I have been wondering about this for the last couple of weeks... There are a few things about that give me pause. We've seen the Dow climb a bit, but I don't think there haven't really been increased profits to explain it. And where there have been increased profits has been largely from overseas operations.
Sure, there are some companies that are bucking that trend... but I still wonder.
A good bit of the increase in overseas profit comes down to exchange rates. the US Dollar has been pounded in currency markets. This means that companies with overseas profits will see an increase in the profit measured in Dollars, even if there hasn't been an increase in the local currency.
And with the increased and continuing deficits, strengthening the Dollar isn't likely. To start with, it isn't in the government's best interest to keep inflation in check too much... although they DO need to keep interest rates down. As the currency suffers from inflation, the debt the government owes becomes less valuable (easier to pay off). Of course, if interest rates rise, the service on the debt increases.
Back to the markets...
Normally, when the markets rise, it is because there is an expansion of business. We are seeing contraction or stagnation in most sectors. The market increases because there is an expectation of higher profits... we don't really see a lot of that, either.
Instead, many analysts think the market is rising because it is the only place to put money where there is any sort of reasonable return. Saving accounts are paying less that 1%. CDs and other longer term investments are paying not much more. Obviously, real estate isn't hopping in the short term, and many are still worried about the long term prospects. So, some of the market rise can be explained by a flight from other investments...
If we look back at the stock market bubble of 2000, we know that it started with people investing in the stock market based not on an a reasonable expectation of future corporate profits, but because the returns looked to be better than anywhere else. People were chasing a "hot stock" or the "next big thing". In many ways, this market has a lot of similarities with a momentum market like that.
The bubble of 2000 led to a severe recession. The bubble of 2008 led to a severe recession. I'm just wondering if we still aren't through with the 2008 bubble...
Unless otherwise noted, all content of this blog is the property of Lane Bailey, ©2012 Lane Bailey.
I'd love to hear from you...
