A Bear Case Overview
by Bill Fox
VP/Investment Strategist
American First Trust Financial Services
February 24, 2003
There is strong evidence that America's
economic trends and outlook may be far more serious than has been generally reported in
the national media. Prudent investors need to be aware of the full spectrum of bear
casearguments, even if it is hard to prove the validity of certain trends or understand
when or where they might reacha "tipping point" where they could fully impact
the economy and market. All of that having been said, this report explains why I think it
is likely the market will continue to significantly decline over the next couple of years
or longer.
a) Numerous key macroeconomic indicators look
bad with no near term recovery in sight:
Debt is at historic highs and keeps growing
while credit quality is deteriorating: According to Doug Noland, author of
"Credit Bubble Bulletin," Total indebtedness (corporate, personal, and
government) is currently about three times GDP compared to 2.6 times during the Great
Depression. Corporate and individual bankruptcies are at record highs. Consumer spending,
which comprises about 75% of GDP, now appears to be slowing down as a result of higher
debt levels eating into discretionary funds, while credit creation by Government Supported
Enterprises such as Fannie Mae, GNMA, and Freddie Mac outside the banking system continues
to grow by as much as 20% a year. The national strategy of outsourcing manufacturing and
emphasizing services through a very liberal approach to "free trade" has
distorted our economy in both directions. The mortgage refinance boom has been an
important element to provide consumers with liquidity and keep the economy going, but this
can not last forever. (cf. Noland interview at http://www.financialsense.com/transcriptions/Noland2003.htm)..
The economic activity pulse is weak: Consumer sentiment is low, production is in a slump, and hiring is at its worst point in twenty five years. The U.S. personal savings rate has dropped to nearly zero. cf. Jim Puplava "WhatAils Our Economy,"
http://www.financialsense.com/Market/archive/2003/0129.htm
The balance of trade deficit is over the 5%
of GDP "danger zone" and keeps growing: The U.S. has gone from being the net creditor
of the world to the world's greatest debtor nation. In the recent past, foreigners have
used their excess dollars generated by the balance of trade deficits to buy around 15% of
America's stocks and about 40% of its Treasuries. America consumes 6% of the world's
savings to finance its deficit. http://www.econ.umn.edu/~cswan/F02/Class/Oct1/dollar.html
Dollar slide trend shows no sign of
reversing. The dollar has lost
about 20% of its value against the Euro in the last year, and looks likely to continue
sliding much further. Normally a dollar slide could be simply a cyclic corrective process
that will make exports cheaper and imports more expensive, decreasing imports and
increasing exports to bring things back in balance. Bears fear that something more ominous
has taken place; that is, America has exported so many jobs and facilities overseas that
it has seriously hollowed out its manufacturing base and does not offer enough quality
products to eliminate its trade deficit problem even at lower prices. In classical
economics, over the long run, a strengthening currency is a good sign that a country is
increasing its manufacturing base, productivity, innovativeness, standard of living, and
quality of its products (from this viewpoint, a unit of currency is roughly like holding a
share of stock in an entire country). Countries such as Argentina that went from being a
first world country at the beginning of the 20th century to a third world country by its
end suffer from continuing currency slide problems.
Earnings growth for American companies is
still lackluster. Analysts
continue (as they have since 2000) to revise earnings growth estimates downward from
initial rosy projections such as a 20% growth rate looking forward a year to well below 8%
as the projected time periods arrive. High tech companies complain again that inventory
channels are backing up.
