Barataria has long joked that economics is just sociology with a way of keeping score. Like most jokes, that’s an exaggeration with a kernel of truth at the heart of it. Where we should all be interested in fairly circulating wealth in a way that provides a good life for everyone and raising capital to get things done, people naturally want to know who is “winning” instead.
The stock market is the best, or worst, example of this. Where it should concentrate on raising capital for corporations, it is instead a kind of sporting match. Like any sport, it can be bet on. With the betting comes attempts to game the system which can work in the short term before it all eventually returns to the mean.
That is pretty much all that is happening right now, aside from attempts to game the overall economy with poorly considered deficits and trade wars.
The forecast calls for the cold and stormy June to resume here in the middle of this vast continent after a brief heat wave. We’ve come to rely on weather forecasters to at least give us a guess as to what it will be like as the lazy days demand outdoor fun. Tomorrow night, for example, they tell us there is a 25% chance of rain.
But such forecasts are usually limited to the weather. Why not stocks?
The short answer is that when there’s a lot of money riding on something a busted forecast could be cause for a lawsuit. No one wants to stick their neck out too far beyond the herd because anything unprecedented is a risk not worth taking. But we’re here among friends, right? Barataria makes forecasts from time to time and this month is a good one for it. The reason is that we can see a storm brewing as stocks have gotten pretty far ahead of the “recovery” so far.
Is the stock market nothing but a bubble waiting to burst? There are many reasons to believe that there is one last downturn at the exit of this Managed Depression, which may indeed be slowly forming. The risk comes in the nature of how the economy is so carefully managed through monetary policy directed by the Federal Reserve. Years of zero interest and $3.7T in quantitative easing have produced a situation that’s hard to pull out of without a lot of collateral damage.
The problem is that a lot of money is chasing an awful lot of risk these days. Junk Bonds (aka “speculative grade investments”) are making a strong run, selling a record $265B through May 2014. The reason? Interest rates stuck near zero mean no return for investors, and as things turn around they have an appetite for risk. A rise in interest rates would slaughter this market and cause losses that will reverberate through equity markets before things really have a chance to turn around.
It’s May Day, and it’s more than the traditional first day of (real) Spring and the worker’s holiday. It’s also the day that the old stock market adage “Sell in May and go away” kicks in. Why is that? It’s hard to say exactly why, but Wall Street traditionally takes a long summer break. The S&P 500 since 1928 has risen on average 1.83% from May to October, but 4.98% from November through April. The summer is also a period of high volatility and danger, so smart investors often skip the warm seasons.
Not this year. The huge rise of 9.3% in the S&P 500 so far in 2013 might be enough to scare some people into profit-taking, getting out while the getting is good, but many advisers say you should stay in this year. That includes Nouriel Roubini, better known as Dr. Doom, the New York University Econ prof who famously predicted the housing crash. The faith in the stock market is impressive, but is it realistic?