Is it time to get back into the market?

Is it time to get back into the market?

Let me start by being honest. We’re in the fog of war right now, and I don’t have a clue what is going to happen next week or even later today. AIG’s purchase by the Fed was not on my radar screen at all. For all I know, Paulson will nationalize the auto companies next.

So let’s turn to a different question: Is it time to get back into the stock market? I shifted most of my funds into low-risk assets last December….is it time to shift back?

Another way of asking the same question: Do I expect the U.S. and global economies to be in decent shape 12 or 18 months from now? The Fed has effectively put a massive shot of monetary stimulus into the financial markets. So if the economy is basically going to be okay, that should mean a stock market boom.

Let’s think this through. What happened over the past ten years or so was a massive debt binge by both the household and the financial sectors. The two were intertwined, particuarly in the real estate market. Since 1997 inflation-adjusted debt in both sectors has basically doubled

By contrast, debt growth in businesses and the federal government has been much slower.

So. The deleveraging of the financial sector has just begun. If that feeds directly into the household sector, we will see a massive decline in spending, which will hit imports and U.S. sales. That will take more than a year to play out. If that happens, it’s not time yet to get back into the market.

The other alternative is that the underleveraged sectors—the feds and businesses—step up to the plate. For businesses, that would mean offering credit directly to borrowers, rather than going through the financial system. For the federal government, that means taking on some of the financial system debt itself. That will cushion the blow, and probably means that the stock market is near a bottom.

Based on what we are seeing now, the feds will take on this role. So I am leaning towards getting back into the market. I’m not quite there yet, but almost.

Correction: I’ve replaced the chart because the original was slightly wrong—I pulled data from the wrong years.

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