Monetary policy is the mechanism through which the supply of money is controlled by monetary authorities. Monetary stimulus is the attempt by the monetary authority to manipulate money supply and generate growth. This can come in the form of lower interest rates, as well by lowering the reserve ration. The reserve ratio is the amount of assets that banks need to have on deposit with a central bank.
Recently, I revisited J. Anthony Boeckh’s book The Great Reflation, which was written in 2010 and is a thorough, well-written analysis of the long-run cycles experienced by the U.S. economy and the affects of financial crises and monetary policy on the stock market.
Back in June, I presented a summary of Boeckh’s conclusions in this column. Many of his points, based on a non-political historical analysis of business and stock market cycles, have come to fruition. (See “Breakdown: U.S. Economy and Its Cycles in 18 Brief Points.”)
Here are Boeckh’s key top-10 conclusions:
1. The global financial system will always remain flawed and subject to price inflation and bubbles, so long as it is based on fiat paper money. All anchorless fiat money systems are destined to suffer inflation and instability.
2. Stock market investors will be playing a cat-and-mouse game with the Federal Reserve for years to come, a problem caused by excessive private and public debt.
3. Deleveraging of the private sector bodes well for the transition process to the next long-wave cycle (2015 or later).
4. In the short term, deficits and extreme monetary expansion help the private sector repair balance sheets, but they cannot raise the standard of living for the average person.
5. Gold is a crowded trade (in the context of 2010), but is useful as an insurance/inflation hedge in portfolios. Gold is an emotional purchase. Financial/investment demand for … Read More
The stock market surged on Monday, but it wasn’t due to the report of any major positive economic data.
The S&P 500 surged on news that stimulus-friendly Fed Vice Chairman Janet Yellen may become the next leader of the Federal Reserve after front-runner Lawrence Summers announced his withdrawal. The boost to the stock market was due to the assumption that Summers was a supporter of tapering and less monetary stimulus.
Yet while the upward move was welcomed by Wall Street, it’s not what the U.S. economy needs. What the stock market and America really need are stronger economic numbers that support the rise in the stock market.
We need to see the jobs market picking up instead of losing steam, as was the case in August. After spending trillions of dollars on stimulus, we still need more growth in the economy.
Also, with the third quarter coming to an end in a few weeks, we need to see a boost in earnings in corporate America as a result of revenue growth, not because of aggressive cost-cutting and income manipulation. Revenues are estimated to grow 2.6% in the third quarter, according to FactSet. (Source: “Earnings Insight,” FactSet Research Systems Inc., September 13, 2013.) The estimate has already been revised downward from the three percent in June, so I’m skeptical.
If the economy was truly healthy, we should be seeing consistent jobs growth, better manufacturing data, higher consumer spending, and rising corporate revenues.
These are the reasons why the stock market should advance higher, and not simply because the easy money is allowed to flow unabated into the economy. When this … Read More
Geopolitical events are overtaking the stock market’s near-term trading action, which was all about speculation over the Federal Reserve and what Chairman Ben Bernanke will do regarding quantitative easing.
Based on what transpires in Syria, the equity market is ripe for more declines; realistically, the stock market has been extremely lofty this year, considering the economic news and the prospects of reduced monetary stimulus.
Confirming the overly positive disposition of the stock market has been the performance of the NASDAQ Composite Index, which previously lagged behind the Dow Jones Industrial Average until it recently confirmed the market’s uptrend.
Over the last 12 months, the Russell 2000 index has been the strongest of the main stock market indices. This is a classic secular bull market indicator, but everything’s been turning downward this week.
Obviously, geopolitical events skew the certainty the capital markets crave. Second-quarter earnings season was underwhelming, with the exception of balance sheets, which continue to be top-notch for most Dow Jones components.
Looking at the equity market constructively, many of its leading blue chips were very strong until the beginning of August. Then speculation about the potential reduction in quantitative easing and monetary stimulus, in general, took the froth out of some of these leading positions, including Johnson & Johnson (JNJ) and PepsiCo, Inc. (PEP).
I repeat my view that there is very little action to take in this market, particularly as it pertains to long-term blue-chip investors. The stock market has come off a very large uptrend in a short period of time, and it’s been due for a full-blown, material correction for a number of months … Read More
The best companies the stock market has to offer rarely go on sale. But when they do, you have to make a determination as to whether there’s been a fundamental change in the long-run prospects of an enterprise. If there hasn’t been a change, then that company is worthy of serious consideration.
One such company that’s been an excellent wealth creator on the stock market and has recently pulled back from its high is Visa Inc. (V). The position crossed below its 50-day simple moving average (MA) at the end of July and is just a few points away from hitting its 200-day simple MA.
Prospects for Visa haven’t diminished. Wall Street has been consistently increasing its earnings outlook on the company for this year and next.
Both Visa and MasterCard Incorporated (MA) trade similarly on the stock market. While Visa is the larger company by market capitalization, both positions are off their highs.
Now is a good time to put Visa on your radar for a number of reasons. The position isn’t down from its high very often—let alone being down to this degree. Business prospects for the company haven’t changed. It’s the lull between earnings seasons, and the marketplace is worried about a reduction in monetary stimulus. For long-term portfolios, Visa is a good pick to consider.
The business of credit cards is a good one. In its fiscal third quarter of 2013 (which just ended), Visa’s revenues were $3.0 billion, up markedly from $2.57 billion in the comparable quarter. Plus, the company is highly profitable, generating earnings of $1.23 billion last quarter, compared to a loss due … Read More
Making the case for a rising stock market in the face of little sales growth and earnings results that are basically just meeting expectations is difficult. The stock market’s performance for the last few years has been very much due to the monetary expansion, followed by a slight improvement in general business conditions.
What is clear is that corporate balance sheets continue to be extremely healthy. However, the lack of investment in new plants, equipment, and employees remains a big problem. There is more certainty in the marketplace, but corporations just aren’t making much in the way of bold new investments.
Despite the mediocrity, there are still a number of blue chips whose earnings estimates are being increased by Wall Street. In a lot of the earnings results from blue chips over the last several quarters, sales increases have mostly been due to rising prices, not necessarily rising volumes. This is emblematic of the very slow growth environment the U.S. economy continues to experience, as well as the economic misnomer that price inflation is tame.
The velocity of money, which is the willingness of both corporations and individuals to spend cash, continues to be faint. Improving balance sheets is an excellent development for the long run, but cash hoarding means no growth near term. It’s a trend that’s likely to continue.
While not much of an advocate for buying in the stock market today, I do think that it’s wise for investors to stick with the … Read More
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