A well known Wall Street adage says that the market likes to climb a wall of worries. This sounds strange but is true for a very simple reason: If there is no wall of worries the market is probably too high and/or too overbought to go up. Even so, I have never in my professional life (which is a long time) seen the market climb such a long series of very tall walls as it is doing today.
Yet the market does want to go up, and, if none of the possible horror scenarios now materializes, it will. How do I know that? Well, on any day that the news is not awful but just bad – - a day when oil prices go up only $1 or the minuscule housing starts just fall another twenty odd percent – - the market does go up.
The Wall of Worries
Just in case you are in a good mood, which means you have not heard or read any news for quite a while, let me list for you some of these walls:
1. The US economy is doing reasonably well with a very strong push from fiscal and monetary policies but they have to come to an end soon. The Fed will probably end quantitative easing 2 in June and Congress will try to cut the budget deficit this week while state and local governments are cutting budgets and raising taxes.
2. The housing market is dead: average house prices are still falling, foreclosures are expected to reach one million this year and deflation is still a risk.
3. Congress may not be able to pass a budget and government may have to shut down.
4. Food and oil prices are high and still rising world-wide (except in China where food prices turned down).
5. The Islamic world is in upheaval and that may raise oil prices sky high. (think of what will happen if the Iranians shoot one missile at a tanker carrying Saudi oil in the gulf. It is probably not in their best interest until they have The Bomb but how can Ahmadinejad resist when the Shi’ites in Bahrain are oppressed and asking for his help).
6. The West is involved in another war, in Libya, in addition to Afghanistan.
7. Al-Qaeda is still out there and may get control of a state (Yemen).
8. Poor and starving people in Pakistan may get into the Islamic trend, topple the government and give The Bomb to Al-Qaeda.
9. The Assad regime may fall and Syria has chemical and biological weapons.
10. A meltdown in Japan is still an uncomfortably high probability scenario.
11. Shortage of various high tech parts from Japan may stop production of various products world-wide.
12. The US is up to its neck in the war in Afghanistan and seems to be losing it. It is also still in Iraq that seems to be destined to be taken over by Iran.
13. The US is too scared to face up to the Chinese who seem to be breaking every rule of free trade they can break (e.g. stealing IP, manipulating their currency, dumping products in the US and Europe, etc.).
14. The US $ (real, trade weighted) fell to a new all time low due to (intentional?) debasement of the currency by the Fed’s quantitative easing 2. (Chart 1)
15. Several European states and banks are on a verge of bankruptcy and are (temporarily?) being floated by the EMU, the ECB, the IMF and others. The latest summit was supposed to come up with a permanent solution but although they made significant progress didn’t even come close. They postponed dealing with some aspects of this matter to June but the Euro financial system may not hold together that long.
16. Interest rates are being raised almost world-wide, from the BRICs countries and other developing economies, to,apparently soon, the Euro Zone .
17. … At this stage I just got too tired and depressed to keep this list going. The reader can do it for himself.
Why the Market Should Go Up
So, why is the market trying to go up and isn’t it too high as it is? After all, it got to the present levels only twice before when two bubbles were fully inflated and about to burst. The first time was in 1999 when the high tech bubble was about to burst the next year. The second time was in 2006 when the housing bubble was getting to the same stage. (Chart 2)
The answer is negative. The market is not too high because interest rates (short term and long term) are lower and unlikely to rise much near term, the world and US economies have grown since then, and corporate profits have increased (+70% from 1999 for the S&P 500). Data and discussion on these in my next post soon.