From:
John Mauldin's Last Bear Standing:
...someone asked our thoughts about the direction of the stock market.
Richard Russell (of Dow Theory Letter fame) started off, and I expected him to give his usual bearish answer, but it did not come.
"We are seeing all three Dow averages (30, transports and utilities) at all-time highs. My own proprietary private indicator, the PTI (primary trend index) is bullish. I expect to see all the markets go on to record new highs."
The Street.com excerpted some of the more salient quotes from Grantham's recent newsletter. From their site:
"While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent. One, unsurprisingly, is legendary value investor Jeremy Grantham - the man a lot of rich people, trust with their money. Grantham ... has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.
"'Everything is in bubble territory,' he says. 'Everything. The bursting of this bubble will be across all countries and all assets.'
So, does he counsel you to run for the hills? No. Their study of bubbles suggests there is a short but dramatic "exponential" phase before the bubble bursts. He writes:
"My colleagues suggest that this global bubble has not yet had this phase and perhaps they are right. ... In which case, pessimists or conservatives will take considerably more pain."
So what is fueling the stock market if it is not a rising economy? Let's look at a few possible reasons.
First, we are seeing large amounts of stock being taken out of public hands and going into private hands. Lombard Street Research reports that net retirement of stock in nonfinancial US companies reached 5.2% of GDP in the last quarter of 2006, and about 6.5% of their market value. About 85% of that was financed by debt of some kind, either through buy-backs, takeovers, or private equity (the latter of which is highly leveraged).
Second, money supply does matter. We are seeing the broad money supply indicators (M-2 and M-3) rise not only in the US but all over the world. This is not a central bank pumping function but a market-driven phenomenon, as leverage is increasing the capital deployed in today's markets. The central banks of the world have largely lost the ability to control the money supply, other than by the narrowest of measures, which are increasingly less meaningful. We are not seeing the rapid increase in money supply show up in inflation or loss of buying power but rather as inflation in asset prices of every kind, as Grantham notes.
Edited by Rogerdodger, 04 May 2007 - 10:44 PM.
