Has the Wall Street Journal Lost its Mind?
Stock-Markets / Stock Markets 2010 Apr 07, 2010 - 04:42 PM GMTBy: Dr_Jeff_Lewis
In a recent piece from the Wall Street Journal titled “Stocks' Parallel Universe,” columnist Richard Barley paints a relatively rosy picture for an otherwise unexciting stock market. Using recent data and historical examples, Barley attempts to solidify the “soaring” (which is 5.2% year to date) returns of the stock market as a function of an improving economy and stock market. In our humble opinion, his analysis couldn't be further from the truth.
Year to Date Returns
Perhaps the most interesting part of the piece is how much Barley is impressed of the 5.2% returns of the S&P500 in the first three months of the year, parroting the notion that 5.2% in just three months is a record setting trend. Of course, 20.8% annualized returns are nothing to balk at and are actually quite healthy, but three months of data does little to predict a future trend. Just one quarter before the S&P500 fell off a cliff before the financial crisis and subsequent stock market meltdown, the S&P500 added 6% in one quarter. Of course, we all know the rest of the story—stocks are still off 20% from those levels.
The Mechanics of Capital
Barley continues in his column with the claim that non-financial companies are flush with cash, as they have removed themselves from much of their unproductive human capital. Unfortunately for this analysis is the fact that today's jobless numbers are an even further strain on the economy, costing taxpayers and ultimately consumers and other businesses billions of dollars in additional taxation and public debt.
Barley also makes the case that savings from a purge of the unproductive will be directly reinvested into the respective business, but then contradicts the statement after acknowledging that the merger and acquisition scene is still silent. If companies were so willing to pay 2008 prices for competitors, why aren't they willing to pay 2010's bear market prices?
With companies unwilling to buy their competition, isn't that an even better indication there are no good investments to be found? Corporations have greater interest in buying their competitors than do individual investors. Corporations can gain market share and revenue by purchasing a rival entity, while individual investors just have the potential earnings and capital appreciation. So why aren't the companies buying?
Discounted Prices
Possibly one of the most solid of Barley's arguments was the fact that stock prices are currently valued directly in line with their historical averages, dating all the way back to the 1870s. However, we also have to consider that today's economy is anything but average. Comparing today's stock prices to that of the industrial revolution, war production booms, and times when the society wasn't plagued with debt is dangerous at best. We live in very trying times, and with an economy that is largely fueled by the realization and destruction of wealth (consumption), it would be foolish to draw such comparisons to a previously productive economy.
Barley then compares the stock market to the bond market, which is another questionable comparison. The bond market is perhaps the most inflated of them all, in part due to a trillion dollar program by the Federal Reserve to drive down the price of money. Astute investors know it’s only a matter of time before bonds lose their value, interest rates rise, and the booming economy again cripples to a halt.
Today's explosion in the stock market is nothing but a paper game. Cheap credit is fueling investments with poor returns, inverting the capital structure and laying the groundwork for another asset bubble. Of course, this newest bubble will be just like the last, ending the second the Federal Reserve loses its stranglehold on the price of money. Don't be fooled. Today's bond prices have little to do with the underlying business and everything to do with the people backing the system: Congress's power to tax and the Federal Reserve's printing press.
Monetary Policy
Again reversing his point that the underlying economy is built on sound investments, Barley states that the economy could again enter a tailspin should the Federal Reserve tighten monetary policy via its target interest rates. This argument is also filled with financial fallacy, as the Federal Reserve cannot remove money from the banking system via interest rates; it can only restrict future growth. This is, of course, after the organization added $1.25 trillion to the system, lubricating the engine of inflation.
Wrapping Up the Debate
The author again ends on a high note, articulating that the stock market should prove strong unless a sudden change in climate strikes investors. Of course, this should throw warning signs as bright as fireworks, as anyone knows the game can change on at the drop of a hat.
With the Federal Reserve ending its quantitative easing program, corporations still lacking room for growth, and the jobless unable to spend money in our consumption economy, the best investment for these trying times is nothing but true wealth: silver and gold. Often avoided by the mainstream propaganda arms of the Federal Government and Wall Street, no investment has protected and grown investors’ wealth with as much stability as silver and gold.
By Dr. Jeff Lewis
Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com
Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
