May

26

Amidst the bearish and bullish voices of present, there are three subjects that I believe are important which have received little consideration:

1. The tremendous hedged long/short (both direct and indirect) pool of funds still trying to capture an alpha of a few percent, that has not bought into the 10% a year rise in stocks. There is also considerable capital with the foreigners who either hate Bush, or are just uninterested in the US.

2. The moves to cut taxes all over the world, as countries try to compete with China where they have no capital gains tax, and an income tax of 15% (there is even talk of abolishing this).

3. The incredible increase of wealth in such things as real estate and equity holdings, as well as firm values, mutual fund values (and a dozen other such 'values' that are indirect signals of the US's great wealth), collectibles, investment in intangibles such as patents, education, or brand names, and improvements in homes. Also, spending in the stock market due to the Wealth Effect has increased to an inordinate extent, and there has been great rises in almost every other stock market around the world, offering great untapped reservoirs of liquidity. I believe that the much denigrated and unstudied Wealth Effect is a greater source of spending on stocks, and a driver of stock values, than the normallly used Income Effect explanations, that economists and officials of the doomsday persuasion like to pay attention to and study.


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