Writing on Aug. 17, the 30th anniversary of Elvis Presley's death, I'd have to say the US equities bull market has left the building. (And see Aug. 20 update about Fed action, below.) When people like Jim Cramer on CNBC (who are paid to be stock market cheerleaders) melt down on national TV, it's a red flag that everything isn't hunky-dory at the corner of Wall and Broad Streets. The recent weakness in the Dow Jones index is another example of what happens when government intervenes in financial and real estate markets, and doesn't let the free-market work out stupidity and excesses quickly and efficiently. I had lunch with a friend this week, and he wondered what Fed Chair Ben Bernanke and the Fed could do to make things better. I replied that there's really nothing they can do, and I explained our country's situation with this analogy:
Let's say you're partying in downtown Denver, it's 1:30AM and one of your buddies is pretty drunk. He doesn't need any more drinks – much less being behind the wheel of a car. He should get off the sauce, maybe drink water or Coke, and call it a night to let the hangover and recovery process begin. But instead, he downs three more shots of tequila. Then he takes off and drives his car recklessly (with several other passengers in tow) and crashes it into a tree.
The American economy and consumers are playing the role of your buddy, with Alan Greenspan and Ben Bernanke acting as bartenders who gave him the hooch. I've heard people say “Why doesn't the Fed and Bernanke do something about this?” The reason is that they really can't avert this financial hangover because they were the ones that caused it.
Increasing the money supply and reducing interest rates (again) is more of the same medicine that got our country in this fix. It'll temporarily relieve the financial pain, but won't get us out of it. The only remedy will be time and the repayment (or default) of enough debt in the system, and more honest-to-Pete savings and investment - which doesn't include stock or mutual fund holdings in 401k plans.
I guarantee you'll hear the financial talking heads on CNBC, Bloomberg, and mainstream media say something like “this is a great buying opportunity, and chance to get back in the market. Remember, you invest in stocks for the 'long term.'” Baloney. That's nothing more than Wall Street propaganda, and has no basis in economic or financial fact. When the Dow takes daily triple-digit hits in this short of a time frame, and a 1,000-point haircut in weeks, that's not a bullish sign to me. It reminds me of the saying: “The bull (up market) climbs up the stairs, and the bear (down market) jumps out of the window.”
Even though financial assets (like stocks and mutual funds) and real estate have appreciated quite a bit in value the past few years, it's been a false prosperity based on cheap credit and an ever-increasing money supply. Real estate values went up because scared stock investors thought it was a better deal than Wall Street, interest rates were lowered to the floor, and mortgage companies had incredibly loose lending standards. For the last several years (up until recently), if you could fog up a mirror and had a job, you could buy a house with little to no money down.
The sub-prime mortgage mess and liquidity crunch are another example in history of the start of a bust after another financial boom. Government needs to get out of the way, and let the financial hangover and subsequent recovery begin. Yes, it'll be painful in the short-term for folks who only know how to profit from up-trending stock and real estate markets. But for professional investors who are financially and economically literate, this is the start of an opportunity of a lifetime to build (or increase) your fortune.
I've said it before, and I'll say it again: If you're not financially literate already, learn to sell, learn to market, and learn to read a financial statement. Don't rely on politicians who helped get our country into this financial mess to get us out of it. Even with these economic and financial challenges, America is still a great country and the land of opportunity. The American recovery won't be led by big-government pols who want more people dependent on the state. It'll be wise, bold, and visionary leaders who can inspire folks to get the most from their God-given talents.
Start with getting the most out of your talents, then work to bring out the best in others. That's the true American way, and it's what will lead us back from the arrogance and insanity of our time.
----------------------- Update, August 20 -------------------------
Well, Ben Bernanke and the Fed poured more booze in the punchbowl Friday when the Fed lowered the discount rate by ½%. But I agree wholeheartedly with Bill Fleckenstein, who says: “The bailout (should) stop here.”
The Federal Reserve can’t really do much except delay the inevitable recession that’s coming soon to the US; no matter how badly politicians or individuals want the Fed to make it all better. America’s central bank doesn’t have magical, Svengali-like abilities to “manage” the economy – and neither does any other elected official. The Fed can only do two things: 1) Control the expansion (or contraction) of money supply and 2) Control the interest rates. That’s it.
Again, don’t rely on the Fed, President or Congress to step in and make things better. All they can (and should) do is let this financial craziness run its course, and let all the bad debt work its way out of the system. It’ll take time (several years to a decade), and it’s not the ‘Goldlilocks’ economic landing that talking heads have promised. But it’s the only way to have a true economic recovery.