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Stock Market Unlikely to Leap Higher Just Yet


We need to spend a few more sessions working off the overbought condition.

From Michael Lewis' Liar's Poker:
At 10:00 a.m. that day in London, Alexander telephoned . . . he wanted to know why the dollar was plunging. When the dollar moved, it was usually because some other central banker or politician somewhere had made a statement . . . but there was no such news. I told Alexander that several Arabs had sold massive holdings of gold, for which they had received dollars. They were selling those dollars for marks and thereby driving the dollar lower . . . I spent much of my working life inventing logical lies like this. Most of the time when markets move, no one has any idea why. A man who can tell a good story can make a good living as a broker. It was the job of the people like me to make up reasons, to spin a yarn. And it's amazing what people will believe. Heavy selling out of the Middle East was an old standby. Since no one ever had any clue what the Arabs were doing with their money or why, no story involving Arabs could ever be refuted. So if you didn't know why the dollar was failing, you shouted out something about the Arabs. Alexander, of course, had a keen sense of the value of my commentary. He just laughed.

So wrote Michael Lewis in his bestselling book Liar's Poker that was first published in 1989. Recall that fresh out of Princeton, and the London School of Economics, Michael Lewis landed a job at the esteemed institutional brokerage firm of Salomon Brothers. Over the ensuing three years he rose from a trainee to an institutional salesman making millions of dollars. Subsequently, he left Salomon and penned the aforementioned book, which is an insider's expose of an unprecedented era of greed and gluttony. While that era died, along with the secular bull market, I still find many of his humorous insights to be right on the mark. I remembered said quip last week when someone asked, "Who is buying stocks and preventing the stock market from correcting?!" Without even thinking I responded, "The buying is coming out of the Middle East because the rising turmoil is causing a flight to safety; and the safest place in the world is the USA." My caller then asked, "Really, why is that?" My response went like this:

In additions to being a country of laws, as well as the world's reserve currency, you are not going to wake up one morning and find out you no longer are using euros but drachmas [the previous Greek currency] that have been devalued by 50%. Indeed, the US is in the best position seen in years. To wit, there are four basic inputs that are needed to drive economic activity: 1) labor, 2) energy, 3) raw materials, and 4) financial capital. Plainly, with the current high unemployment rate we have a huge reservoir of labor. Second, the collapse in natural gas prices, and new technology in drilling, has caused our energy analysts to opine that the US is moving toward energy independence. Third, worries about a Chinese economic slowdown have pressured most raw material prices down to levels far below where they were a few years ago (exception, precious metals). As for financial capital, in this country we have record low interest rates and if rates are inflation-adjusted the effective cost of capital is zero.
No positions in stocks mentioned.
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