In response to an FT Blog by Larry Summers on 29th January 2017, entitled ‘Markets enjoying a sugar high that will not last’
“Last week, the Trump rally continued as the Dow crossed 20,000 and the president issued a celebratory tweet. How much does this mean? To what extent is it a vindication of the economic policy approaches pursued by the new administration? Will the post-election rally continue? No one knows these answer and market timing is a fool’s game but I remain persuaded that markets and the economy are most likely enjoying a sugar high that will not last a year.
First, Dow 20,000 is a meaningless benchmark and crossing it means little. It is numerology not analysis to focus on round numbers. The Dow is an odd and arbitrary index that weights companies by their share price not their market value. It is highly limited in who is included, with Goldman Sachs accounting for over 20 per cent of the gain in the 30-stock index since election day...
...new governments with authoritarian tendencies have historically brought about bull markets even before they led to disaster. Governments with much stronger authoritarian tendencies than anything plausible in the US, like those of Hitler or Mussolini, nonetheless saw strong markets in their early years" – Larry Summers
Market analysis from the guy who junked the Harvard Endowment fund...what a treat. For those who weren't around at the time, or for those who have a short memory like the Professor seems to have, here's a reminder:
A couple of things about the Dow and 20,000:
1. The meaning of any benchmark or level reached is exactly what the market 'decides' it is, nothing more, nothing less. The market is moved by 'sentiment' and 'confidence' not by 'rational' expectations, and doesn't give two hoots what Larry Summers or anyone else thinks it should or shouldn't care about
2. The Dow may be 'an odd and arbitrary index that weights companies by their share price not their market value'...but consider this possibility: as global interest rates rise...as sovereign debt markets begin to crack...as big money is looking for a place to park itself out of harm's way...the dollar and the Dow is where much of it will go
Yes - the Dow could come down at any point and will come down at some point; it could collapse; it could collapse and then slingshot as capital flees foreign sovereign debt markets. I.E. capital flows are global.
But a sugar high? Worse than that I'm afraid - it's been high on drugs for years - QE and ZIRP to be precise, NIRP if the Professor had had his way. The Fed has been a most accommodating 'dealer' for its grateful junkies - the banks, the insiders, the front-runners and the C Suites. It's strange how little Professor Summers has written about the deliberate distortions created by his Eccles colleagues over the years...but not really.
So...what am I saying? This article isn't really about markets is it Professor? It's about your loathing of Donald Trump. Fair enough - that's your prerogative - loathe away. Just include a 'health warning' so that anyone reading this article for the purpose of understanding markets and capital flows realises that you haven't got a clue what you're talking about when it comes to those things.
Reader 'A' replied: Time will tell who is correct. My money is on Summers
My response: If your money is on Summers, as in 'the market will come down', you may well be right - an avalanche could be triggered at any point by the Fed, by China, by almost anything. However, the 'cause' of a collapse will be the vast accumulation of Fed & government enabled debt, not the last snowflake that lands on top of it.
What I predict with confidence, is that when it does, the Professor will claim it was nothing to do with him, his chums in the central banks, or any of the insane policies they have been pursuing whilst Donald Trump was busy flogging real estate.