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Four Es keep the rally going

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by Peter Switzer

With Wall Street putting on another up and down day where the bottom line is that no one wants to bet heavily against this rally, it’s timely for me to answer “what is going to keep the rally going?”

Now remember, I think we will see stocks go up 10 per cent or more this year — it could even be a really big year. A part of this ongoing rally will be the expanded money supply thanks to the central banks of the USA and Europe and now Japan is going to get in on the act.

Why more debt?

The thinking that surprises non-economists is: “if too much debt caused this GFC, why is more debt the solution?”

The answer is that by allowing debt to increase and using an easy money supply policy, interest rates are held down, which will lead to investment and consumption, then economic growth. From this growth, the US budget deficit reduces as tax revenue increases and less is spent on bailing out the unemployed and bankrupt car manufacturers, banks, etc.

That’s the theory and it’s not working well here. I blame the slow actions of the Reserve Bank (RBA) and the high dollar for part of the delayed reactions of consumers and businesses to spend.

There has also been a negative contagion linked especially to Europe and the stock market responses but I think, as does the European Central Bank boss Mario Draghi, that this will be replaced by a positive contagion this year.

Expanding rally

Helping the rally will be better growth stats out of China and the USA and later in the year, Japan could be looking stronger. And even later, Europe could start to grow.

Also helping the rally will be better company earnings, which will help share prices, and US companies in particular should start investing to end their strike against taking risks.

Already we have seen the US housing sector show ‘comeback from the dead’ signs and this flies in the face of experts who said US housing would be crushed for 20 years.

Here we should see some interest rates cuts and an election that will KO the hung parliament which will all help confidence but we will also be helped by China and Japan — our two best export customers growing at better rates.

The four Es

You could sum it up as the four Es — economic growth, earnings, exports and Europe — combined they will drive the positive contagion that will drive the rally.

In terms of what Wall Street did overnight, the Dow was 18.89 points or 0.14 per cent higher to 13,507.32 while the S&P lost 1.37 points or 0.09 per cent to 1470.68.

Adding credibility to my story above, the Chicago Fed President Charles Evans tipped US growth to be 2.5 per cent in 2013 and 3.5 per cent in 2014.

And this is why I think this rally could last at least two more years, but I could be wrong if a left-field event emerges. I’m good on right field but the left-field challenges can be hard to pick!

Important information: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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, January 15, 2013

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