Saturday, 3 September 2011


I have been writing for more than six months now that the world economy will retreat and it will take much longer to recover than governments and many experts have been saying. On the other hand, I see no evidence of a doomsday scenario as some economists are prediction, economists drawing paychecks from firms that short the market. I find that there is no evidence from central banks of the G-8 and IMF to indicate otherwise. On the contrary, we may be witnessing a prolonged dragged out recession that could last for several years until the credit economy -both public and private sector - is back on a sound basis.

Despite recent stock market drops that have been rather shocking for investors because of its volatility, speculation that the US job stimulus will not be sufficient to lift the economy in 2012, and lingering public debt problems across southern Europe, slowing of Asian growth, combined with much deeper banking sector dislocations, and a much lower GDP growth in most of the G-8, the evidence suggests a long-term recession, perhaps as long as a decade with permanent lower living standards for the middle class and workers.

The bad news about the 'real economy' notwithstanding, I am convinced that Sam Eisenstadt, former research director at Value Line, is right on target predicting a sharp increase in the US stock market, a rise that would lift world markets by as much as 18% in the next six months. This does not mean that securities will rise to such levels, but I believe that the veteran market analyst has a reasonable position for making the claim, given that the stimulus imminent from governments combined with debt reduction policies will entail more capital free for investment in a low-interest rate environment where borrowing is very favorable and money will flow from banks into securities. Why leave your money in the bank earning next to nothing when securities, some paying good dividends, offer an attractive alternative; so goes the reasoning.

What does this mean for the 'real economy'? Actually not much in terms of lowering unemployment to pre-2008 recession and living standards levels for labor and working class. However, it will be a psychological boost for markets and governments that can point to economic light at the end of the tunnel at last. However, that would be a very dim light because the tunnel is very long for the majority of the people.

Furthermore, the rising markets that will be reflecting the economic boost coming with election-year spending in the US will entail that the 'system works', and nothing much needs to be done but to tinker on the edges. That the US government is now suing 17 banks would be a major development toward reform, if indeed the case results in multi-billion dollar fines and jail terms  for bank executives.

The Federal Housing Finance Agency (FHFA), overseeing US property bodies Fannie Mae and Freddie Mac, has accused Bank of America Corp and its Countrywide and Merrill Lynch units, Barclays Plc, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, Royal Bank of Scotland Group Plc and others of misrepresenting the checks they had done on mortgages before bundling them into securities.
The question is one of timing; why now, given that the government knew about this issue from the start? Election year politics is what apologists of the banking industry claim, and that makes sense. But why is AIG suing Bank of America for $10 billion in a massive fraud case? Pandora's box is now wide open, and that may be about the only possible obstacle to preventing stock markets from rising as Sam Eisenstadt is predicting. I am still sticking with Eisenstadt who has more than six decades of market analysis experience, but with the caveat that the average person should not expect much out of this optimistic scenario.

1 comment:

Anonymous said...

So in other words you subscribe to a more qualitative analysis?

With qualitative analysis vs. quantitative easing models in mind, would this explain why individual investors might not profit similarly to profits shown in the past?

And would this also explain why Sam Eisenstadt was fired from Value Line? A complete and utter disgrace given his expertise in statistical analysis? To transistion the economic landscape toward the integration of quantitative objectives which has merged ideological beliefs foreign to qualitative measures such as gaia hypothesis?

Where is that article on religion . . . .