The global economy is still stalled out with no near term turn around in sight. There is no major advanced industrial nation around to act as an "global economic engine." Japan and Europe are both in recession. If the Japanese economy becomes more distressed and Japanese start pulling investment funds out of the U.S, that could hurt the dollar and U.S. markets further. China has the world's fastest growing major economy with a large balance of trade and currency surplus, and the national media usually portrays this as wonderful news. But there is an important dark side to the "free trade" miracle of China that American business magazines and business school professors rarely mention in their discussions about free trade. (On the benefits side, the basic idea is that if all nations focus on their comparative advantage through free trade, a global version of the division of labor concept will supposedly make nations wealthier, and wealthier peoples tend to be happier and friendlier to each other). The Chinese work force is effectively engaged in a labor price war with American, Japanese, and European workers, working long hours for almost nothing to gain global manufacturing market share. India is trying to play the same game as China but is not nearly as significant. In one sense, this really is a "war," that is, rather than operate in muddy trenches while sacrificing lives, the contestants work grueling hours under substandard conditions with low paychecks to achieve the same ultimate goal as in most shooting wars, that is, gain market share or command of natural resources that translate into enhanced national economic, military, and political power. Please remember that a manufacturing base is part of the total power equation, which is why Sherman's troops in the Civil War and Allied bombers in World War II leveled every manufacturing facility they could strike at. If being an American citizen is comparable to belonging to an American "union;" Chinese workers are analogous to "strikebreakers" in the global economy. As a point of fact, the Chinese "miracle" has had a militaristic/nationalistic struggle tinge to it, to the extent that the Chinese government has made it a practice to place active duty Red Chinese Army officers in charge of newly privatized industries. A Chinese firm controls both ends of the Panama canal, and American "free trade" goods have gone into Chinese ICBMs that can now incinerate our major cities. (c.f. the video interview of global investment gurus Jim Rogers, Marc Faber, and Daniel Yergin which validates many of the key points in this Bear Case Overview, and includes an extensive, albeit "gushing" discussion of China. Marc Faber claims the U.S. dollar has to drop 80% before the U.S. will become competitive with the Chinese RMB currency. Click to the "Riverside Conversations" interview via: http://info.vpro.nl/info/tegenlicht/index.shtml?7738514+7738518+7738520+10443446#loadvariables.
Although this has a Dutch language
introduction, the interviewees speak in English.)
The overall U.S. stock market valuation remains high, Despite the S&P's decline by nearly half since March 2000, according to State Street Global Advisor strategist Diane Garnick, the S&P 500 still trades at 30.4 times trailing GAAP earnings, well above its 53-year average of 16.2. Most prolonged bull markets have been followed by bear markets that are proportional to them. From 1982 to 2000 the U.S. had the longest secular bull market in its history, capped by the greatest mania in history from 1995 to 2000. We are only two and a half years on the backside of all this. Please note the PowerPoint presentations "Buy & Hold?" and "Why the Bear Market Is Not Over" at: http://www.prudentbear.com/bc_library_bear_case_home.html. Also, Bill Gross, head strategist of PIMCO Funds, thinks the Dow must drop below 5000 before it is positioned to offer reasonable risk-adjusted returns. (c.f. "Dow 5000" at: http://www.pimcofunds.com/PIMCO?op=www&mainsection=bond_center&subsection
=commentary&request=investment_outlook&content_id=38839).
The stock market decline has hurt business
and government: A further
downward market spiral could threaten to increase the "negative wealth effect"
in which eroding portfolio values reduce consumer confidence and consumer spending. The
"negative wealth effect" is already impacting corporations, for example IBM now
has to devote 20% of its cash flow for the last year to bringing its pension plan back up
(cf. Paul Kasriel: http://www.ntrs.com/library/econ_research/weekly/us/021021.html.) Lack of capital gains tax revenue and
recession is now causing about half the states in America to talk about raising taxes: http://www.nytimes.com/2003/02/14/national/14TAX.html . This could threaten to choke off business
profits and capital investment required to create jobs and sustain economic recovery. .
