The Runaway Rally

A cura di Walter Snyder, Swiss Financial Consulting

This Newsletter has already observed that the current rally is now the second longest in history and that equity prices are extraordinarily high with a P/E ratio of 25 or even more according to other calculations. The real economy does not justify Wall Street`s seductive optimism. The soft data is belied by the hard data.

There are several factors that should caution investors about being excessively optimistic regarding the potential for further rises in the stock market. The Fed is planning more interest rate rises that may bring on a recession. The ongoing debacle in the American retail sector will result in numerous bankruptcies and an increase in unemployment with various REITs suffering painful losses as more and more malls fall prey to a fall in occupancy rates and rot away. Mortgage-backed loans will default, thus causing severe losses even though e-commerce flourishes.

Student loans have marked increasing default rates, and unemployed graduates will not contribute to the consumer economy. New car sales have slumped amidst an increase in the default rate on auto loans, many of which are subprime. These loans have also been securitized, and a repetition on a smaller scale of the disastrous subprime housing mortgage disaster of 2007/2008 is more than likely. House prices are inflated: could that be another bubble brewing?

The federal budget deficit continues to grow while the debt remains blocked at 19.8 trillion dollars, which is 105% of GDP. It is uncertain if Congress will soon approve any measure to stave off a government shutdown after 28th April 2017, which could spook markets. States and corporations are also deep in debt.

The railroads have cut the amounts earmarked for capital expenditure while companies have been borrowing large sums for share buybacks that have boosted share prices. Executives have enriched themselves with such operations as they sell off the shares received as part of their salary arrangements. At the same time the sums invested in capital expenses have diminished accordingly.

The BLS reports record-low unemployment of 4.5%, but the real rate of unemployment is about 22% if one considers the people in the working-age population that are not working and not looking for work.

Several important US pension schemes are underfunded and will not be able to meet their obligations to pensioners. These funds have also invested heavily in stocks, so that if the stock market should head south, the situation will become even more disastrous than it already is. One can reckon that hard times are ahead.

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