Call It A Spade


During a conference call Friday afternoon, members of the National Bureau of Economic Research (NEBR) were expected to conclude that the longest expansion in U.S. economic history gave way to recession in March, 2001.

If, in fact, the expansion ended in March, it would have lasted exactly 10 years, beating the previous record expansion that lasted from February 1961 to December 1969…and far exceeding the post-World War II average of four years.

Still, either investors, fresh back from Thanksgiving, were suffering the side effects of tryptophan…or we need to seek alternate explanations for the Dow closing the session on Friday up 125 to 9959. For the week, the Dow gained 92 points. The S&P 500 ended up 13 to 1150… and our favorite tech index rose 28 to 1903, closing in the black for week 4.

The Wilshire 5000 index – the broadest measure of stocks – is down 14% for the year. Yet, according to Clifford Asness, former director of quantitative research at Goldman Sachs, even if you exclude “the 1999-2000 period of insanity, stocks are [still] approximately tied with September of 1929 for the title of the most expensive U.S. stock market ever – looking over 125+ years of data.” (More in Flotsam & Jetsam below…)

Friday, Russia delayed a decision to join the OPEC cartel in a global oil supply cut next year. Oil dropped back to $19, demonstrating Russia’s growing influence in world oil markets…watch this space.



“…Patriotism used to require self-sacrifice. What a marvelous new world! Patriotism is now as easy as spending money and buying stocks. Express your patriotism through self-indulgence…and get rich!…”

11/22/01 THANKSGIVING, ANNO 1999

“…In a country where roots meant almost nothing, where people were ready to pick up and move at the drop of a hat, where there were huge differences in what people thought and how they lived, Thanksgiving served to provide a unified, national myth…it is now part of everyone…”

11/21/01 A DEATH STRUGGLE WITH TIME Guest Essay by Peter McKillop

Think the Japanese economy is bad now? Just wait. The worst is yet to come…


“…Essentialism is a creed founded on two very important insights: That most people are blockheads most of the time. And that, if you think you are not a blockhead, you are a bigger blockhead than they are…”


“…Will lower short term interest rates do more for the world’s number one economy than they did for its runner up? A look at one of the great stories of the recent boom should have something to teach us…”

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HEADLINE, NEWS And INSIGHT : Is Entrepreneurship Enough To Break The U.S.-Japan Analogy?…The Money Supply, Your Friendly Neighborhood Bull – and You…Why The Bubble Hasn’t Even Begun To Deflate…

Bursting With Strength And Dynamism, But Where Are The Profits?  by Dr. Kurt Richebacher

“…Underlying recovery forecasts for 2002 is a deeply embedded conviction that the U.S. economy, at bottom, is bursting with economic strength and dynamism. The idea that America might follow Japan into a prolonged period of economic stagnation is emphatically discarded with the argument that the U.S. economy is in a much healthier state than Japan was at the start of the1990s…”

Are The Wildly Bullish Out Of Step With Reality? by Dr. Marc Faber

“…The perception around the world is that ‘blood in the streets’ as a result of September 11 has provided a great buying opportunity, since most crises and wars in the past have led, after an initial period of weakness, to strong rallies. But this market is in a unique – and precarious – situation in history: earnings are falling faster than share prices. Look out below!…”

Rising Money, Falling Economy by John Myers

“…Liquidity – or ‘reflation’ – seems to be the tool of choice during crisis. But, while an increase in the money supply may create short-term benefits, but it is not likely to overcome the recession or the bear market. In fact, it could stoke inflation in the years to come…”

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FLOTSAM AND JETSAM : The Bubble Has Not Popped

– from Clifford Asness, former director for quantitative research at Goldman Sachs

“…Excluding the 1999-2000 period of insanity, stocks are approximately tied with September of 1929 for the title of the most expensive U.S. stock market ever (looking over 125+ years of data).

This is robust for any reasonable definition of valuation, and is occurring at the depths of a recession that shows no sign of abating. If the recession does turn, while the short-term bubble brains will probably party, stocks have in fact already discounted a bigger recovery than is rational, and absent another bubble offer little extra upside, and long-term offer real downside as valuations are very high even for good times. This is important.

A tremendous number of investors (and worse, those who call themselves “traders”) are waiting for any sign the recession is turning, assuming that an economic turn presages a return to the halcyon days of 1999.

Well, maybe, but that’s trying to forecast a mania. If the recession soon turns to wild expansion, stock prices are still astronomical vs. similar times in history. If the recession does not turn soon, it is hard to imagine avoiding a disastrous confrontation between hope, hype, and reality.

The bullish pundit crowd today repeatedly refers to stocks as ‘beaten up,’ or when buying occurs, calls it ‘bargain hunting.’ To repeat from my introduction: The fact that stocks could have fallen so much and still be so expensive is a statement about how silly we all got in 1999-2000, and about the disingenuousness of those who didn’t sound the alarm back then. It is not a statement that stocks are cheap today. In fact, the opposite is true.

Stock market ‘pundits’ should have their mouths washed out with soap if they currently call stocks “historically undervalued” as many of them do today.

Bottom line – there might be some very good reasons for accepting lower than historical stock returns going forward, and my points above do not imply that you should sell all your stocks. Perhaps a much lower than historical risk-premium is in order, and perhaps we are there with today’s very high P/Es. But if true, it’s also true that you’re not missing much being cautious. The ultimate possible upside, if all works out perfectly, is that we do not crash, but over the long- term stocks now offer a super-low risk-premium vs. history.

This last possibility is very plausible, and shouldn’t be dismissed, but conversely, neither should the idea that people might not be rational, calmly understanding the implications of low P/Es, and might not be so ready to accept very low long-term stock returns. After all, do the events of 1999-2001 strike anyone as a group of rational investors embracing and accepting a permanently low risk premium?

If so, I missed that on ‘Power Lunch.’

If investors do decide they need more expected return from stocks, then look out below. In order to raise the risk-premium on stocks by 2% per annum going forward, today’s prices need to fall about 50% from here. If this happens, the strategists may call them cheap without me writing a nasty essay…”

Hope you’re enjoying your holiday weekend,

Addison Wiggin,

The Daily Reckoning

P.S. Mr. Asness is the founder of AQR Asset Management. His complete essay can be found on the Prudent Bear

The Daily Reckoning