Interest rates are at historic lows and seem to have no way to go but back up. So far dramatic drops in interest rates by the Fed have been "pushing on a string" to revive the economy. The problem is that if interest rates start moving back up, rising debt service could help push America into a liquidity trap. (Fed Chairman Alan Greenspan voiced concerns about reaching a "point of no return" in his recent Congressional testimony, discussed at: http://cbs.marketwatch.com/news/story.asp?guid={14E24E25-8F5F-4DB3-A428-FC27D41E4A36}
&siteid=mktw&dist=&archive=true
America's money supply is growing at
torrid pace threatening to ignite serious inflation. According to Jim Puplava (www.financialsense.com), the money supply grew at 16% in the 4th
quarter of 2002. Its growth has averaged at least two to three times the officially
reported inflation rate of 2-3% over the last five years. Historically, inflation runs
parallel to money supply growth. From 1995 to 2000 the U.S. was able to ramp up the money
supply and run balance of trade deficits and get away with it, largely because foreigners
were willing to sop up excess dollars as a global reserve currency or invest their dollars
in America's roaring stock market. Now the global demand for dollars is holding constant
or even reversing, and meanwhile the money pump keeps going. Russians have started dumping
dollars for Euros, and many Islamic countries plan to dump dollars for a revival of the
ancient Arab gold coin the Dinar as a reserve currency. Dollars washing back at the U.S.
would encourage inflation. Critics voice concern that by ramping up the money supply to
stave off the impact of the Asian crisis beginning in late 1997, followed by similar
actions regarding the Russian default and LTCM crisis in 1998, followed by the Y2K
concerns of 1999, followed by efforts to stave off a U.S. market and economic collapse
since 2000, the Fed has created additional bubbles in the economy besides the stock market
bubble, such as bubbles in consumer finance, the bond market, and the mortgage
finance/real estate market.
Risks of "shocks" is high,
particularly related to oil, terrorism, and financial system meltdown. Oil shocks helped to induce the stagflation of
the 1970's. Marshall Auerbach explains how we might see higher overall oil prices even if
the U.S. quickly occupies Iraqi and its oil fields at: http://www.prudentbear.com/internationalperspective.asp.
Oil prices are sensitive to relatively small supply disruptions, and last year the Alaska
pipeline was shut down for two days to fix damage from a hunter's rounds. Al Qaeda has
targeted the global oil industry for sabotage, as reflected by a recent attempt to attack
the world's largest refinery in Saudi Arabia. Another point on oil: global demand is
escalating, particularly from China, while North America and other areas outside of the
Middle East face a production decline curve. "War for oil" will probably become
an increasingly familiar theme in the 21st century. Check out Jim Puplava's
"Powershift" series on oil, politics, and war at: http://www.financialsense.com/series3/part1.htm.
+Commentary&content_idx=14623, in regard to the thirty "blue chip"
companies that make up the Dow Jones industrial average, "The Dow’s net
tangible assets are presently leveraged at a 6/1 ratio- a capital structure bearing far
greater resemblance to a hedge fund than a prudently financed corporation"
b) Policies on a government, corporate, Wall
Street, and national media level may still be adding fuel to the fire, driving us deeper
into crisis:
Symptom suppression and feedback distortion: Critics charge that in the late 1990s the Fed
and U.S. Treasury intervened to artificially build a strong dollar and suppress the price
of gold and silver to mask underlying economic problems and disguise inflation, and now we
are beginning to experience pent up whip-lash as the smoke-and-mirrors act begins to
unwind. Among other things, an artificially strong dollar increased demand for the exports
of third world countries struggling to pay their debts to major U.S. banks. As part of
this pattern, the U.S. bailed out Mexico in the mid-1990's following the Peso crisis. An
artificially strong dollar and artificially low inflation rates also helped fuel the
greatest speculative stock market in history and make money for major Wall Street firms.
Misleading inflation reports: The topic of inflation can be complicated by
the process of netting out pockets of deflation resulting from cheap imports from China
and lower cost chips from the microcomputer chip revolution with pockets of inflation
elsewhere, such as in basic commodities, consumer durables, and asset prices (stocks and
real estate). But step back and look at the big picture, and Jim Rogers sees plenty of
snake oil in the way "inflation" is being presented overall to Americans. Go to
his archives at www.jimrogers.com, click on "articles," scroll down to
"22 March 2002 They Are Lying To Us Again." (This was published in a summer 2002
issue of Worth Magazine).
