What’s keeping stocks up?


I’m a pessimist when it comes to stocks. For the life of me I can’t figure out why the Dow is still going up.

I know the conventional wisdom says it’s because of green shots, fundamentals or that housing sales are going up. Yet, it’s imperative to remember this is the same conventional wisdom that said housing prices could never fall. That the bubble (before it popped) was sustainable and based on market fundamentals. Needless to say, I think they are wrong. I don’t think that the economy is anyway near being any better than it was before 2008.

The housing market is still over inflated, thanks to numerous government interventions that distort the real economic picture. The only reason that the housing number, for April, were any good is because of the rush to buy and still get the tax credit. Expect May, June and July’s numbers to be “unexpectedly” low. Of course there is nothing unexpected about it, the MSM had pretty much resigned itself to a propaganda machine for the administration.

So what is keeping the Market up?

I think a reasonable expectation, given Higg’s Regime Uncertainty theory, is that the Market is waiting for November.

If you think about it, it does make some sense. The Obama administration has, to a high correlation, played this recession the same way FDR did in the 30s. Obama has taken over some private firms, instituted numerous regulations and passed very business unfriendly laws. Business doesn’t know what’s next.

You have the FCC trying to take over the internet (Yes yes I’m being overly dramatic here, only because this hasn’t gotten nearly as much press as it needs, probably because the News media will hit the jackpot when this goes through.) You have new regulations, that pretty much no one has read, on the financial sector. Even though finance has taken a drubbing from the public, they still provide the cash that’s necessary for business to get off the ground. You have new health care laws that severely negatively impact hiring new workers. And who knows what’s next, which is the essence of regime uncertainty.

The only way to really tell is to wait till November. If the market has a huge rally, when Republicans win big, then we may know a little bit. Yet, it important to know that even then we won’t know the answer. Many people might wait to see if the Republicans do what they say they are going to do; cut spending, bring in the deficits and decrease government control of the economy. If they don’t do any of those things, I think a lot of people will continue to stand on the sidelines until we actually get someone in office that will cut down the government.

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  1. yttik
    June 2, 2010 at 18:37

    The market can see November from it’s window?

    I think it’s true. This weekend signifies the unofficial start of summer. It’s very cold and gloomy here in winter, so people really look forward to summer. Not this year, for the first time in my life people seem to be looking forward to November. They can’t hardly wait for summer to be over and it hasn’t even arrived yet.

    • June 3, 2010 at 10:01

      It’s just a thought. I definitely agree, there are a lot of people waiting for November.

  2. Seth
    June 4, 2010 at 08:35

    It’s a good thought. The market is a reasonably good predictor of the economy. It may be predicting, at the very least, more balance in Washington after November, whether than means more Republicans/conservatives or Democrats getting the message and moving to the center.

    The market may also reflect the reduction in uncertainty now that some big stuff has passed.

    • June 8, 2010 at 06:09

      Well after th Dow has tanked, do you think the markets still are optimistic about November?

  3. Seth
    June 9, 2010 at 11:45

    Maybe not as much, but there hasn’t been much movement on Intrade wrs to 2010 election outcomes recently. I’d be more inclined to think that uncertainty in Israel, Iran and the N/S Korea are playing factors as well as uncertainty around potential policy fallout of the oil spill. But that’s all conjecture.

    • June 9, 2010 at 18:49

      I’m not a big fan of prediction markets. Data is too random for a prediction market to work as theorized. At least that is a take away I get from Taleb.
      I agree uncertainty on world affairs and possible wars are having an effect as well. Either way, we really just don’t know until it happens. Models be damned!

      One more strike against Economics as a predictive science.
      One more notch for Mises and Hayek.

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