TheLiveBigWay* – Good News and the Power of Pessimism
The New York Times ran an interesting piece a few days ago (Wary of Heights (and the Future)) that pointed out the seeming paradox of the S&P 500 Index hitting four-year highs, while investors continue to sit skeptically on the sidelines. Morningstar reports another $3.8 billion in net outflows from stock mutual funds during the first two months of the year, bringing the 12 month total to $114 billion. Economist Ed Yardeni calls this “the Rodney Dangerfield of bull markets . . . it doesn’t get any respect.” But respect is deserved according to Yardeni.
“There have been numerous nearly apocalyptic scenarios out there that haven’t played out,” he said. “Despite the scares we’ve had, the global economy continues to grow. The adage about the market climbing a wall of worry has never been more relevant.”
In Mr. Yardeni’s view, investors are ignoring a persistent lift to economic growth and corporate profits from reduced constraints on international trade.
“What the bears have been missing is the power of globalization,” he said. “The liberalization of national economies through relatively free-trade policies is creating a lot of wealth. There are a lot more consumers out there than before the end of the cold war.”
The same day the Times article appeared, CNN economist and commentator Fareed Zakaria gave his latest assessment of the American economy. Zakaria finds many more positive trends than negative, including demographics and energy, two trends that we have discussed before.
The United States, alone in the industrialized world, is demographically dynamic. It adds 3 million people to its numbers every year. At some point, kids don’t want to live with their parents and that will produce demand for housing. And at that point, the recovery will gain full steam.
The new, potentially game-changing trend for the United States is the rise of shale gas. Thanks to the new process of fracking, America now has 75 years of natural gas – and most important, it is the world’s low-cost producer.
The rise in gas prices has obscured this more important fact – energy costs are plummeting in America. That’s why manufacturers like Dow Chemical are actually opening new factories in the United States. Asia has the advantage of lower labor costs, but now the U.S. has the advantage of lower energy costs. And this is a process that has just begun.
As we’ve often noted in last year’s “Economic Vomatility” webinar, humans are wired to give more weight to the negative than the positive, a trait that served our ancestors well when they were trying to avoid the neighborhood Sabertooth. Not to mention the heightened sensitivity to the any negative events in the post-traumatic shock syndrome world we inhabit. As always, we don’t deny the inherent risks that fill our world, we simply feel the need to offer a healthy counter-narrative.
*Service Marked (SM)