In economics, as in
many other “soft sciences,” facts are often overshadowed by
theories. The dominant economic theory currently in vogue is that the massive
government stimuli orchestrated by the Bush and Obama administrations would
produce an economic recovery by the end of this year.
Thus, it is no
surprise that media cheerleaders have seized on the recent steep, but thinly
traded, rally to find the facts that appear to fit the theory. From where do
these talking heads draw this conclusion?
In recent months, we
have allowed for the probability that a bear market rally, driven by
seemingly low price-earnings multiples, would take hold for the first half of
2009. Months ago, I had stated that the rally would reasonably last into the
summer and that the Dow could reach 10,000 before the next major downturn
In the depths of the
stock market crash of 2008/9, buying opportunities certainly arose. By March
2009, stock markets appeared to have been oversold. Certainly price-earnings
multiples on many stocks had been compressed to generational lows. Ignoring
the fact that these low multiples were underpinned by pre-recession earnings
data, investors declared a bottom.
However, as is the tendency
with sudden declines, bargain hunters entered the market too aggressively. On
relatively thin trading levels, this led to a steep rise in stock prices
which, in turn, drew in investors who feared being left behind. A steep bear
market rally was in place. This mirrored the pattern of the Great Depression,
when the initial crash was followed by a 68 percent rally in 1930. But after
that rally had fizzled, stocks then declined by an astounding 86 percent over
the two subsequent years.
While we urged caution
in this rally by highlighting, among other indicators, a 38 percent decline
in corporate earnings, speculative traders made enormous profits as stock
markets rose by over 40 percent. But as dismal economic statistics continue
to rain on everyone's parade, the cheers are beginning to subside. Last week,
the unemployment figures were released and the Dow slid by some 223 points.
speculative traders are preparing for a drop. The new-found concern is due to
three basic indicators:
First, the U.S.
dollar, linchpin of all American (and most global) transactions, is appearing
increasingly weak. 10-year Treasury yields, as low as 2.1 percent post-crash,
and continuing to stay below 4 percent, indicate a persistent bubble in
“safe” U.S. bonds and cash.
fiscal situation of the United States government doesn't warrant the
confidence placed in its debt. The U.S. will soon have to choose between
outright default and hyperinflation. The BRIC countries are already preparing
themselves for the latter eventuality by seeking alternatives to the dollar.
Second, there has
been a realization that the low multiples of March 2009 were largely
illusory. With corporate earnings falling faster than share prices,
price-earnings ratios are still high and historically expensive for an
economy in an official recession.
figures have been so bleak that the financial spin-doctors have been
suggesting a “jobless recovery”! Reading between the lines, that
means even the most deluded forecasters cannot find an argument for hiring to
Despite the enormous
stimulus packages, there are now roughly 15 million Americans unemployed, the
highest total for some 26 years. Worse still, the official figures do not
include the long-term unemployed or those who have been forced to accept
part-time employment. If these “unofficial” unemployed figures
were included, the total would be nearer to 20 percent than the official 9.6
percent. Furthermore, annualized figures show Americans earning less for each
There can be little
wonder that consumers are hoarding cash, increasing their savings and not
buying on Main Street. American consumers are in a state of financial shock.
The U.S. economy is heading deeper into severe recession, even depression.
The facts are
universally bearish for the American stock markets. As for the pundits'
sentiments, you can measure their value by how much you personally pay for
CNBC (very little) versus your cost if they're wrong (very much). Now, there's a
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John Browne is the
Senior Market Strategist for Euro Pacific Capital, Inc. Mr. Brown is a
distinguished former member of Britain's Parliament who served on the
Treasury Select Committee, as Chairman of the Conservative Small Business
Committee, and as a close associate of then-Prime Minister Margaret Thatcher.
Among his many notable assignments, John served as a principal advisor to
Mrs. Thatcher's government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher
famously pronounced that Gorbachev was a man the West "could do business
with." A graduate of the Royal Military Academy Sandhurst, Britain's
version of West Point and retired British army major, John served as a pilot,
parachutist, and communications specialist in the elite Grenadiers of the
In addition to careers
in British politics and the military, John has a significant background,
spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an
investment banker. He has also worked with such firms as Barclays Bank and
Citigroup. During his career he has served on the boards of numerous banks
and international corporations, with a special interest in venture capital.
He is a frequent guest on CNBC's Kudlow & Co. and the former editor of
NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds
FINRA series 7 & 63 licenses.
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