Optimistic Financial Musings

Wow!!!

What a mess our financial markets are still in.

The negativity in the media is almost overwhelming.

Looking on the optimistic side though, the Obama administration may have an opportunity to pull off a surprise in global prosperity.

Here is a possible scenario:

Trade relations improve with our foreign trading partners.

War payments subside.

Tax cuts incentivize the middle class to increase their purchases of goods and services, and the increase in equity valuations offsets the increased taxes on the wealthy.

Interest rates stay low. Say in 8 years they are averaging 3% on one year TBills and 5.5% on 10 year Treasuries.

Say that the S&P 500 compounds earnings at 10% and the P/E ratio averages 18 times earnings.

In other words, what if S&P 500 earnings in 8 years are at $170; then at 18 times earnings, the S&P 500 will be at 3060, compared to 900 today. That's an increase of 240%.

With even better numbers for productivity and inflation, the P/E ratio could be higher, and so could the averages. Let's see. If the value of equities in the next 8 years increases by 240%, that means that the wealth in equities alone of Americans will increase by maybe $40 Trillion.

What if this happens with the Federal Debt doubling? A $10 Trillion increase in debt with a $40 Trillion increase in wealth in equities alone, sounds like a good investment to me. And what if we are really profitable and the budget deficits are much less?

There is still the question of labor and capital to deal with. Which comes first; labor or capital?

Abraham Lincoln said that labor creates capital. But we need capital to incentivize labor.

The $800 Billion bailout package should be a good first step to provide that capital.

I am a little surprised though, that the government is charging the banks 5% for this capital. They should be charging less. Banks need to make money too. The government should be charging less and adding a greater equity kicker.

As a taxpayer and citizen of America, I would like to see part of my investment in the bailout package have the potential to increase 240% to help balance the budget.