How policymakers may have put the gold and
silver barometer of inflation to sleep for a while: John Embry, chairman of investment
committee for the Royal Bank of Canada, has accused the Fed and U.S. Treasury of
artificially suppressing the price of gold through coordinated central bank sales. You can
find his internal report that got leaked to the public by clicking on 'The Embry
Report" archived at Chris Temple's National Investor "Other Experts" web
site at: http://www.nationalinvestor.com/experts.htm
Manipulation of commodities markets and general stock market: Jim Puplava describes how "gearing" may be behind "flag pole" rallies that have periodically bolstered the markets:
http://www.financialsense.com/Market/archive/shortsilver_1.htm According to Puplava, the gold and silver markets are among the most heavily "geared" markets of all. He claims there are about three times as many short positions in derivative contracts on gold and silver as there is physical gold and silver to cover. Most long contracts get rolled over rather than delivered on the commodity exchanges. If the longs all demanded delivery, some financial observers think that this could possibly cause panic and possibly bring down some exchanges...and maybe even J.P. Morgan Chase, which some sources believe is heavily exposed in this area. Bill Murphy, head of the Gold Anti Trust Action Committee, provides important insights in his interview with Jim Puplava at:
http://www.financialsense.com/transcriptions/Murphy.htm.
...a quick editorial remark...when the price of gold steadily declined under
the pressure of central bank sales and other influences from 1996 to 1999, it threatened
to put half of the world's gold mining companies out of business. Back in 1996, many
investors responded to Alan Greenspan's comment about "irrational exuberance"
regarding overall stock market valuation (the Dow then was at 6500) by seeking to
diversify into gold as a safe haven, only to see it collapse underneath them as internet
stocks without earnings kept moving up. "Prudence" was punished and recklessness
was rewarded. This is a theme I will return to later in my comments in the
"grid-lock" section about social values getting turned on their head.
Ironically, back in 1966, during his more Bohemian days as a member of Ayn Rand's inner
circle, Dr. Alan Greenspan wrote a paper titled "Gold and Economic Freedom" (cf.
http://www.321gold.com/editorials/bjm/greenspan_gold.html) in which he stated towards the last two
paragraphs: "In the absence of the gold standard, there is no way to protect savings
from confiscation through inflation. There is no safe store of value...The financial
policy of the welfare state requires that there be no way for the owners of wealth to
protect themselves. This is the shabby secret of the welfare statists' tirades against
gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in
the way of this insidious process. It stands as a protector of property rights. If one
grasps this, one has no difficulty in understanding the statists' antagonism toward the
gold standard."
Could a headstrong guns and butter policy
drive us to double digit inflation? According to my introductory economics textbook
by MIT professor Paul Samuelson, societies can afford either guns or butter but not both.
Go for both, and financially beleaguered governments eventually end up running the
printing presses to make ends meet --and one gets serious inflation. (For example, in the
1970's Vietnam-related spending plus the Great Society Programs plus oil shocks helped to
give us stagnation and double digit inflation that killed the stock market).
Corporations need to rebuild credibility: The article "Illusory Profits Cloud USA
Inc" claims that profit growth may have been overstated by American S & P 500
companies by about 150% from 1995 to 2000. http://news.bbc.co.uk/1/hi/business/2075864.stm Warren Buffet stated in a November 1999
Fortune article that on average companies in the 1990's actually had below average profits
and earnings growth, particularly compared to the 1950's. In other words, deceit was
practiced far more widely than by just Arthur Anderson.
