This Market Is Not Calm and Rational
Anybody know how the stock markets are up since March and rising?
When all else fails, try being calm and rational. Problem is, the calm and rational view these days doesn't work.
Being calm and rational, you'd look at the S&P 500's trailing-12 P/E multiple of 24 and say, "That's a bubble the air's got to come out of." But then it doesn't. Or you'd look at an unemployment rate nearing 10%, or the maturity schedules of debt in the commercial real-estate sector, and have to conclude that financial crises of a magnitude larger than those surrounding the year-ago collapse of Lehman (see also One Year Later: What Have We Learned?) must be imminent. You'd look at housing starts still limping along at half a million annually -- the lowest levels in a recorded history spanning five decades, or back to a time when the nation's population was well under 200 million -- and wonder where the recovery so many are predicting is coming from.
This is apparently no time to be calm and rational, because every analysis by that orthodox angle leads you anywhere but explaining how the American stock market has risen more than 50% since its March bottom.
And yet, for the incessantly curious and even obsessed analytical mind, that just pours gasoline on the flames of desire to uncover and understand the hidden explanations that must be in there somewhere. The explanations that make sense. For me, it's an intellectual translation of Chinese handcuffs. The harder you pull, the stucker you get.
Let's try a longer-term view. Since early August 2007, the market is still declining at a rate of almost 13% annualized, the terrific recent advance notwithstanding. Don't take my word for it; look up the most widely followed benchmarks and do the math. The Dow was then just shy of 13,200 and the S&P 500 was above 1430. Just thinking about those numbers makes me feel like I've been punched in the gut, and they only go back a bit more than two years.
Still another view. Ten years ago the Dow was in the 11,000 range. The S&P 500 was around 1340-1350. That means the current market is trading at a 22% discount for your patience as a "buy and hold" investor over the past decade (an average annual compound rate of decline of about 2.5%). Additionally, 1999 opened the year with oil trading at $11-$12 a barrel and gold fluctuating around $275. Oil now goes for seven times what it was then (yet everyone talks about the massive selloff in oil over the past year or so), while gold has nearly quadrupled. Hmmm… doesn't sound so much like a financial asset bubble as it does a commodity bubble anymore, does it?
With the US economy still contracting, albeit at a lesser rate some call evidence of an incipient turnaround, that oil-price number is cause for huge concern. Demand is virtually dead, so it's difficult if not impossible to attribute a septupling of oil prices over a decade to industrial activity or budget-conscious consumer usage. That leaves two areas of concern to dwell on. One is a very troubling lack of attention to domestic energy development among traditional sources, and the other is the portent of monetary inflation and the degree of attention paid to the TARP, TALF and other bailouts that essentially point to Fed and Treasury money-printing.
The recently reported 1.7% rise for August producer prices would seem to be huge cause for concern; it's not only a double-digit annualized rate -- which is very disconcerting -- it's happening at a time when there's no way to attribute it to rising incomes, burgeoning employment or industrial demand. But instead, most observations seem to emphasize the rear view mirror's 12-month decline and not much speculation regarding its future importance, or the outsized energy portion of that report.
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