The market has entered a roller-coaster mode, one day despondent, the next day perky. This can drive investors crazy, since we all tend to want to follow a trend, whether it is rising or declining. In my experience, the constant flip-flopping often signals a top (or bottom, in a bear market) because the evidence for the contra-trend is suddenly becoming compelling, rather than excusable. But I see reasonable evidence for both the bull and bear cases, so I understand the frustration.
JPMorgan Private Wealth CIO Michael Cembalest recently assembled an impressive array of charts, from various public sources to make the case that things are OK in the U.S. A few charts stood out, although a few of the "good" actually struck me as "bad."
One of the most important for the bull case is that consumer debt service as a percent of income is down significantly. This is important, as it can offset lower wages and the tax increase that hit us all in January. Good stuff. I am concerned that household borrowing is starting to increase, after a healthy decline that helped to shore up personal balance sheets. A return to the system of debt financing our consumption can be nothing but bad, bad, bad.
Capital spending looks OK as businesses slowly expand. In fact, this segment of the economy could grow even without any contribution from consumers, since this also serves export markets and the U.S. is a more competitive exporter than a few years ago.
We are all aware that housing has revived, which is not a bad thing for the economy. Inventory is slowly declining, and prices are firming.
But this is a double-edged sword. Housing prices up with median incomes flat to down means housing will quickly become unaffordable again. I live in one of these Phoenix-rising markets and the house prices increases are eye-popping, and often worrisome. California was never cheap, but having houses up 30% or more in a couple years is not healthy and it feels like Fed promiscuity is reviving the bubble mentality.
The last housing bubble was driven by Greenspan's easy money in the wake of the 2000-2002 bust and took about 3-4 years to reach irrational exuberance. We may be repeating ourselves again, since excess monetary liquidity has to show up somewhere, and the early signs are not good. Like last time, there is probably a half decade before things become so out of control that we crash again. But at least if we replay that video, we all will be a little wiser to get out before the music stops.
Right?
When I net this all out, things look good. And they look worrisome. So the market will debate, up one day and down the next. Perhaps the best bet is to go long volatility.