My last weekly said the hand-in-hand Fed activism and fiscal activism via Obama’s mortgage proposal is bullish. Let me add a bit of colour here.
I never say anywhere that I advocate the policy. My goal is not to advocate one economic policy over another per se, but rather to figure out what is likely to occur and what the consequences will be for the economy, business, households and investors.
What I do think here is that the proposed policy response will goose the economy (and asset prices) from whatever baseline we have already set over the medium term, which is exactly what it is designed to do (at least from the Obama perspective). The policy is designed to both get jobs over the short-to-medium term and to win an election. Whether it is sustainable over the longer-term and whether I advocate it is not the point of the post.
Moreover, I wouldn’t say I am bullish on stocks although I will admit i am not bearish yet. It’s more that the combination of stimulative monetary policy and refinancing mortgages would be bullish. By that, I mean that compared to any baseline scenario, this policy response raises your estimates for consumer spending, GDP growth and hence corporate earnings.
There are two caveats:
- My baseline is for weakening growth and weakening corporate earnings, which is bearish.
- It’s not clear the mortgage proposal will actually happen
These are two big caveats.
And I am just talking short-to-medium term here. I still think we are in a secular bear market. I stick to my forecast of a US double dip by 2013 and an eventual retesting of the March 2009 stock market lows on an inflation-adjusted basis.
Bottom line: printing money and socialising losses is not going to prevent economic calamity. It does buy time, but ultimately the credit system is still too overleveraged and deleveraging will re-assert itself when the next recession hits. Until then, I remain cautiously optimistic, which means taking a low risk and increasingly defensive posture but with a still market positive orientation.