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Skeptical About the Rebound

10/07/2009 11:17 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

Kelley Wright, managing editor of Investment Quality Trends, says the stock market’s rally has surprised a lot of people, but he thinks it has a lot of obstacles to overcome, like a weak economy.

According to no less an expert than current Federal Reserve Chairman Ben Bernanke, the recession that began officially In December 2007, is over. Not only is the recession over, but so is the global financial crisis; politicians, central bankers, economists, and mainstream market commentators have said so.

So, far be it for me, a mere lowly stock-picker, to disagree with the powers that be; from my viewpoint, however, the global macroeconomic picture is nothing to write home about.

I must give credit where it is due, though: So far, governments and central bankers have somehow miraculously circumvented the laws of supply and demand. As a result, the markets have rallied 50% from their lows, but this was always to be expected; no market can move in one direction forever. How long this market will continue to rally is anybody’s guess, but I [suspect] we will see a display of Keynes’s famous observation that “markets can stay irrational for longer than you can stay solvent.”

I suspect that much of the current rally is attributable to fund managers moving cash from the sidelines into the markets; no manager wants to miss out, even if their research and instincts tell them otherwise. Heaven forbid their performance is beneath that of their peers! I suspect, though, that this embrace of equities will be short-lived and will move elsewhere at the first hint of trouble.

There has been no real economic improvement aside from that which has resulted from government handouts and stimulus. I don’t recall any major infrastructure investment, not to mention that manufacturing capacity is still far below historical trends. As for job creation, there has been little except in the public sector.

The banks are making money due to the steep yield curve, but there are still land mines galore such as major credit-card defaults, adjustable-rate mortgage refinancing problems in tranches not related to sub-prime, and looming commercial property refinancing issues that could present a larger problem than the one in the residential market.

Also disconcerting is the problem with the US dollar. Our largest creditor, China, is getting squeamish about the depreciating value of its dollar-denominated assets and is beginning to diversify into other currencies and tangible assets. In particular, China has become enamored with gold and for the first time is actually encouraging its citizens to store a portion of their new-found wealth into coins and smaller weight bars.

The Chinese seem to be on to the fact that the US in particular is facing some daunting economic times and has some very steep hills to climb. This isn’t the first time the US has been in a pickle, however, and most certainly won’t be the last. America is a creative and resilient country, and has many assets and advantages that are still the envy of the world.

In short, the economy will present many challenges in the years ahead. The stock market, as it has always done, will create opportunities from these challenges. Our job will be to deal with the challenges and take advantage of the opportunities.

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