Letter to Roubini

Discussion in 'Economics' started by drsteph, Dec 4, 2006.

  1. I posted this on Roubini's blog, will also post here. While it is, to put it kindly, counterintuitive, how would one explain a rising equity market in the setting of recessionary influences?



    Appreciate your blog. However, I am unconvinced that the impending recession, which I agree is real and likely when measured by leading indicators, the yield curve, and empiric evidence of a housing slowdown, will necessarily be followed by an equity crash. Current monetary policy is highly inflationary, and while there are deflationary influences to balance this, i.e. the "china effect", foreign government treasury purchases, and economic slowdown hitting the lower and middle classes (c.f. walmart's poor december sales), any decrease in the Fed Funds rate to provide liquidity will probably not impact the sectors of the economy where it is most needed (the low end), but due to issues of credit risk, will potentially end up in the hands of those who need it the least (the rich). That wealth will then have to find a home somewhere, and since real estate and commodities have been temporarily discredited and rendered unattractive, and bond yields offer real rates of return that are potentially negative at these levels, will find themselves entering into the liquid equity markets of not only the US, but the world, potentially causing new equity highs. So much for any narrowing of the GINI index.

    Yes, it will all be based upon fluff, but given the non-rational behavior of our markets lately, why not?

    I’ll hold on to those way out of the money puts, though, just in case.

    What I also didn't put into the above but upon further consideration should have been in, is that there are different ways to cause a relative loss of value, even in a rising equity market, if there is a change in the underlying's value (i.e. the dollar's).
  2. A relatively small number of people move enormous amounts of money in the market. They are immune from recessionary influences. Their customers have become complacent while accepting mediocre returns and tolerating the enormous compensation the money managers receive.