Viewpoint: Market upsurge an illusion

There has been much hoopla recently over third quarter figures on the economy and the Gross Domestic Product. Economists continue to revise their forecasts.

Despite the numbers and the cheerleading by the economic forecasters, there are disturbing elements to this so-called recovery.

At the beginning of 2000, the same crowd got very excited when the GDP grew at 7.1 percent in the fourth quarter of 1999. Their euphoria drew a lot of speculators—what some call “sucker money”—into the market in the first quarter of 2000 just as the market peaked.

Methinks we are being conned again. While the bulk of economists and financial pundits are still bullish, this economy is not yet in a strong recovery.

Momentum has been slowing considerably in the past four months. In the shorter period from March 12 to June 17, the Standard & Poor’s 500 index rose 29 percent, but has had a difficult time since reaching 1.8 percent.

Other indicators point to an important market top. The volatility index is about 18, near the low end of its range over the past five years. Since 1998, every time the market has reached this level, it has tanked. Then there is equity mutual fund cash. It stands at 4.3 percent of assets, near the low point for the last 37 years.

CEOs do not share the rosy predictions of the financial community. John Dillon, head of International Paper, said he doesn’t see any strong upturn based on orders he sees at his company.

Sam Palmisano, CEO of IBM, had only faint praise. “We are beginning to see signs that the economy has stabilized,” he said.

Reports are that insider selling is exceeding buying by record amounts. Despite deep cuts in short-term interest rates, three tax cuts, a huge swing from budget surplus to record red ink and hundreds of billions of dollars in mortgage refinancing cash-outs, employment, production and capital spending are much weaker than in other past recovery.

Albert Cox was the former chief economist at Merrill Lynch during the 1970s and also served in the Nixon and Reagan administrations.

Cox’s assessment of present conditions: “I expect the bear market to resume for a long list of reasons: consumer spending has been force-fed for two years and no more bullets are left; no decline or slowdown in consumer spending in 13 years (that hasn’t happened before going back to 1864); debt ratios are through the roof everywhere—mortgage debt, installment debt, corporate debt, a rise in margin debt as employment sags.”

Cox continued: “Employment is a coincident, NOT a lagging economic indicator as the cheerleaders keep saying. (We also have) massive budget deficits at all levels of government; a huge trade deficit which is sinking the dollar and will trigger foreign selling; another frenzy of stock market speculation and the bubble will burst on a wildly overvalued market; same for home prices; (plus) heavy deflationary pressure from China and Mexico (goods) and India (services).

“I continue to believe that we are rather closely tracking Japan’s experience of the past 13 years (Japan had huge rallies all along the way, just as we’re having now) and that we’re still in the early stages of what will be a long secular economic and stock market decline.”

Charles Minter of Comstock Partners, an investment company, observed: “Until we get the liquidation we believe is inevitable and the stock valuations down to much more reasonable levels, we don’t think the bears will have to go into hibernation.”

Not exactly a merry Christmas outlook, but perhaps a healthy dose of reality.

Enjoy The Rock River Times? Help spread the word!