Tuesday 8 April 2003

The Stink of America Rotting

The bull market is dead. It was shot in the head and gutted - and its decaying carcass has been smelling up the neighborhood for the last three years. Even last summer, I can recall so-called investment experts who claimed that the bull was just taking a nap - it is now in fashion to insist that because of the success of the war in Iraq, a reinvigorated economy and revitalized bull market are just around the corner.

This, ladies and gentlemen, is nothing more than the ripest, rankest bovine excrement.

The first lesson is: Believe nothing from the financial media. They make the ABCNNBCBS news cabal look honest - Friday morning, the consensus prediction on a decline in March Nonfarm Payrolls was 29,000. But hours after the release of the data, which was 372 percent worse than predicted, the same news source was citing "a whopping loss of 108,000 jobs vs. the expected loss of 60,000 jobs in the U.S. economy in March."

Even worse, the headline was an attempted spin to the positive, "Blue chips move higher despite jobs data." Let's see, should we write about the massive and unexpected loss of jobs, or the Dow going up one-third of one percent? That's easy! Buy! Buy! Buy!

Here's the facts. The average market-weighted price-to-earnings ratio at a bear-market bottom historically averages 7.4. The current P/E ratio for the Dow is 22.9, down from 44.7 at peak - and that's if you buy into the official earnings with their fictional pension returns and unexpensed options - the real P/E is probably close to 70 right now. Furthermore, the average dividend yield at a bear market bottom is 8.3 percent, whereas the Dow blue chips are yielding all of 2.3 percent. Yeah, them's some real cheap stocks right there!

Now, I have no doubt that the Federal Reserve, believing as it does that a failure to print enough money caused the Great Depression, will eventually cut interest rates to zero and print scads of money too. But it won't work. Growth through inflation has not worked since the first king got the bright idea to debase his gold coins, and it won't work now. The bull market of 1999? It's called asset inflation, and it's going on right now in a house near you. The truth is that the Federal Reserve, also known as the Magic Inflation Machine, is an unmitigated disaster. Yes, it's unconstitutional, and yes, it's nefarious, but even worse, it's hopelessly, stupidly incompetent!

Which is frightening to consider, when you realize that the Fed's main task at hand is shock-starting the bull market. Ignoring the stink of rotting flesh, the director of the Fed's Division of Monetary Affairs recently came right out and said: "If asset prices don't adjust sufficiently to stimulate spending, then open-market purchases of long-term Treasurys in sizable quantities can move premiums lower."

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