Uncomfortable market optimism

Founder and Publisher of the Switzer Report
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I’m writing this on Sunday night ahead of my departure from France for home and in the process of ending my break I have stumbled upon stock market or, more correctly, US economic optimism that even makes me feel a tad uncomfortable.

But if Donald Luskin, the chief investment officer at Trend Macrolytics is right, then my reservations about stocks and 2016 could end up being terribly conservative!

A big bull

And this extremely positive view comes as my charts guy, Lance Lai, who often subdues my market positivity, has emailed me from China, where he’s attending a conference, and has surprised me by simply saying: “I am now bullish on China.”

This is a U-turn for Lance but we will save his story for another day because I want to share with you the Luskin view on the US economy.

I picked up his analysis as I was waiting for my wife to pack up her things when we were departing La Croix Valmer for a night in Nice, ahead of a train trip to Paris before flying out two days later.

Our holiday residence only gave us Sky News and CNBC, as well as CNN, and, apart from the odd YouTube video, that has been the total of my TV viewing for three weeks.

Luskin says the output gap in the US is huge and that means there is a lot of potential for growth in that economy. He argues that the US economy is just coming out of a “crisis era” where US banks, carmakers, European banks, the euro and PIIGS (Portugal, Italy, Ireland, Greece and Spain) economies have been saved and so more normal growing economies stuff lies ahead.

“We have not had our business cycle coming out of the Great Recession — it lies ahead of us,” he told Squawk Box. He’s tipping, wait for it, 5-6% growth!

He actually said we will “look back on November 2016 on two fantastic years and November 2014 will be seen as the lift off!”

Then he used the term I haven’t heard before — “a recovery with rockets!”

US growth

Relevantly, this could be a nuclear test week for US stocks and Luskin’s view, as key data will be released. But if the numbers don’t stack up, it could put a bomb under the market. All this comes when some US economists have been peeling back their economic growth numbers following a weaker than expected growth outcome for the first quarter. That’s where an expected minus 1.0% number dropped to minus 2.9%.

Economists have pulled back their quarter two growth forecasts but they are mostly around 3%. Few people, not on medication, would be pitching in the same ballpark as Luskin with 5-6% growth ahead.

If this happens, as he predicts with a takeoff in November for the US economy, then it will be huge for our market and it will hit our dollar too, undoubtedly taking it down as the greenback surges.|

That’s if Luskin is right.

Interestingly he tips November to be the takeoff month because by then, quarter three growth should be pretty well better than expected – really better than expected – and that would precipitate heightened anxiety of rising US interest rates, a stronger greenback and that normal battle between bonds and stocks.

Of course, in a normal business cycle, stocks win until interest rates get high enough for smart investors to start saying “I have made enough money out of stocks and I am out of here!”

The odd couple

But who knows because the oddness of the central bank policies, where interest rates are being held spectacularly low, means we could be living through the longest bull market of all-time. And that’s especially so if Luskin’s story that assumes we need to see a proper business cycle take shape is right.

Now I know I rail against the likes of Dr Marc Faber who is always tipping a big correction but I do think this wacky Luskin view can’t be ruled out.

If he’s right this could be a great time to be building wealth slowly inside a SMSF. Let’s hope he is on the money as it will mean that we are too.

By the way, it is a huge week of data from the US, China and Australia, so I might have more to say on this incredibly bullish view come Saturday.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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