So for the last few months I definitely considered myself more of a Bear Market proponent on stocks than a Bull Market proponent. (i.e., I anticipated slow to negative growth), but this may be changing. My change of attitude is not so much about me changing my fundamental theory of markets and the need for the market to clear itself of bad assets, but rather a realization of certain dynamics. So here’s my proof on what may come of the Stimulus Package and the current financial crisis:

1) Consumer spending and investment drives our stock markets’ success. Stock market prices reflect the long term potential of companies, which is on a quarterly basis viewed as their ability to make quarterly earnings estimates. Their ability to make quarterly earnings estimates is dependent on selling their goods and services.

2) The ability of companies to sell their goods and services is dependent on consumers ability to pay for these goods and services. Consumers usually use credit to pay for things, hints our recent negative savings rates.

3) The results of the stimulus package and write-off of banks bad debt with tax payer dollars will revive the economy in the short term. This will be perceived in the short term by consumers simply as “things are fixed.” I highly doubt most consumers understand the need for an economy to self-correct and truly purge itself of bad assets and investment decisions. The propping up of these bad assets and investments will stimulate the economy in the short term, but will inevitable have to be paid for via increased taxes, inflation, and write-offs. Most people could care less if short term decisions don’t match their long term goals, hints our recent negative savings rate.

4) As consumers perceive things are fixed and they start spending again companies will make or exceed quarterly earnings estimates and the market will increase. The cheap dollar will increase exports, money will flow again, debts will be put off, taxes will stay the same, all will look good, until…

5) Eventually the economy will falter again and the government will try its same old trick of stimulating out of a problem, but next time it will be much more difficult due to the accumulation of debt, liabilities, and propped up bad assets that are now being created to stimulate ourselves out of this mess. The business cycle will become shorter and likely more severe.

So I think I may move to a long position for the next 24 months or so and then transfer back into cash or gold, and wait for the next crash.

A few additional notes.

I think there are still bad assets on the books of some companies, likely concentrated on the financial sector. There is little to no incentive to mark these assets down, when the government is unpredictable (companies wait to find out if they will be bailed out like the rest).

I see this view as a balance between acknowledging what is inevitable in the long run with how humans will respond in the short run.

Consumers could also use the short lived boom to reduce their debt and begin saving again. To some this shouldn’t matter as savings will turn into investment, but for a post-Keynesian, this will lead to lower aggregate demand and a decrease in consumption.

The governments interference in the economy in the short run could hamper this movement. The current discussion on Cap and Trade comes to mind, although likely wouldn’t increase prices for some months.

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