interest rates.
Investment ideas from this article? Long gold, and short US dollar
After reading this article, I kind of want to hide under a rock in an island in the Pacific Ocean somewhere for the next 5 years.
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