The national media has been a big part of the problem: Please note the Washington Post expose: "The Media Fueled New Economy and Vice Versa" at http://www.washingtonpost.com/ac2/wp-dyn?pagename =article&node=&contentId=A40947-2002Nov11¬Found=true, read about Maria "Money Honey" Bartiromo and other cheerleaders in "On CNBC, Boosters for the Boom" at: http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node
=&contentId=A41103-2002Nov11¬Found=true , and lastly, this article explains why the media tends to deny the reality of a bearish economy: "Why James Grant Will Never Be Louis Rukeyser" at:p;s1=blk&tp=ad_topright_bbco&T=markets_fgcgi_content99.ht&s2=ad_
right1_bbco&bt=ad_bottom_bbco&s=APb5APBTaV2h5IEph"
><
backwards. running now is ?movie? 1990?s the like feels it and circles, vicious into
reversed have to seem in expansion market economic led that circles? virtuous>
Worse than Japan? Contrary to the current Wall Street consensus that America is different, Doug Noland in "Pondering Post Bubble America" argues that the U.S. is actually worse off than Japan and may emulate the tragedy of Argentina at: http://64.29.208.119/archive_comm_article.asp?category=Credit+Bubble+Bulletin&content_
idx=19973.
Japan entered its decade of economic malaise as a net surplus, net creditor country, which
has given it a cushion that the U.S. now lacks as a net debtor country with record trade
deficits.
Are we overly "grid-locked" when it
comes to handling the REAL problems? ( Are policymakers so encumbered with "hidden
agendas", conflicts of interests, "super ordinate goals," and
misperceptions that they are unlikely to adequately address and help "fix" our
economic problems any time soon?)
Lew Rockwell argues that America's policy
makers are too steeped in inappropriate Keynesian economic ideology to adequately diagnose
and cure our economic ills (c.f. "George W. Keynes" and "Keynes Rules From
the Grave" in his archives at: http://www.lewrockwell.com/rockwell/rockwell-arch.html.) Rockwell's "Austrian" school of
economics (www.mises.org), whose proponent Friedrich von Hayek has been
idolized by Forbes magazine, emphasizes saving, prudent investment, cost control, and free
markets as the true path for viable economic growth. Keynesian economics emphasizes
utilizing credit expansion and deficit government spending to stimulate overall demand.
This can be great for pork barrel politicians and big money center bankers looking to
boost loan volume, but tough on Joe Average American when he finds out that he is tapped
out on unsecured debt while overextended business owners have to cut back on jobs. Lets
rewind the tape here for a moment and recollect that "Deficit spending
is simply a scheme for the confiscation of wealth" according to Dr. Alan Greenspan
(as mentioned elsewhere in this report) performed by people who might hold the "shabby secret of the welfare
statist's tirade against gold." .
Forbes business writer and CBS Market Watch
commentator Peter Brimelow argues that most Americans are ideologically blind to trends
that are permanently altering the country's social fabric, undermining core values,
increasing welfare and other "drag" costs to the economy while decreasing its
overall level of social and economic efficiency (cf. reviews of his book "Alien
Nation" at his site www.vdare.com such as http://www.vdare.com/pb/anation_review_05.htm)
From the left, Gore Vidal claims that policy
makers are showing some serious inconsistencies in terms of their obligation to support
and defend the U.S. Constitution: "The Enemy Within" at http://www.whatreallyhappened.com/enemywithin.html, and "The Last Defender of the American
Republic?" at: http://www.laweekly.com/ink/02/33/features-cooper.php. (Somewhat paradoxically, there are
commentators on the right such as Pat Buchanan and Ron Paul who have been making similar
observations as Gore Vidal).
