-Caveat Lector- Commentary, by Mark M. Rostenko
Welcome to the Post-Postwar Period October 4, 2002 Mark M. Rostenko is a veteran of Chicago's commodities pits and the editor of The Sovereign Strategist investment newsletter, www.sovereignstrategist.com. Almost two years ago I wrote in The Sovereign Strategist that a recession was coming. The "experts" told you there wouldn't be one. The recession came and I said it was going to be worse than it looked. The "experts" told you it was nothing and that it probably didn't even happen. I told you they were wrong and later we discovered that in fact they were wrong. I told you we'd likely see a "double dip". The experts said we'd see a recovery in the second half. I'm telling you now that deflation is a real threat. The "experts" don't even talk about deflation because it hasn't been a problem in the States during the entire "postwar period." The "experts" have yet to realize that we're no longer in the "postwar period". Hello and welcome to the second half. The stock market is teetering above multi-year lows. The value of the S&P 500 has been cut in half. To be sure we've seen a bit and a bob of "encouraging" news here and there, but nothing that smacks of a real recovery. Scanning the financial pages I'm struck by the unceasing attempts to paint a rosy, yet highly inaccurate picture of why things are just about to turn the corner and why the milk and honey is about to start flowing through the valley once again. Here's one of my favorites: "During the postwar period beginning in 1950..." How many optimistic articles designed to convince us that the market is underpriced or that the consumer is healthy or that the economy is about to start ripping and roaring again have started with those words? All kinds of comparisons are bandied about demonstrating how this thing or that is so much better than it has ever been during the "postwar period" and that therefore we should all put on our happy-happy face, buy some stocks, refinance our homes, spend that cash on another SUV and a second big screen TV for the bathroom and get ready for the next big boom. Has anyone stopped to ask what is so special about this "postwar period"? Are the decades prior to the war not relevant? The "postwar period" has seen a lot of things. Lots of comparisons to be made, lots of statistics to toss around. But limiting discussions of the stock market to an arbitrary 52 year period makes no sense whatsoever. Here's a newsflash for the media: the "postwar period" has seen only ONE major stock market bubble and it happened in the 1990s. There is NOTHING else in the "postwar period" to compare it to. Comparing it to any other time during the "postwar period" is intellectually lazy at best and utterly meaningless at worst. If you want to compare this market in an intelligent way, compare it to the last time that the stock market saw a bubble: in the late 1920s. And it was followed by the Crash of 1929 and the Depression of the 1930s. Things are very different today than they were in the 50s, the 60s, the 70s, and the 80s. We're not in a "postwar period" so much as we are in a "post stock market bubble period". If you want to make comparisons, then compare things to another "post stock market bubble period". That at least has SOME basis in logic and intelligence. (I'm not arguing that we're about to relive the 1930s, only that it's a more meaningful comparison, if you must make a comparison.) To be sure, not all of the media nor all the so-called experts are guilty. A recent issue of the Economist had this to say about central bankers: "(They) do not seem to grasp that this economic cycle is different from its predecessors." Thank goodness that someone in the press has finally caught on to the very obvious! Things are very different today, but the so-called experts are still fighting this battle by the same old rules made up in the "postwar period". As the quote from the Economist implies, the current powers have never dealt with a post-bubble period yet they continue to fight as though we're dealing with just another cyclical downturn. And many stock "experts" think we're dealing with just another cyclical decline in a market destined to go higher forever. Barron's recently profiled 12 Wall Street strategists, entitling the article "Still Bullish". Still bullish when the S&P 500 has been halved, still bullish when the p/e ratio of the S&P 500 is twice its historical norm, still bullish when the p/e is 3-4 times as high as it was when previous bull markets began! Still bullish! If these analysts can remain bullish throughout the most vicious bear market most of us have ever seen, then who needs analysts? In these days of Wall Street budget slashing how about tossing some analysts out on the street and for the price of a sack of bird seed, hiring a parrot to squawk "I'm still bullish!" at various intervals? Abby Joseph Cohen who built her reputation by squawking "I'm bullish!" every few months during the bull market, has maintained her target of 1300 on the S&P 500. A target of 1300? That's a 54% gain. DURING A BEAR MARKET. According to the Barron's article, "the prevailing view among the 12 prognosticators is that the combination of a market drop and the sharp decline in interest rates has created a major buying opportunity in stocks." Weren't conditions the same