Morgan Stanley says ride the raging bull

Morgan Stanley’s analysts suggest running with the bulls this week. They recently announced that they expect the S&P 500 to rise 15% in the next twelve months and possibly to reach 3,000, a gain of 27.4%. They wrote, 

Although optimism is a late cycle phenomenon, history tells us the best returns often come at the end."

Essentially, they are shouting “the end is near!” but “party while you can!” They credited President Trump for their optimism:

While acknowledging that the pro-business agenda of President Trump has awakened "animal spirits" in the economy, the Morgan Stanley strategists feel that Trump has simply "turbocharged" a global business recovery that already has been underway since the first quarter of 2016. They note that one of the worst economic contractions in 30 years, as measured by U.S. GDP, bottomed out a year ago. Since then, their favorite economic indicators have been accelerating, including those capturing business conditions, business outlook and global trade.

Baptists and bootleggers explains lofty stock market

Jason Zweig, who writes the Intelligent Investor column for the Wall Street Journal, posted recently about “Disturbing New Facts about American Capitalism.” He wrote:

“Modern capitalism is built on the idea that as companies get big, they become fat and happy, opening themselves up to lean and hungry competitors who can underprice and overtake them. That cycle of creative destruction may be changing in ways that help explain the seemingly unstoppable rise of the stock market."

Zweig cites new research by academics that claims the US is moving to a “a winner-take-all system in which giants get stronger, not weaker, as they grow.” The evidence consists of higher concentrations of market share among just a handful of companies. For example, the top four grocery chains hold 89% of the market. The top four real-estate service companies command 78%. In intro to economics those are called oligopolies.

How the Fed creates bulls and bears

If you grasp this you will be light years ahead of most economists. Bull and bear markets can't exist without the Fed manipulating the money supply. Here's why.

Assume the stock of money is fixed. For example, say there exists only $1 trillion in gold and banks have lent out nine times that amount so that the total money supply of gold plus credit equals $10 trillion because the required bank reserves are 10%. Also assume the population remains constant. If nothing changed, prices would remain the same and the economy would be in a state that economists call equilibrium. Profits would equal the cost of credit, say 5%.

Now we have to look at how many times the $10 trillion is turned over, or changes hands, in order to figure out the total sales for the year. We’ll assume that the turnover, or velocity, of money is five. Then total sales for the year would come to $50 trillion. A profit of 5% would mean $2.5 trillion. Now let’s assume the PE ratio, the measure of risk tolerance, is 15. The market cap would be $37.5 trillion.

With a fixed stock of money, productivity increases at zero and the population remaining constant, the stock market would show the same values every day. Planned investment equals real savings.