From an Advisor Letter
The Short Run
Over the past ten months the world stock markets have staged a remarkable rally on the back of hope that a vast powerful economic recovery will occur in short order. Those hopes will likely be dashed when it becomes apparent that global capacity (supply) exceeds demand and that demand in the excess capacity nations will not pick up at nearly the rates necessary to clear inventories that have been rebuilt in the last few quarters.
Excess capacity will remind economists and the public alike that in the short run, deflation, not inflation is the issue. Those who are employed with stable incomes, well less than half of the U.S. population, will do well, everybody else will suffer.
In the equity markets we appear to be running into what well regarded money manager John Hussman, PhD calls a "Reckless Myopia" in which "investors chase prevailing trends and (are unwilling) to concern themselves with predictable longer-term risks." As investors get back to even or at least closer than they were months ago on their portfolios, fewer will be willing to take the risks they perceive as necessary to grow their investment balances as markets stall or fall. Many others, suffering high debt loads and reduced household income will spend their retirement funds well ahead of schedule, or at least not contribute to their retirement funds as they worry about what will happen in the next few years versus in their retirement decades. Mass forced selling out of investments in response to a second wave of mortgage problems, with many not investing in their retirement plans in the short run, very likely will cause the broader U.S. equity markets to chop along in a range for years.
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