Daily Reckoning sufferers, listen up. We now have word – directly from the horse’s mouth – that all’s well in the world economy. Stocks are going up. Thus sprach Abby Joseph “Zarathustra” Cohen at the Financial Times.
Yes, the optimistic, albeit delusional economist from Goldman Sachs (NYSE: GS) says the economy is slowing down. But, “critically,” she adds (they pay her big money for these neat insights), “it is also rotating.” Like tyres.
And if the economy now seems to be spinning against the people who buy, finance, build and sell houses, don’t worry your head about that.
“Weak housing is unlikely to derail the economy,” says Miss Eternal Sunshine of the Stock-tout Mind.
You see, over there, commercial property is picking up. And over here, so are exports, thanks to the flailing dollar. And how do you like those consumers? They’re still spending what they don’t have on what they don’t need. Personal consumption is supposed to go up by 3% this year.
And, you want more good news? U.S. corporations are flush with cash. They’re making money…and probably will make even more – which means, stock prices are going up too. Abby’s model says the S&P 500 should hit 1,550 and the Dow should make it to 13,500 by the end of the year.
And who knows? Maybe she’ll be right; she usually is. She’s got a nice gig over there at Goldman. Every year they pay her a lot of money. Every year she says stocks will go up. And most years stocks do go up.
But readers are reminded that it is not by successfully foretelling the future alone that a gambler makes his money. Instead, it is by correctly toting up the odds…and figuring out how much he’ll lose if he is wrong.
Even if Abby is right, from here to 13,500 in the Dow is only about a 4% gain – and more than half that gain reflects nothing more than the effect of inflation. So, you would be putting your money at risk in the hope of making 2% net…less after taxes. If the dollar goes down, or inflation goes up, your gain is wiped out completely. And there is always the chance that Abby is wrong. Suppose instead that the Dow goes down 10%…or 20%…or 50%. Is it worth taking the risk for the hope of a 2% gain?
The Daily Reckoning Australia