Since 1998, the U.S. has lost 13% of its
manufacturing jobs, and NAFTA has exacerbated our trade deficits. Go to www.AFL-CIO.org, click on "manufacturing," scroll
down and click on "IUC Report: The Crisis in Manufacturing." Complete with
narrative, charts, and graphs, this paper talks about the results of policymakers who may
be so steeped in internationalist, free trade ideology (or just plain short-sighted greed)
that they have forgotten that charity begins at home while they proceed to export
manufacturing infrastructure, trade secrets, and skilled, tax-paying jobs overseas to
countries that engage in dumping, gross worker exploitation, vicious human rights
violations, and use of our technology for hostile purposes. Some "free trade"
partners even threaten to become our military enemies, such as China, which makes angry
noises at the U.S. over Taiwan and influences North Korea behind the scenes. Much of
Saddam Hussein's chemical warfare arsenal (which he freely used in the Iran-Iraq War and
is probably hiding right now), was supplied to him by American companies. As another
paradox, it was a Democratic President and supposedly ardent friend of organized labor in
America, Bill Clinton, who helped push through the North American Free Trade Agreement
that organized labor decries as a major policy blunder.
Let me summarize here... there are dozens of sources I could point to
in this area, but what they all have in common is the following theme: sure, there have
been manias and market booms and busts before; there were stock market booms surrounding
canals, telegraphs, railroads, and electrification in the 1800s and the automobile and
radio and aviation in the early twentieth century. In their day, these innovations seemed
every bit as exciting and revolutionary to prior generations as the microchip and internet
revolutions have been to our generation. However, the mania from 1995-2000 has dwarfed all
prior manias hands down. The accounting scandals have dwarfed all previous periods of mass
dishonesty. Because of the sheer scale and magnitude, a lot of social critics are
wondering if there is something much deeper going on, that is, a society that has become
too cacophonous in terms of its core values, and where it does show commonality in values,
it appears to be deeply infected with immediate gratification and a socially irresponsible
"devil take the hind most" and a "wise guy" approach to life. (Even
among some of the sources I like, such as Jim Rogers and Peter Brimelow, they are at
loggerheads on whether an open borders policy is an economic and social blessing or an
economic and social disaster). Many bears believe America is: a) economically,
ideologically, and ethically too deeply distorted to get back on the road to true
prosperity any time soon and b) there is probably a lot more negative news and
"settling of accounts" left ahead before things get sorted out and get put back
on track.
No evidence yet that we AREN"T headed
towards costly boondoggles and "imperial overstretch" For thousands of years Central Asia has been a
graveyard for overconfident empires much like Russia was for Hitler and Napoleon. Empires
that wage costly, prolonged military ventures without keeping their manufacturing and
general economic base healthy have eventually imploded, such as the Spanish and British
Empires. Larry Lindsay, President Bush's former economic advisor, lowballed an estimate of
$200 billion to go to war with Iraq. The longer term tab for "nation rebuilding"
and prolonged occupation for more than five years could exceed a trillion dollars. And of
course we still have troops in Germany and the Balkans and South Korea other exotic places
around the globe.
Just as in the case of buying a risky stock
or mutual fund, when it comes to foreign policy, it can be a good idea to mentally model
in advance the possible outcomes and envision double up, stop loss, or exit strategy
points. As the Bush administration and media talk about going into Iraq and taking a hard
line towards other countries such as Iran and North Korea, the report cards coming out of
Afghanistan are hardly "straight A". (For example, numerous accidental bombings
of civilians --to include a wedding, U.S. troops abandoning posts along the Pakistani
border, increasing tempo of insurgent operations; c.f.: http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2003/02/10/MN67257.DTL; also "Details of U.S. Victory are a
Little Premature": http://www.thetruthseeker.co.uk/article.asp?ID=410
Are we up against a hydra? Let me share a joke that circulated in Germany
in the early 1980's when Israel invaded southern Lebanon with massive tank and aerial
support. The attack was commanded by Ariel Sharon, Israel's current Prime Minister,
nicknamed "the Bulldozer." The joke was that Adolf Hitler came back to earth
from Hell to look around a bit. When he saw that is now the Germans who are making money
and the Jews who were waging Blitzkrieg warfare, he couldn't deal with it and decided to
go back down to Hell.
As you may recall, the Israeli blitzkrieg
failed miserably in its principal objective to root out the PLO; ironically, the PLO is
politically stronger and its headquarters is now physically located closer to Jerusalem.
