THIS letter from one of my readers will tell you what’s wrong with the economy today. And it’ll also show why Wall Street, Washington and all of us pundits will probably be scratching our heads for a long time.
Here’s the letter, sent in response to last week’s column about the Fed’s bewilderment about finicky consumer and investor behavior.
“Dear Sir:
“I read your column regularly and today’s really riles me. In the past you warned about the stock market being wildly overpriced and apparently you were correct – I lost a lot of money, which I had invested in the market because there was no other place to park my invested savings and the gains . . . that was helping me realize the American dream.
“I am sure that most Americans shared the same experience, based on what I’ve heard from my peers and read in the papers. The dream burst with the bubble, and much of my remaining money went to pay off margin debt, leaving little with which to invest in the future market.
“Where do you suppose I’m going to get the money to spend now? I’ve learned my lessons: I’ll not borrow to invest or spend. I’ll not invest unless the market returns all my losses.
“Even if I had the confidence you say is lacking, I could not participate. The Fed can cut interest rates until doomsday and the real estate market could become deliriously attractive, but my money’s all gone, thanks to the market’s precipitous slide since the bubble burst.
RR
Sorry for your losses.
Hey, bubbles are cool – for a while. And they especially help the bubble makers on Wall Street. A lot of people got rich off your losses.
Unfortunately, the asset inflation that a bubble creates leads to the price of goods and services rising far beyond the ability of most people to pay. Remember the pictures of Germans pushing around wheelbarrows full of money? That’s where we’re headed.
Millions of people have not only lost money in the stock market, but they are also getting far less on their bank investments because of the 10 interest rate cuts this year. Where are those people going to find the money to spend?
But let’s talk about the future instead of the past.
After yesterday’s gain on Wall Street, the stock market is now in some sort of a bull market. That’s how the experts are describing the 20 percent-plus rise in equity prices since the market reopened after the Sept. 11 attacks.
I’m thrilled that the market has recovered. If it hadn’t, the American economy would be in far worse shape than it already is. Job losses would have been even more enormous. And I’m happy that Washington appears to have taken a very active role in getting the stock market higher.
While I’m happy about all that, I don’t want my readers to be fooled. I don’t want readers like the one above to get trapped again by bubble-like conditions. Right now stock prices are very overpriced. The price-to-earnings ratios of the major indices are more than double their historical levels. Put in English, the market could drop by half and stocks would still not be cheap.
This might be irrelevant if the economy were expanding enough so that corporate profits were about to boom. But that’s not happening.
According to my friends over at Economic Cycle Research Institute, the economy is still sinking. The only bright spot is the rally in stock prices – and neither ECRI nor I think that is the real McCoy.
“Stocks give you a lot of false dawns,” says Lakshman Achuthan, research director at ECRI. “An economic recovery is not imminent. Things will get worse before they get better.”
And our realism doesn’t even take into account another bad event occurring – perhaps terrorism, the start of a conflict with Iraq or perhaps simply recession-induced banking problems.
The bottom line: Investors should be very careful. The stock market is looking for a few more suckers.
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