When listening to the typical, television-based, Wall Street cheerleader work
themselves up into a bull market frenzy, one is tempted to wonder if they ever
bother to compare the movie that is rolling along in their heads to the one
that is occurring in the outside world. Perhaps for those living in a media
bubble, the only reality that matters is the one reflected in the camera lens.
Over the past nine months, we have seen increasing signs of economic
contraction and falling corporate earnings in America. Although the financials,
airlines, auto manufacturers, and retailers have grabbed the headlines, few
American sectors are immune from the pain. Meanwhile, the cheerleaders and
market pundits have advised that recession fears are overblown and that
investors should buy "unnecessarily" beaten down American stocks. Their
advice is founded on some shallow mantras.
We have all heard the droning:
"If you exclude the subprime, or the financials, things look good."
"If you strip out food and energy, inflation is not a problem."
"You can never underestimate the resilience of the American consumer."
"The earnings are way down, but the earnings are above Wall Street estimates!"
The cry that "stocks are cheap" has been repeated almost daily. But surely, the
price of any item is only cheap when the outlook is for the price to rise, not
just because it has eroded. Investors who heeded such advice to buy the
financials have been crucified.
When faced with news of an unassailably bad character, we often see the
pundits' smile as they assure us that the depths confirm that recovery is nigh.
While the Dow Jones Industrials has slid nearly 17% since its October 2007
highs, the pundits have consistently presented us with a series of occasions in
which the "market bottom" has been proclaimed. Nevertheless, stocks have
continued to slide. Don't look now, but it appears that Toyota looks set to
replace GM as America's leading auto seller.
In an effort to reduce the public's fear of inflation, cheerleaders have cited
a reduced money supply. They make no mention of the way banks and derivatives
have leveraged the money supply or the fact that the Fed no longer publishes M3
(the most widely recognized measure of money supply). While prices gallop out
of control for tangible items in the real world, the cheerleaders point to the
narrow yield spread shown by Treasury Inflation Protected Securities over
classic US Treasuries (TIPS spread). They ignore that the TIPS spread is a
wholly manipulated creation of the "politically cooked" consumer price index
inflation figures.
While the US government has successfully hidden domestic inflation, the grossly
debased US dollar has exported inflation abroad to dollar surplus nations.
Today, Europe is experiencing 3.5% inflation, China 6.7%, India 7.5% and Saudi
Arabia more than 10%. Yet all of the cheerleaders proclaim that inflation fears
are unfounded.
The latest Case-Schiller index shows a 15.3% fall in US house prices. The
magnitude of the drop can be appreciated when it is applied to the US$23
trillion total value of US housing stock. Doing so reveals that $3.52 trillion
of the paper wealth has evaporated. This inconceivably vast figure dwarfs the
$175 billion stimulus package in which the government and Wall Street
cheerleaders have place so much hope.
In announcing "no change" in rates this week, the Fed pretends that its policy
is perfectly calibrated to deal with the current economy. In reality however,
the Fed is pinned down by a crossfire of inflation and recession. The Fed's
leaders see their best move as keeping their heads down and hoping that they
emerge unscathed. Perhaps Alan Greenspan's best move as Fed chairman was
getting out when he did.
The reality is that America is faced by stagflation, economic recession and
financial inflation at the same time. Rank and file American investors are
beginning to understand this. As a result, US stock markets are looking
decidedly nervous. The possibility exists for major falls in the months and
years ahead. However, don't look for anyone on television to tell you this.
They are too busy shaking their pom-poms.
John Browne is senior market strategist, Euro Pacific Capital.
Euro
Pacific Capital commentary and market news is
available at http://www.europac.net.
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