a year ago? Listen: you have a major opportunity to buy stocks almost every Monday through Friday from 9:30 am to 4 pm Eastern time. The question is whether or not there is an opportunity to profit. And the answer, I'm afraid, is questionable. Low interest rates and a major market drop create a great opportunity in a major bull market when the market and economy have reasonable expectations of heading higher. But does a "market drop" create a good buying opportunity if stocks are still overpriced and poised to fall lower? I think not. Wall Street strategists are still playing by bull market rules. Were stocks a bargain when they dropped sharply on October 16, 1987? Not really. The market crashed on October 19. Were stocks a bargain following last September's "major market drop"? Not if you held them into this past July when they dropped considerably farther. None of these strategists have ever witnessed the unwinding of a massive speculative bubble in this country. The financial pages are littered with comparisons to other "postwar" bull markets. Stock market model after model is based on data from the past few decades. They're all comparing apples to oranges. This is a bear market unlike any other we've seen in the past 50 years. This is a kind of economic weakness that the current Fed administration has never battled. It makes no sense to assume that the rules that worked in the 80s and 90s are going to work today. We're in the midst of an imploding bubble of speculative excess. The stock market is unwinding and cracks are appearing in the housing market. We are neck-deep in the sort of situation that historically has led to deflation. I'm not going to suggest that deflation is imminent. There isn't much hard evidence for deflation in the U.S. right now. But traditionally, the unwinding of speculative bubbles have brought with them some form of deflation. It happened in the 1930s: The Great Depression. It's happening in Japan right now. Are we in the U.S.A. going to get away with just a tiny recession? Depression, deflation, double-dip, I don't know which. But at the very least it's absurd to argue that stocks are cheap and that a solid recovery is in the works. I recently read an article making the case that deflation is not a threat because a) we haven't seen anything like it in 50 years and b) there are currently no signs of deflation. Well, prior to 1987 we hadn't seen anything like a stock market crash in 58 years. So what? If something hasn' t happened in 50 years that means it will never happen again? And if something isn't happening right now it can't possibly happen anytime soon? The economy was here long before any of us and will likely still be here after we're dead. There are cycles bigger than our lifetimes. What we've never seen before has happened in the past. It will happen again in the future. The "postwar period" is merely a speck in the big picture. Drawing conclusions based on 50 years of history is sheer folly. Prior to the year 2000, household net worth had never fallen, not in one single year, during the entire "postwar period". But the fact that household wealth hadn't fallen in 50 years didn't stop it for falling for a couple of years thereafter. And is not likely to stop it from falling this year as well. There is a very real threat of deflation and that threat is compounded by the fact that our Fed believes its mission is solely to prevent inflation. Inflation has been the primary threat during the entire "postwar period". But now we're in the "post-postwar period" and it's vastly different from the entire "postwar period." The "traditional" threat that follows the implosion of a speculative bubble is that of deflation. The Fed still believes its main mission is to fight inflation. Postwar recessions have been primarily the result of increasing inflation. Last year's recession and current economic weakness are not the result of inflation but the result of an imploding economic bubble. The first real big one during the entire "postwar period". Generals fighting the last war don't win the next one. Is the Fed likely to win the war against economic weakness by fighting inflation during deflationary times? Investment has fallen for seven consecutive quarters. That's the longest string in the entire "postwar period". Stocks haven't fallen for this long in 60 years. Household net worth never fell during the "postwar period". (Until 2000.) And never during the "postwar period" have we witnessed the unwinding of a massive speculative bubble. Clearly, things are different today. Welcome to the "post-postwar period". It makes no sense to compare apples to oranges, it makes no sense to compare today's economic environment to the "postwar period" and it makes even less sense to fight inflation when deflation is a bigger threat. Things are very different today and the threats we're facing are very different than most people alive today have ever faced. Welcome to the "post-postwar period". This ain't your daddy's bear market. <A HREF="http://www.ctrl.org/";>www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance�not soap-boxing�please! These are sordid matters and 'conspiracy theory'�with its many half-truths, mis- directions and outright frauds�is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. 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