Mosler: Time to Buy Equities

By Warren Mosler, Mosler Economics

I’m thinking it’s about that time for portfolio managers to buy stocks and go play golf for a few years, with the following very caveats:

1. A serious spike in crude oil/gasoline prices that undermines consumption
2. The euro zone could break down socially under the stress of continued austerity
3. Congress opting for ‘meaningful’ proactive deficit reduction

But apart from that it looks like relatively clear sailing to me. The Republicans are now softening on revenue increases to get past the fiscal cliff. And in any case the fiscal cliff may already be up to 50% discounted, as business has slowed due to delayed contracts, etc. & with top line growth still remaining modestly positive as the cyclical housing ‘recovery’ begins its multi-year upward grind, providing a powerful ‘borrowing to spend’ force for growth. I call it a drop in ‘savings desires’ as borrowing is in fact ‘negative savings’. This is fundamentally supported by continuing federal deficit spending that, while down from the peak, is still looking more than high enough to support a growing credit structure.

And the 4 years of ‘larger than ever’ federal deficits have added exactly (to the penny) that much in dollar net financial assets to the global economy, with much of that being added here domestically. This is evidenced by the full recoveries, and then some, of macro debt service ratios of all types. In short, ‘savings’ has been, for all practical purposes, more than sufficiently restored for a ‘normal’ recovery. This kind of underlying strength will quickly cause the Fed to re-evaluate policy as unemployment drops towards 7%, leading to a ‘normalization’ of policy, which means a fed funds rate at a ‘normal’ premium over ‘inflation’ for a ‘neutral monetary policy.’ In fact, as this happens, the higher rates from the Fed further support the expansion via the interest income channels.

The output gap is wide enough for this to go on for a long time without excess demand issues, again with the caveat of crude oil. Growth has already caused the federal deficit to come in lower than expected, which is helping put off proactive deficit reduction efforts. Yes, eventually, the automatic fiscal stabilizers will bring the deficit down too far for it to support the credit structure, and serve to end the cycle. But this is WAY down the road.

The first Obamaboom came from the ‘stimulus’ which wasn’t nothing, but was far too weak to remove the sudden drag on demand from the private sector credit contraction. The ‘crime against humanity’ was not implementing the likes of my proposed ‘payroll tax holiday’ in mid 2008 to support demand at full employment levels at that time. Instead, the govt allowed demand to collapse/output gap to widen. This did not have to happen. It was a total failure of govt.

Also, timing is also important, so mind the technicals!


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
  • S.E.


  • Detroit Dan

    I find this surprising, and will be interested in others’ opinions. The obvious big risk is political. The “ownership society” in the U.S. has been good for U.S. stock prices, but is not working for the middle class these days, and hence is due to suffer some political reversals. So the risk is that the ownership society will go into reverse, with stock prices being dragged down along with other capital assets…

  • Bond Vigilante

    What about:

    4. A severe debt crisis in the US.

  • Anon

    Interesting point! Please elaborate by running us through what this would look like…

  • Bond Vigilante

    Don’t you remember what happened in 2008 ?

    what about “Rising US interest rates” ? Stockmarkets crashing ? Bond market crashing ?

  • hangemhi

    no, please don’t elaborate. 1,000 posts saying the same thing is enough. How about you comment on Mosler’s site so you can have the same debate for the millionth time there instead of here?

  • micro2macro

    Bond Vigilantes – always wrong but never in doubt.

  • belsha

    This is crazy.

    When history is any guide, observing long time market cycles, it seems inevitable that we will see another major selloff in the newt few years — and very possibly now — that could lead the SP500 to as low as 450 points. We know that secular bear markets last 15 to 20 years, that secular bull markets typically start with valuations under a P/E ratio of 10, and often at a 7 P/E. So a 50% and possibly even 70% decline from here would actually be “normal” from a historical and statistical perspective. This time will be different? Maybe…. but I wouldn’t bet on that playing golf !

  • Anon

    Oh I see – you mean another PRIVATE SECTOR debt crisis. Well, that’s certainly a possibility I guess but as the USA private sector continues to work through its excessive debt load the probability of another 2008-style event is highly unlikely (till next time in the future!)

    By the way, as I recall US interest rates came down a little in 2008 didn’t they? Perhaps I’m not recalling clearly…

  • Anon

    ha ha – true. According to scientists our brains give off “feel-good” hormones when we realise we “understand” something. They can be very powerful and re-enforce our conviction in what we believe…

  • S.E.


  • Bond Vigilante

    Nope. In 2008 it was a private sector debt crisis. The next crisis will hit countries, including the US. A.k.a. soveriegn debt crisis.

  • Geoff

    I think it will take a drop in the unemployment rate well below 7% before the Fed “re-evaluates policy”. They’ve been pretty clear about maintaining the ZIRP into 2015, even things do start to improve before then.

  • Geoff

    even IF things.

  • Jay

    I think it’s important for those who saw this earlier post to see the latest chatter from Warren…

    Raising tax rates is “unacceptable” to House Speaker John Boehner

    Posted by WARREN MOSLER on November 9th, 2012

    I hear you.
    I’m starting to get worried the ‘caveats’ are winning


    in any case the charts are still saying ‘sell’ even though,
    ex caveats, the fundamentals are ok.

    So in any case timing isn’t right yet for a long position, seems

    On Fri, Nov 9, 2012 at 7:25 AM, Michael Norman wrote:
    You’re pretty sanguine on being able to avoid the fiscal cliff, however, I just don’t see it.

  • Old Dog

    Y2K hysteria – one more time.

    How else can the market timers make a living other than trading? You want maybe they do something productive, something that actually creates wealth???

  • pvk22000

    i guess that i’m a bit surprised by this as well.

    i understand that sustained fiscal deficits will most likely continue to lead to elevated corporate margins and profits. but i’ve always felt that this important knowledge also needs to be coupled with a knowledge of valuations.

    i feel that a “generational buying opportunity” is more defined by valuation than by a fickle fiscal environment. i’d much rather bet on the inevitability of market forces than on the calculations/miscalculations of politicians.