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The Alfred E. Neuman Stock Market

May 4, 2007 by  


By Bob Wood, Muslim Media News Service (MMNS)

If you’ve never read a copy of the cult favorite, “Mad Magazine,” there is certainly no shame involved, but you might want to do a Google search on that name. The caricature of Alfred E. Neuman always appeared on the cover with the caption: ‘’What, me worry?’’ When you see the picture, you will understand what follows.

The Neuman face has long been used as a symbol of — stupidity. Perhaps you have seen variations of the face created by critics of our current president. But once you understand the character, you will understand why I think the 2007 stock market resembles him.

To start, yes, I continue to be a Bear while the market is hitting new highs points – while technology stocks with options investigations, intense competitive pressures and lofty valuations are running even higher. Doesn’t this scene resemble the late 1990s? But of course, as a Bear, I have to find ways to feel better about being wrong, don’t I?

Well, I do. And I don’t! We all find ourselves on the wrong side of something from time to time. I certainly missed calling the duration of the current bull market cycle, which I thought might be ending when domestic markets returned so little on investments in 2005. But since then, markets have rallied on, and here we are at new highs for the Dow. What did I miss?

I think I missed the willingness of the Fed and other fiscal policy makers to print money at what would normally be considered “reckless” speed. But when they stopped reporting how fast they were printing money (now labeled by the Bulls as ‘’excess liquidity’’) and eliminated the release of M3 figures, that, admittedly, should have been a hint.

The idea that reckless expansions of the money supply are positive factors for an economy has never succeeded in the past. Look back at John Law and what happened in the French economy and banking system in the early 1700s when he began printing money in a panic-induced effort to save his schemes. Or revisit Weimar Germany for another great example.

Printing massive amounts of money, in excess of the growth rate of the economy, has always been inflationary. And inflation has always reduced the lifestyles of those living in that economic environment. But too many in today’s financial media call the process “a great thing” because of the credit creation it has fostered. But reckless it is, and the results, being played out now in our economy, won’t be pretty.

So when will the other shoe will drop and the consequences of these reckless policies become obvious and finally affect the stock market? Obviously, I don’t know the timing, but I do know that, at some point, it will happen, and it will matter. I may have to wait another year or two, or even longer, before my “bearish” call on the markets looks smarter than it does now. I just want to be on the right side when that day comes.

For the Bulls, this is a case of a “What, me worry?” stock market. They seem to have the uncanny ability either to look past the threats to the markets and economy or, even better, offer justification for why each threat is really an opportunity in disguise. The current mood reminds me of 1999, when the Bulls looked at the Bears with derision for relying on the underlying fundamentals and asking difficult questions about the true health of the markets. Their explaining then how internet stocks could be valued using metrics unrelated to profitability was an amazing thing to hear.

I am reminded, too, of how the real estate industry assured us just a couple years ago that there was little to fear about rapidly rising house prices, when demand was building because of the endless supply of newly printed money and credit offered to marginal buyers who previously would never have qualified for mortgage loans.

And today, threats to our economy are “nothing to worry about” again. This is the ‘’Goldilocks Economy’’ where everything is “just right,” and stocks are forever cheaply priced. “What, me worry?” — about the dramatic downturn in the housing market, one of the most critical industries in the economy and the largest generator of jobs over the past five years? Not me!

“What, me worry?” — about the massive U.S. trade deficits, now running over $800 billion/year and growing? That’s nothing to fear! Buy stocks! And with stock valuations running close to twenty times earnings, which is where all Bull markets have ended in the past, there is nothing to worry about there, either!

Inflation is running at the high rate you would expect with today’s excessive money printing, but if official inflation reports just eliminate those components (like food, energy, health care, or insurance costs) that are rising too fast for comfort, there is nothing to worry about. And even though real costs are rising and average Americans are spending more than they earn each month (as shown by the negative savings rate), don’t let that bother you!

Of course, those low savings rates have resulted in the average American worker in the 45-54 age group having saved less than $100,000 for retirement. Add to that dilemma renewed concerns about the massive shortfall in funding for the Social Security and Medicare benefits promised and you might begin to see a huge problem about to manifest itself in ways we can only imagine. But for today’s stock market Bulls, the response is: “What, me worry?” That’s a problem for tomorrow. Today we party on!

Remember, of course, that the U.S. is involved in two expensive wars, with neither of them going well and neither appearing to end anytime soon. Some see a very real possibility that the U.S. may be in the ‘’last throes’’ of its efforts to turn the tide of bad results in the Iraq fiasco before our troops finally wear out from overuse. And with dissention coming from higher ranking officers like Lt. Colonel Paul Yingling, who is assailing the performance of generals who are running the war, it may be only a matter of time until that effort is doomed. Waning public support is yet another sign of our fading chances of success.

And what effect does losing a war have on our economy, especially in terms of the massive resources devoted to the effort? For today’s Bulls, it’s nothing to worry about. Just add the cost to our debt, which is now funded by foreign central banks to the tune of over $2 billion/day — as if they will prove a never-ending source of funds. Let’s face it, if we have to borrow that much from foreign central banks, we can’t even pay the interest on our debt. And that sounds like the Federal government may be running a massive Ponzi Scheme, doesn’t it?

And the Bulls believe that will work out just fine too!

Call me stupid — or just prone to worrying too much. But I can’t see how these concerns can be considered trivial to anyone using an ounce of objectivity. Bad fiscal policies, poor leadership, lost wars and overwhelming amounts of debt are not ingredients for a strong and sustainable economy going forward. And none of them individually bodes well for the future.

But we are experiencing all of them, and they all have generated negative consequences in other economies of the past. To think that somehow they will work positively for us now seems to refute all logic and history.

I’m remain as bearish as ever on the domestic markets, just as I was pessimistic about the housing market last year while the head of the National Association of Realtors was promoting his new book explaining how to get rich buying real estate.

To me, today’s scenario provides an easy call. It bodes ill for anyone thinking that buying expensive stocks works even in the best of times. In times like this, it spells disaster. Yet the Bulls party on, regardless of the fundamentals (which they now consider “quaint”), and I’m sure they think they’ll be fast enough on the sell button to get out before it all hits the fan.

I think I have a better idea. Don’t get into the game at all. There are still better places to invest, though with global liquidity now at record levels, that list grows shorter by the day.

Have a great week.
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.

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