Tuesday, March 30, 2010

Morgan Stanley: Current Stock Market Rally Is Near Its End: Debt has NOT Been Reduced, it Only Changed Hands to the Governments (to Us!)

Today there are sombre predictions from Teun Draaisma, Morgan Stanley’s strategist. He says that the recent rally was larger than we expected, and it was due to:

  • no positive payrolls or Fed language change yet; in fact there was some loosening rather than tightening last week: the Greek bailout, the ECB keeping its wide collateral pool for longer, and the Obama plan for troubled mortgage borrowers
  • sentiment had turned quite cautious in early February.

"Nevertheless, we do think the market peak associated with the start of tightening is near, and expect 2010 to show a volatile whipsaw pattern in equities".

Draaisma believes the secular bear market is incomplete. He says that banking crises and bailouts tend to precede debt crises. Furthermore, quite rightly he states that the "amount of debt has not been reduced yet (it only changed hands to the government)".

This of course means that the banks' debts have in fact been transferred to all of us, and to our children.

His historical analysis show that equities tend to struggle for longer in the aftermath of secular bear markets.

"When the next earnings recession hits, perhaps in 2012, we expect equities to complete the bear market that started in 2000".

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