'A Goldilocks economy -- for corporations and the wealthy'
If you hate this stock market rally because you aren’t participating, you may take some comfort in the perspective of John Taylor, who heads the world’s largest currency hedge fund at FX Concepts in New York.
He hates it, too -- not least because he didn’t believe it was possible, given what he thinks is just a temporary reprieve from the Great Recession.
In his latest weekly market commentary, Taylor mocks the recent upbeat U.S. economic data:
U.S. employment numbers turned up last month with the help of some temporary $20 per hour jobs in the decennial census, at the same time retail sales jumped 1.6%, way outpacing any plausible rise in personal income. ‘Hooray!’ cried the markets, the U.S. consumer is alive and spending again. American trade figures deteriorated sharply as well, even though the oil import bill was down, as other imports grew rapidly while exports languished -- making it very clear that the U.S. had reclaimed its old position as the world’s consumer of last resort.
Taylor is firmly in the jobless-recovery camp. For the moment, he says, the stock market is fine with that kind of recovery because it assures that the Federal Reserve will maintain its super-cheap-money policy. He writes:
As a result of very low interest rates, non-existent inflation, and a rather weak dollar, the economy is in a sweet spot, a Goldilocks situation for corporations and wealthy families. Unfortunately this positive spell does not cover a significant portion of the country’s economic actors. The losers are the middle and lower-middle classes as well as the state and local governments and those who depend on them for jobs or their largess. This economic recovery is different because these groups are already struggling even though liquidity is super-plentiful and risk-free rates are near zero. They are too leveraged to borrow more.
Still, Taylor, like many people, underestimated the recovery’s strength last year, and has been too bearish on stocks all along. Now, he is partly capitulating: Although he predicts a short-term pullback for markets (isn’t everyone predicting that?) he thinks the equity rally will resume by mid-May, driven by a “stream of strong economic and corporate news, plus continued benign inflation outside of Asia.”
With short-term interest rates holding near rock-bottom, “There is incredible liquidity available, [and] those who can get their hands on it will use it,” Taylor says.
But he predicts that by mid-August, investors will be focusing on what he believes will be a restart of the recession under the weight of the economy’s still-massive debt load and all the problems associated with it.
At that point, expect “a major market rout continuing into the middle of 2011, at a minimum,” Taylor says. "The global liquidity crisis has been solved but the global solvency crisis is just arriving."
For the bears, there’s a reason to keep getting out of bed in the morning.
-- Tom Petruno