Tuesday, September 27, 2011

Dow 7,000 or 20,000?

Bulls and bears always go back and forth about what is happening in the economy. Their views depend in large part on their ideology. These days, investors who subscribe to the Austrian school of thought (an economic study founded in large part by Ludwig Von Mises) think things are looking bad for the next few years. They generally expect a continuing recession or depression. Those that follow the views of Keynes (an economist during the great depression), who believes that more government debt, money creation, and "stimulus" is what it takes to get the economy out of the doldrums and back on track, believe that the economy can be turned around by adding more money.
The Austrian investors I follow think that the stock market will go down, along with consumer spending and higher unemployment. Some thinking the stock will go down as low as 7,000, or more. James Altucher, on the other hand, thinks otherwise. He sees a boom coming and is more worried about a bubble in 2013. James has an interesting point of view. He is an entrepreneur who started several businesses and has worked for a hedge fund. If anybody would have a good perspective, he would be a good one. He thinks we will see the Dow at 20,000 in the next 12 to 18 months.  

Here is his article in full.

He cites factors such as QE2 filtering through the system by the end of 2011, along with big stock buy backs from the big corporations. He also talks about the multiplier effect (when you buy something, that person is able to turn around and buy something else, etc..), and that large companies are hiring temp workers at a good pace. He says this usually means that companies will soon start hiring full time workers.
He has a few other points as well. I encourage you to read the article.
This is good. Maybe things will get better soon. I do have my concerns though:
Any time more money is introduced through the system, it lowers the value of other dollars. This leads to inflation. People who don't get that stimulus first have to pay higher prices for items with the same amount of pay. It puts a real squeeze on most workers and retirees. It also makes it harder for the middle class to accumulate savings, and when they do, it has lower purchasing power later.
Is it good to have the Dow at 20,000? It seems to me that it may go to 20,000, but if it is due to more money in the system, it does not mean there is more value to them. It would be a wash.
If there is excess money and credit in the system, productivity will certainly increase to meet demand. But too much credit means extra debt. Sooner or later that needs to be paid off. When people concentrate on paying that down, it would lead to a contraction. Less buying of stuff. This would fit in with his concern about a bubble in 2013. If so, there would certainly be a contraction then.
This is interesting to see. I am going to watch and see what comes to fruition.
Dow 7,000, or Dow 20,000. What do you think? 

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