Charlie Minter and Marty Weiner have steadfastly maintained that the reinflation of the past 2 1/2 years has been a classic post bubble bounce, destined to fail.
Their latest missive sums up some of the more egregious longer term problems they perceive. Its hard to find much to disagree with here:
"JANUARY 28 – We believe that the economic and financial imbalances caused by the prior bubble have not been corrected, and have actually gotten worse, thereby creating serious problems for the economy and the market.
The expanding US budget deficit is leading to calls for fiscal restraint that will probably be spelled out in the upcoming White House budget proposals.
The Fed is engaged in a round of monetary restraint that is being dismissed by most observers as harmless.
The problem for the Fed is that if the policy is harmless it isn’t working, and when it does begin to work some sectors will get hurt and cause the bursting of a number of ongoing bubbles.
American consumers have essentially stopped saving, depending on rising home prices to provide for both their spending and saving. The result is a massive, but unsustainable trade imbalance that leads to foreigners recycling billions of dollars back into the US Treasury markets every day.
The trend toward protectionism is growing as domestic political considerations in each nation begin to drive policy.
At the same time the market remains highly overvalued in terms of price to earnings ratios and other relevant metrics.
Although the vast majority remains bullish, investors should retain some perspective and remember that the crowd is always optimistic at market peaks. After all, by definition it is this very attitude that actually causes the peak.
Some past quotes that follow illustrate this point:
• July 3, 1929 – "Moody’s says returns are in line with industrial activity."
• October 16, 1929 – "Fisher sees stocks permanently high"
(The New York Times, note: Irving Fisher was the leading economist of the time)
• November 2, 1968 – "The Boom That won’t Stop" (Business Week)
• January 1, 1973 – "Not A Bear Among Them" (Barron’s annual roundtable)
• October 26, 1987 – "Why Greenspan Is Bullish" (Fortune-edition issued before Oct. 19 crash)
• September 1999 – "Dow 36,000: The Right Price For Stocks" (Atlantic Monthly)
• April 27, 2000 – "…relax, the over-all market probably won’t tank." (Business Week)
These quotes were not isolated, but were merely a small reflection of prevailing opinion at the time.
We were thinking about this when we saw the January 31, 2005 edition of Business Week featuring a prominently placed article titled "Why Greenspan Is Not Worried" and stating that…"as he swings into his final year astride the world’s economy, he appears to be as relaxed as any central banker can be."
This may very well turn out to be another historical quote that we will look back on in years to come.
In our view, the market’s 27-month upward move is a cyclical bull market within a secular bear market, and it is now giving definitive signs of running out of steam. Although an oversold rally is still possible, we believe the market is extremely risky at this time.
-Charlie Minter and Marty Weiner