I know Carl through a mutual friend — he’s in Washington State, and had been very successfully running several 100 million dollars, primarily in small cap companies. I’ve found his views to be informative and refreshing.
We last heard from Carl when he penned Its Dues Paying Time: American Myths Being Destroyed — And What May Happen Next.
Here’s his latest missive
So What Could Really Turn the Economy Around?
by Carl Haefling
Could it be something as simple as a huge rally in the stock market? Think about it! The stock market is a reflection of what people are feeling at one point in time. One day their feeling good, another day their feeling bad. Stocks go up and stocks go down.
Since the end of 2008 the average investor has had the @@@@ scared out of them as they have confronted one negative headline after another. The real estate market collapsed, pension plans are in trouble, city and state governments are watching their tax revenues slip, slide away and our federal budget is out of control. Corporations have reduced expenses as much as possible and are socking away cash every moment of the day. They are afraid to hire–so instead they are buying businesses, and then firing even more people as they eliminate duplication of jobs. There is little confidence anywhere that tomorrow the financial system will survive, or that our jobs (your job if your working, I’m retired), will be there when you show up for work.
The federal reserve in their response to fear has lowered interest rates about as low as they can go. They have saved the day—they prevented 30% unemployment or worse instead of 10%. But what we see is the best of we may achieve, UNLESS confidence is established somewhere in our economy. The easiest place for that to happen is in the stock market.
Stocks are trading at 20 year valuation lows. You can buy blue chips yielding 5% with Treasury yields below 1%. I see stocks trading at 3 to 8 times earnings everywhere I turn. Companies are now run as tightly as possible. Employees work day and night because they fear loosing their jobs. Stock prices reflect zero confidence and many seem to be betting that the economy will not only have a second dip into a deeper recession (most people think we never escaped the first one), but it will officially called a depression. Economic fear is rampant.
There is most likely more cash sitting on the sidelines then any time in the modern history of financial choice making. If the market begins to rally and confidence builds, stocks will skyrocket—nothing else currently offers any competition. Government bonds are yielding little, CD’s yield little, and corporate bonds yield little.
The price of gold keeps climbing–a reaction to fear. Speculators are now bidding up grains and other food items—fear about supply. Fear is everywhere. Five years ago if I had attempted to discuss anything to do with the economy in a conversation people did not want to engage. Now it is the first topic of engagement. Over the last 2 years people have sat up and taken notice about how the economy works, what makes the stock market go up and down, and the relationship of the economy to politics.
The world of politics is predictably a reflection of fear. If people are fearful all politicians who are in power should be fearful. As long as the economy is suffering it will be the political party flavor of the year. Whoever is in power, will be at risk of loosing power. Two years ago the Republicans were blamed for everything that was wrong, rightfully so in my estimation, and this year the Democrats are being blamed. Since they have done a horrendous job of educating people about the problems now faced, they deserve to be blamed. If we are fearful of not being able to pay our bills you can be certain that political parties will point that out in their advertising campaigns. I now sit with my finger on the mute button when political commercials dash across my TV screen. The fear mongering must be near an all time record.
The stock market is a very emotional critter. If it starts to climb people will jump to the conclusion that things are getting better. If confidence builds the economy will get better. If stock prices go higher business people will be less interested in buying a business and more interested in building a business—and that means job creation.
I have been investing since I was 14 years old. I’m now 62. I have rarely seen stocks as cheap as they are. All that needs to happen is for the economy to improve at a 1 to 2% rate next year and stocks will become even cheaper relative to their buy out values, unless stock prices climb. Business men with excess cash are and will be buying every business in sight that is trading at a discount to future earnings. Why shouldn’t we? You could not come close to duplicating the business of many companies trading at current market capitalizations.
So if you want the economy to improve—invest in the stock market. If you want to get beyond the political wackiness now running rampant in American politics where your vote is determined by what you fear, not what is best for the country, hope for a higher stock market. I know it sounds greedy and even irrational. But having played this game for almost 40 years, I have learned that it is fear that drives stock prices higher—fear of not participating in a rally.
Its a simple formula. Higher stock prices, leads to confidence, confidence leads to investing in jobs.
Now before you think I worship at the alter of the free market, I don’t. I have my own theories about human behavior that have helped me through this life. I do not believe that humanity will for the most part make the right choice when it comes to financial self interest. I strongly believe that an unregulated market is a precursor to economic disaster and allows the worse of what it means to be human to emerge. Stock market optimism is not the free market run wild. It is a statement of belief in the future of a regulated economic system that allows us all entry into the market place. The stock market is one of the few places that one can take paper route money and turn it into a significant amount of money. I know.
When things seem bad, it is very counter-intuitive to buy stocks. I’m a buyer.