Hezbollah, which is funded by Iran and is considered by some to be as dangerous as Al
Qaeda, developed the insurgent infrastructure to help eject the Israelis out of Lebanon,
and Ariel Sharon has been tainted in the international community by associations with the
Shatilla massacre. To make a reference from Greek mythology, the Israelis tried to slice
off one hydra head and got three coming back at them.
America's quick victory against Iraqi troops
in the Kuwaiti desert in the Persian Gulf War was a poster boy of blitzkrieg warfare,
complete with massive air support and a huge left hook envelopment of Iraqi forces by
massed tank formations. But will the same cookie cutter approach work in other situations?
Will "blitzkrieging" and "bulldozing" our way through the urban areas
of Islamic countries solve our problems, or will we end up creating more hydra heads like
the Israelis did in southern Lebanon?
Imagine hearing this from a Texas Republican: Congressman Ron Paul, thinks the Bush
Administration has become an overly adventuristic bull in an international diplomatic
china shop and its policy is creating more problems than it is solving; c.f. "The
Heroic Ron Paul" at: http://www.lewrockwell.com/paul/paul-arch.html.
Before we try complex
"nation-building" in Iraq, could our military first try to get it right in
preparing for chemical warfare? One of America's most heavily decorated
veterans and well-regarded military authors, Col David Hackworth, U.S. Army(Ret) thinks
the U.S. military has not adequately thought through likely chemical warfare scenarios in
preparation for invading Iraq: c.f. http://www.sftt.org/dwa/2003/2/12/da.html. For starters, up until an outsider recently
sent in an e-mail, the Pentagon was apparently unaware that the water inside its mobile
water tanks ("water buffalos") used by troops to refill their canteens could be
easily contaminated by chemical agents. Everything might have been fine until our troops
had to start refilling their canteens in the desert. Hackworth claims that the military
has failed to conduct prolonged large unit training exercises in a nonlethal chemical
environment to adequately test its gear and chemical battlefield doctrine. He also claims
that nearly 200,000 Gulf War veterans continue to complain of ailments that may be linked
to indirect chemical contamination during the Persian Gulf War. (Please remember elsewhere
in this report I mentioned that American companies once "free-traded" chemical
agents to the Iraqis).
d) My own opinion:
Jim Puplava (www.financialsense.com) points out how "things"
(commodities and precious metals) rather than paper claims (stocks in general) have been
in a "stealth" bull market for the last two years, signaling current rising
prices and inflation concerns. If we head towards a stagflatonary scenario similar to the
late 1970's, these areas should continue to do well while the overall market may
experience a steady slide until it ultimately reaches a historically low P/E and high
dividend yield. In 1982 the average P/E was around 7 and the dividend yield on many
"blue chip" stocks was around 6%.
The Wall Street consensus for the year ahead
has been mildly bullish, and I think the odds are that it will be wrong again. The bear
arguments I have outlined have not yet been openly absorbed by Wall Street strategists or
the general public. My guess is that that full absorption will not be achieved until about
two to three years from now. In the 1970's about 25% of American households were into
stocks, at the bull market peak by 2000 it got up to 75%. Mutual fund withdrawals have
remained relatively subdued despite the market drop. One hellish scenario I haven't even
addressed yet is if the public starts to panic and pull their money out of mutual funds
all at once. In the aforementioned video interview with Jim Rogers and Marc Faber, Faber
claims that Japan's malaise for over a decade has cost Japanese mutual fund companies over
90% of their assets.
A couple of years from now, if the public
mood starts to really get ugly, paradoxically the market may form its first major bottom
and then it may time to start increasing ones exposure to on the long side to general
equities. Until then, I would look at sitting on the side lines or leaning towards certain
foreign bond funds, short funds, precious metals, commodities or "hard
assets"-related funds.
