Profits are Easy, Growth is Difficult
The first 30 percent of the 60 percent bounce of the stock market since March was no doubt due to a simple reaction to an oversold condition. The second 30 percent, however, is being fed by good S&P profits. Profits are good, the equation in this economy is simple, adjust to a 20 percent decline in sales by laying off workers. The workers are surviving through expanded unemployment benefits. This is not a good long-term scenario and other than a big “Green Revolution” program which Washington doesn’t seem to have any appetite for, the consumer sector of the economy is against a brick wall.
Therein lies our view, you need to protect your assets and deflation will be the long-term outcome. So outside of owning a home with at least 20 percent equity, notice we said home, houses are not an investment vehicle, you need to be in cash. In my opinion the next downturn will not have government parachutes, even for the big guys.
Oil is the lead indicator for the macro deflation rout that we expect over the next two years. Today it traded down 14 percent from its recent high. Gold will follow at some point and then eventually the stock market.
Short-term, many market followers are looking for the pattern that started after the August 7th high to continue ie. buy the 3 to 5 % sell-off. The problem is that the rally above 1039 which started in early September has been a bubble type formation that will in our opinion end badly.