I was just having a debate with a former colleague on the state of the stock market/economy. He thinks the economy still stinks and the stock market is headed for a renewed fall. I, taking the counterpoint, think the economy has seen the worst and we are now experiencing a more typical recession having averted a systemic financial meltdown by the skin of our teeth last fall/winter.
My thesis is that we are returning to a more-normal state of play like we were in before the Lehman/AIG meltdowns. The economy was lousy, jobs were being cut, banks were weak but it was just a recession. After the Lehman-inspired credit crisis, the bottom dropped out of the global economy. My contention, based on the return of the ISM to their September levels, is that we’ve seen the worst, though the recovery could be less than robust.
My colleague thinks EUR/USD will come back under pressure as the reflation trade proves illusory. I think we trend sideways to higher as the market and economy normalizes. It won’t be one way traffic, but trends seldom are.
On stocks, the fall in the S&P t0 666 was predicated, I argue, on the notion of US banks being nationalized, Eastern European economies collapsing and other nasty outcomes like collapsing commodity prices spawning intractable deflation. He thinks it accurately reflected the state of the economy as it was, not as it was projected to be.
My final argument is that while equities have recovered very rapidly, they could have more upside once they consolidate. Why do I think so? It goes back to my worldview that we are returning to a pre-credit crunch world. Where was the S&P the Friday before Lehman and AIG hit the skids? 1252. 900 does not look so lofty against that backdrop. 666 , or anything close, will not be seen again in this cycle, in my view.
