US stock rally will run out of steam (page 1 of 3)

Interest rates will rise in the next few years - possibly far more than what investors now expect as commodity prices have made a secular low, following their more than 20 years bear markets and as the Fed will print money as if there was no tomorrow.

In addition, I believe the present stock market rally in the US will shortly run out of steam - possibly between now and January of 2003 and thereafter, we will likely move into a trading range and eventually make new lows - maybe only in 2004 or 2005!

Emerging markets should do better next year as in Eastern Europe there is a convergence play while in Asia a modest but enduring recovery is taking shape. Finally, the Fed's easy monetary policies will ensure that gold will regain its proper place in the investment universe by rising significantly.

Let's explore what is going on from a different perspective, and I apologize to readers who have heard me mention this before. I want you to visualize on top of the earth a gigantic flat bowl about three times the size of the earth, perched on a very large bamboo pole, which is continuously supplied with fresh water from a huge tap and is controlled by the world's central bankers.

Under what economists might call 'equilibrium' (which does not exist in the real world), the water (money) would continuously overflow from the bowl evenly unto the earth and, therefore, economies around the world would expand and all asset classes would appreciate at about the same rate. However, the bowl being so large, relative to the flexible bamboo pole on which it is perched, is highly unstable and will lean towards one or the other side depending on which side of the pole investors lean on.

If, collectively, investors are bullish about America, they will lean against the bamboo pole in such a way as to let the water (money) overflow into the direction of the American continent. If they are optimistic about the NASDAQ, the bowl will tilt and overflow into the high tech, telecommunication, media, and biotech sector, and so on. In short, the direction of the overflowing water will depend on the expectations of investors, which in turn can be manipulated by opinion leaders, the media, analysts, strategists, politicians and economists.

Or think of the investment community at large as being very powerful due to its total size - similar to a herd of elephants - but not very sophisticated when it comes to financial matters. The elephants, being rather docile animals, will listen to the commands they receive from their mahouts (keepers). When the mahouts tell them to do something they will obey, and so, with their strength and weight, they can bend the gigantic bamboo pole for quite some time in the one or the other direction.

The mahouts aren't particularly sophisticated either - in our case, a group consisting of fund managers, stock brokers, economists, strategists and so on - but they have a keen interest to boost the productivity of their elephants and making as much money out of them as possible. Therefore, from time to time, they will give them new instructions as to which side of the bamboo pole they should lean on. This is only natural, because the mahouts' salaries depend on the performance of the elephants and on the volume of business they do.

Each time the elephants receive new instructions, the gigantic water bowl perched on the bamboo pole overflows into a different region, industrial sector, or another asset class altogether. The point is simply this: As long as the water bowl is continuously refilled with water coming from the water tap, which is controlled by central banks, and as long as the perch is buffeted around by the elephants, which are driven by the mahouts, there will always be some assets that will appreciate while others lose their momentum, depending on which side the water bowl is leaning towards.