Fed Economists – “We see a 15 year Bear Market for Stocks” Posted by: Bruce Krasting
Post date: 08/23/2011 - 10:03
The San Francisco Fed has come out with a research paper connecting the dots between the retiring baby boomers and stock prices. The thinking is that the boomers will divest themselves of stocks as they retire and eat into their savings. This is an old argument, but I still found it interesting.
The authors, Zheng Liu and Mark M. Spiegel have attempted to quantify the implications. Their principal conclusions:
We find that the actual P/E ratio should decline from about 15 in 2010 to about 8.3 in 2025.
The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021.
On the brighter side, as the M/O ratio rebounds in 2025 (BK: M/O = Baby Boomers die), we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.These conclusions are just horrendous! The suggestion is that there is a 15-year bear market in front of us. Multiples will fall by 50%!! I loved the “good news” from the report, that stocks might be 20% higher than 2010, but we have to wait 20 years to see that improvement.
Bloomberg interviewed Spiegel about this report. There was one comment that I thought was telling:
“We do see it as something of a headwind as the economy is attempting to recover.”
This is worst kind of "Fed Speak" in my opinion. These deep thinkers have it completely wrong. They think that the key to having a stronger economy is higher stock prices. So they spend all of their efforts dreaming up ways to keep the S&P ramping up. I think it is the exact other way around. If the economy were to be growing, it is reasonable to assume that stock price might rise. It is completely false to assume that attempts to jigger stocks higher will lead to a stronger economy.
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http://www.zerohedge.com/contributed/fe ... s%E2%80%9D======
Consumer debt forgiveness needed for recovery Published: Monday, 22 Aug 2011 | 1:05 PM ET
Special to CNBC.com
American consumers have too much debt, not enough savings and are afraid they will lose their jobs—if they haven't lost them already.
It might be time for something that hasn't been done since the 1930s to get Americans spending again: national debt forgiveness, Stephen Roach told CNBC Monday.
A stronger dollar or higher interest rates would encourage consumption and saving, Roach said, but he prefers the more "direct approach" of coming up with "ways to forgive the excesses of mortgage, installment and revolving credit, as what was done in the 1930s, that will help consumers get through the pain of deleveraging sooner rather than later."
The nonexecutive chairman at Morgan Stanley Asia and senior fellow at Yale's Jackson Institute said the American consumer makes up 71 percent of gross domestic product, but growth is up only 0.2 percent over the last 14 months.
"The American consumer...is going nowhere," he said. It’s a Japanese style balance sheet correction. If we don’t address that, all the public policy aimed at the fiscal and monetary stimuluses are going to be pushing on a string."
Debt forgiveness may hurt lenders, Roach said, but "they’re the ones who wrote the bad loans and they're the ones who had the free ride. There's no gain without some pain and we have to decide who in society has to bear the brunt of that."
At the same time, "politicians don’t want to inflict pain on any constituency," Roach said. "We have a leadership deficit. People are unwilling to take the tough choices and say, 'This is going to be painful for a while, but we’re going to come out the other side.' "
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http://www.cnbc.com/id/44229642
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