Opening Position
April 2010
If you look at the state of the US financial system, what you are likely to find is that the underlying fundamentals don’t present a picture that would send me eagerly sprinting to the equity markets. All you have to do is look at a chart of the total credit in the private sector and compare it to the national Gdp. You’ll see that the credit just keeps growing and growing and growing. And as that credit keeps growing, we have seen financial crises come and go. And every time there is a crisis, we see some sort of a federal bailout and the Fed keeps interest rates low in the hope of rescuing the economy. We saw it in the savings & loans crisis in the late 1980s to the early 1990s, the Ltcm bailout, the dotcom bubble, and more recently, the subprime bubble. But how long can the Fed keep doing so in light of the growing credit?
In Federal Reserve chairman Ben Bernanke’s testimony on February 23, 2010, he suggested that the US economy was growing, but modestly, making it necessary to keep interest rates low. Employment is still weak and the housing market still flat. So the bottom line: In spite of Bernanke’s mildly optimistic words, we have yet to see any confirmable economic recovery. We need to see demand picking up, we need to see more consumer spending, we need to see people borrowing again, and we need to see signs of stronger growth. But the main challenge in a growing economy is to not get too hung up on that growth and forget that what goes up must come down.
It’s normal to see this cycle of growth followed by a crisis, and although crises in the markets are not desirable, their absence would take away the character of the markets. The financial markets wouldn’t be as exciting as they are if they didn’t go through peaks and troughs. As a market participant, it is only to your advantage to keep abreast of these cyclical patterns that take place in the market so you are aware of which cycle phase the markets are in. Are we in a secular bull or bear market, or are we in a bull/bear market cycle?
To find out, we were fortunate enough to talk to cycle expert Danielle Park of Venable Park Investment Counsel and find out what we can likely expect moving forward. Our interview with her for the April 2010 issue of Stocks & Commodities starts on page 50. Interesting to note, our feature article, “Kondratieff Wave Comeback” by Koos van der Merwe, also looks at market cycles from a purely technical view. Putting the two together may give you a very good idea of whether we can expect the market to rally, or test another low going forward.
Jayanthi Gopalakrishnan, Editor