Double-dippers reject reality
Written by Dock David Treece | | letters@toledofreepress.comDespite the market’s recent behavior, it is our growing opinion that the chances of a double-dip are extremely low, and continuing to fall. This idea, as overly-optimistic as it may sound, is not without evidence. On June 25, an article appeared in The Wall Street Journal stating that many corporations are beginning to spend money on capital investments (Lahart and Maher, “Seeing Economic Rebound, Firms Step Up Spending”).
However, this recent spending has — for the most part — not been financed by debt, but paid for in cash that companies have been hoarding since the 2008 financial crisis. In addition to investments in production, there has also been a small wave of corporate acquisitions as of late, serving as further evidence of confidence among business leaders.
Despite this recent increase in the flow of money around the U.S. economy, broad money supply numbers have continued to slip at an alarming rate. We consider this to be mostly a flash in the pan, mostly because a great deal of this so-called “deflation” is due to default rather than traditional deleveraging.
Our anticipation is that once companies gain additional confidence that they can benefit from investing in production and expansion, the corporate appetite for debt (and risk) will likely increase. Once that happens, money will begin flowing through our economy at a quickening pace, and deflation will cease to be a concern.
In fact, quite the contrary may occur. Given the amount of new money that has been created through government stimulus programs, there is a very real possibility that inflation may become a problem, once that new money starts making its way through the economy.
Examining the market, it is apparent that investors have become extremely negative extremely quickly in past few weeks. We saw multiple 90 percent down days, during which more than 90 percent of all trading volume was down (for every 100 shares of stock traded, more than 90 were at a lower price than the previous trade). Unfortunately, this is hardly unusual; it’s typical of the investing public to overreact. In reality, the market is more likely close to a relative bottom rather than a top.
Stepping back to look at the market over the long term, we can see that stocks remain trading within a range entered in October 2008 during the collapse. Those long-time readers may recall that this is precisely what we called for at the time.
In fact, during the fall of ’08 we said that after their precipitous decline stocks would recover, and that once they peaked they would likely stay within a trading range for an extended period of time.
At the time, we equated this to the period from about 1975 until roughly 1982, during which a similar trading range existed. However, we do not expect the current trading range to exist for that long.
Our anticipation is partly due to the fact that we’re now coming down to crunch time in the political world. It is our clear expectation that political profligates in Washington will likely lean on the Treasury and Fed to boost conditions of the U.S. economy and financial market coming into election season.
After all, in mere months these grandstanders will need to be able to go back to their constituents and claim that all is well. At that time they need things to at least appear to have resumed some state of normalcy, at least in the eyes of the American public.
Dock David Treece is a discretionary money manager with Treece Investment Advisory Corp and a stockbroker licensed with FINRA. He works for Treece Financial Services Corp. and also serves as editor of the financial news site Green Faucet and as a business commentator for Toledo Free Press. The above information is the express opinion of Dock David Treece and should not be construed as investment advice or used without outside verification.
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