Market Review: Financial Heresy
The economy dazzles, while the stock market disappoints.
All week long, a chorus line of favorable economic reports tap-danced along the newswires…But the stock market merely yawned. The Dow Jones Industrial Average ended the week at 9,810 — only 9 points higher than its closing price the prior Friday.
The Nasdaq fared somewhat better by gaining 2% to 1,971. Cisco Systems, which surged 7% on the week, powered most of the Nasdaq’s advance. The networking giant’s shares surged to their highest price in more than two years after the company announced cosmetically pleasing quarterly earnings.
The dollar also trekked higher last week, as bonds and gold both retreated to lower elevations. The dollar gained about half a percent against the euro to $1.153. Gold slipped $1.20 to $383.40 an ounce. Bond prices fell sharply all week — which caused yields to rise sharply all week — in response to signs of renewed economic vitality. The 10-year Treasury note yield jumped to 4.44%, up from 4.30% a week earlier.
The economy is recovering. (We know this is true because the government tells us so). Friday, the Labor Department informed us that the unemployment rate fell to 6% in October, as the economy added 126,000 non-farm jobs. Earlier in the week, we learned that manufacturing activity is rebounding and that productivity is surging.
But the stock market has been celebrating these phenomena for months already. So now that the recovery has actually arrived, there is little celebrating left to do. Then too, our recovering economy is not without its shortcomings. The economy may be a statistical Adonis, but it’s a real-world Elephant Man. Job growth is resuming…a little; industrial production is reviving…a little; and capacity utilization is increasing…a little. But government deficits, household indebtedness and the U.S. current account deficit are all worsening…a lot.
Just yesterday, the Federal Reserve reported that consumer credit in the U.S. rose $15.2 billion, or at a 9.7 percent annual pace, in September. That’s the biggest jump in consumer credit since January. But how trustworthy is 7% GDP growth when national indebtedness is soaring?…It’s a strange sort of prosperity that impoverishes those who are becoming “wealthier.”
“Our age in finance is an age of heresy,” says Jim Grant, editor of Grant’s Interest Rate Observer. “Budgets go unbalanced, currencies go un-collateralized, current-account deficits go uncorrected, securities go unanalyzed and bubbles go un-popped (until too late)…We see the S&P 500 or the dollar…and we imagine a kind of anvil suspended by dental floss.”
For now, however, buying overpriced American stocks is as fashionable as it has ever been. And yet, does anyone worry about whether the stocks they are buying might — one day undefined fall?
Most investors imagine that share prices are soaring undefined and will continue soaring — on the strength of an improving economy. We observe the same stock market trajectory and imagine a field mouse tossed into the air by a hungry cat. Share prices are still flying, only because the cat isn’t done playing.
“As a rule, the world is always falling apart, yet forever carrying on. Opportunity exists in tandem with clear and compelling reasons not to get out of bed in the morning,” says Jim Grant. “Absurd overvaluation duly gives way to unique under-valuation. And at extremes, experts provide cogent reasons to accept as rational the irrational prevailing prices.”
We non-experts, on the other hand, find cogent reasons to reject as irrational the prevailing prices that most investors find completely normal. We find trouble and worry as effortlessly as the father of a 16-year old daughter. We can’t see expensive as cheap, no matter how hard we try and no matter how many times Wall Street promises that “this time is different.”
We still suspect that overpriced stocks are dangerous things to own and that an over-indebted consumer and government are dangerous foundations for the world’s largest economy…And yet, the stock market moves ahead while the gold price languishes.
The Daily Reckoning
November 08-09, 2003 — Paris, France
— Daily Reckoning undefined The Book —
Real Recovery… or the Rebirth of Bull!
History shows that people who save and invest grow and prosper, the others deteriorate and collapse. “Financial Reckoning Day,” the new NATIONAL BESTSELLER by Bill Bonner and Addison Wiggin, demonstrates that current FED policies are re-inflating the stock market bubble, the consumption bubble and the housing bubble… when these bubbles burst there are going to be a lot of angry people!
“Now that I am enjoying my 60th year in Wall Street, I can say with a decent background of credibility that your fine work undefined Financial Reckoning Day — should be required reading for anyone who signs up for economics 101 undefined Congratulations!”
Arthur Gray, Jr.
Senior Managing Director
Carret & Company
THIS WEEK in THE DAILY RECKONING
PRACTICING RANDOM ACTS OF INSANITY (11/7/03)
By Bill Bonner
“…At the Daily Reckoning…we like old things. Old buildings. Old ideas. Old trees. Old rules. Old investors. The older the investor, the more confidence we have in him. He’s seen good times and bad times. He’s seen bulls and bears. Maybe the old fellow’s even heard enough absurdities to be able to recognize the voice. [We consider] the wisdom of the old…and the lessons of history…as a sort of ‘distilled information.’…”
THE EMPEROR HAS NO CLOTHES (11/6/03)
By Kurt Richebächer
“…While a few economists have been warning that this recovery’s actual pace may disappoint, our own view is that the U.S. economy’s higher growth rate in the second quarter was totally deceptive. Focusing strictly on the hard economic data, like employment, personal income, production, business fixed investment and profits, we completely fail to see any recovery at all in the United States…”
LAST MAN STANDING (11/5/03)
By Bill Bonner
“…We have come to believe that Alan Greenspan is one of the last of the New Era heroes. As long as he still stands, we think, the delusion of greater wealth through greater borrowing stands, too. But the last man standing – the only member of the ‘committee to save the world’ triumvirate still in office, the Caesar of central banking – cannot last much longer. When Greenspan’s reputation gives way…we think…so will the dollar, and the consumer…”
DEEP IN DEBT, CAUGHT IN A NET (11/4/03)
By Hans Sennholz
“…Private debtors may find it difficult to pay for bread that has been eaten. It is likely to become ever more difficult in the future as the cost of debt is likely to double and triple. In economic disarray, the Fed may have no choice but to raise its rate to market heights that enable businessmen to readjust to the judgments and wishes of the people…”
LITANY OF WOE (11/3/03)
By the Mogambo Guru
“…The poor and the old and the disabled and all those static-income people get the old baseball-bat-upside-the-head treatment, or in this case let-them-starve-to-death treatment, when it comes to inflation. History has shown that these are the people who ALWAYS feel it first, and then the misery travels up and up into the middle classes and chews their guts out awhile, and then pretty soon everybody else is looking at reduced real income. Welcome to the Wonderful World of Inflation!…”