‘Animal spirits’ in America and the stock market oscillator

Yesterday we introduced the “animal spirits” stock market oscillator that shocked us with its apparent prediction of a “real” bottom in the stock market.  (Remember that our models are literally models of emotion, not rational decision making.)  Today for your viewing pleasure we offer a graph of the consumer confidence measure together with the stock market oscillator.  What it shows is remarkable:  the current simultaneous apparent bottoming of the confidence indicator and the stock market oscillator is a fairly rare occurrence.  Since 1960 it happened only in 1970, 1974, 1982, 1990, and with the stock market bottom lagging the real economy bottom, in 2001-2002.

Click to enlarge.  This is research, not investment advice.  Invest at your own risk.

What would drive this rally?  Sheer liquidity, just like all the other rallies recently.  There are trillions of dollars on the sidelines.  Helicopter Ben is printing money like mad, and there’s a huge carry-trade opportunity for well-heeled borrowers.  If the market makes a massive head-and-shoulders top between now and 2011 or 2012, the next crash will probably be worse than this one—just as the 1973-1974 bear market was worse than the sharp 1970 bear, and was followed by the 1980-1982 double dip, recessions that quenched the ‘Sixties guns-and-butter inflation.  It will take several market crashes and failures of effective demand to wring the bad debt out of the system.  Activist macroeconomic policy, thy name is Volatility.

The current situation is that Americans are tired of being down (“been down so long it looks like up to me”) and their “animal spirits” are rebounding.  This rally is a dangerous bear market rally with the ultimate bottom still years away.  Our long-term view is that we Americans are going further down and must confront and defeat our deepest demons of greedy national identity to emerge safely.

So the next inflation, it seems, will be an asset inflation (“Ladies and gentlemen, place your bets”), a super-suckers’ rally that will probably end up transferring wealth from working people to Wall Street, contributing to the expropriation of the assets of working Americans in the monetary shell game run by the Fed, and leading to the critical distributional inequities that we believe will precipitate the next great American crisis.