Looking For Love In All The Wrong Places?…We are all very much aware of the change in market tone and sentiment over the last four to five months. Strategists and investors fretting over rapidly deteriorating macro leading economic indicators (remember the ECRI reaching levels always consistent with recession?) and contemplating the possibility of a double dip in late summer of last year has given way to these same folks now trying to one up each other in putting forth ever higher domestic GDP growth estimates for the new year. Goldman (Jan Hatzius) has been a poster child example of this about face, but they have plenty of company. The transition is not hard to understand. With the heavy POMO started in late August of last year, followed up by the reality of QE2, and now the tax cut extension legislation that should add about $350 billion of “new” fiscal stimulus in 2011, we better have an improved outlook. And we will, so count on it.
Certainly THE issue as we move into 2011 is the potential for organic economic growth, or otherwise. Personally, we just can’t put a big “multiple” on marginal stimulus (read borrowed or printed money) additions to macro near term economic expansion. But this issue will not become relevant until 2011 is well underway, and more realistically it will be an issue for the second half and latter part of the year. For now, the rhythm of extraordinary monetary and fiscal stimulus will drive financial market outcomes and to a lesser extent real economic outcomes. As always, neither good nor bad. But this set of circumstances does tell us thinking in “time frames” during 2011 will be important.
Although we will not drag you through a bunch of explanatory detail, as we see it one of the really big keys for economic and we believe ultimately financial market performance in the new year will be first, whether corporations spend their currently amassed “savings”. It’s more than well known that through both operations and borrowing in a generationally low interest rate environment, corporations are sitting on top of a boatload of cash at the moment. We’re already seeing the M&A deals primarily in tech and health care sectors taking place, as we should expect. Secondly, again if QE2 is to be effective, corporations must spend their cash domestically, and not let that cash “leak” into foreign direct investment and/or capital markets. Preferably, corporations would spend their cash domestically on productive investment. To be honest, that would be long term bullish. And crazily enough, it would be in stark contrast to what we believe are the misguided policies of the Fed and US government over the last three years.