America still has ample natural resources and
in terms of demographics the equivalent of Germany, Britain, France, and Scandinavia
inside its borders, so I do not see us necessarily turning into Argentina or Brazil within
the next five to ten years. Once the bad debts get liquidated and the middle class gets
unconfused (perhaps after a period of crisis and cynicism to finally figure it out how
badly they have been misled), I think we will finally have the basis for a viable rebound.
I am reminded of the observation of Friedrich Nietzsche that in order for civilizations to
function, they start promoting "white lies" in their public discourse to avoid
social conflict. The problem is that generation after generation, the white lies get built
on top of each other (and the new generations take too much at face value) to the point
that the value systems (and even religious theologies) become inverted and dysfunctional
and removed from basic realities of life. Anyone who has watched the movie Gangs of New
York knows that American leaders have been making extra efforts to "spin"
and smooth over messy problems ever since the War Between the States. But sometimes the
smooth talk gets too rich, and "putting your best foot forward" for corporations
becomes outright fraud. "Free trade", carried to excess (depending on what kinds
of concessions are made), can bleed away a country's competitive advantages and wealth and
turn into outright "treason." A lot of this still needs to be uncovered and
sorted out. Among other things, we need to motivate American business leaders to get a bit
more interested in generating business income to benefit American workers rather than
sweat shop operations run by active duty military officers of the Red Chinese Army.
Noting the jagged saw tooth downward chart
pattern of the S& P 500 index (on a five year chart), some of my more adventuresome
clients have tried to play the cyclic bull rallies within the context of the longer term
secular bear market. Just remember if you want to be a trader to get out a few months
after the market makes its most recent deep dip to avoid getting swept along in the next
possible leg down.
Two outstanding sources for an in-depth
explanation of the bear arguments, complete with charts, graphs, supporting data, and easy
to read narrative are:
Jim Puplava's "Perfect Storm" and
"Storm Watch" series. Although written from 2000-2002, the Perfect
Storm Series has been on target so far in predicting the course of the market. It provides
good background on how we got into our present state of woes: http://www.financialsense.com/series2/perspectives2.htm
His Storm Watch updates bring you up to date
and are also very good. Archived at: http://www.financialsense.com/stormwatch/oldupdates/main.htm
David Tice's series of articles for "On
Wall Street" magazine archived
at: http://www.prudentbear.com/bc_library_RR_onwallstreet.asp. David Tice is manager of the Prudent Bear
fund whose home page is www.prudentbear.com. As mentioned earlier, it is well worth
scrolling through his PowerPoint presentations at: http://www.prudentbear.com/bc_library_bear_case_home.html.
I am interested in your comments and
feedback.
Best regards,
Bill Fox
VP/Investment Strategist
American First Trust Financial Services
Registered Rep., Sammons Securities Co., LLC
PO Box 820669, Vancouver, WA 98682
tel: 360-882-5369, toll free: 888-241-2813
DISCLAIMER: Not all views referenced
in this report are necessarily those of the author, American First Trust Financial
Services, or Sammons Securities Co., LLC. Nor does this report necessarily reflect the
views of the last two places where the author previously worked: Paulson Investment
Company and Morgan Stanley in Portland, Oregon. Sometimes the author provides opposing
viewpoints to give the reader a greater sense of perspective. This report is intended for
informational purposes only and should not be considered specific investment advice. It is
not intended to be a recommendation to buy or sell securities in the absence of specific
knowledge regarding the financial situation and suitability requirements a reader. The
information has been obtained from sources believed to be reliable but whose accuracy can
not be guaranteed. Past performance is no guarantee of future results. There can be no
guarantee that the market will perform according to the author's opinion or that his
investment ideas will be effective under all market conditions. His opinion can change
without notice. Investment returns will fluctuate and the value of an investor's shares
may be worth more or less than the original cost when redeemed. Market data presented here
is subject to change daily. Both the author and his clients are already invested in the
categories mentioned in the "In my opinion" section. Sammons Securities Co., LLC
is a member of the National Association of Securities Dealers (NASD) and the Securities
Investor Protection Corporation (SIPC).
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