As to the Stock Market…the Dumbbells Were Right


Yesterday, markets did nothing. Both gold and stocks ended the day about where they began. Who knows what tomorrow will bring? A crash? A bubble?

Not us! For dear readers who had lingering doubts, we just proved that we are no good at predicting the future. One of the biggest bull markets in history…and we sat it out! Bloomberg has the story:

US Stocks Rise, S&P 500 Heads for Decade-Best Year Gain

The S&P 500 rose 0.1 percent to 1,762.15 at 4 p.m. in New York. The gauge has rallied 23.6 percent this year, which would be the best annual gain since a 26.4 percent surge in 2003. The Dow Jones Industrial Average fell 1.09 points, or less than 0.1 percent, to 15,569.19.

The most bullish thing a market can do is go up, and that’s what it’s been doing,‘ Bruce Bittles, chief investment strategist at RW Baird & Co., said by phone from Sarasota, Florida. His firm oversees $100 billion. ‘With Janet Yellen coming on stream and the latest jobs data that was a disappointment, that suggests that the Fed will continue to ease and print money until at least March and probably beyond.

Fed policy makers meet Tuesday and Wednesday to consider whether economic growth is strong enough to start trimming $85 billion of bond purchases. This month’s 16-day government shutdown took at least $24 billion out of the economy and will spur central-bank policy makers to wait until March to scale back the stimulus, a Bloomberg survey showed this month.

We should have had more faith in the feds. They set out in a panic to boost asset prices. ‘Yes we can!’ they said. ‘No you can’t,’ we thought to ourselves.

It would have been incredibly reckless and foolish, but we could have moved 100% of our money into US stocks. That was back in 2009. In March of that year, the Dow fell below 7,000. That was the time to buy.

Instead, we assumed they would mess it up… We thought the feds’ recovery efforts would end in failure…like nearly every other federal program since the Second World War.

Then, the stock market would be doomed to a final bear market sell-off, similar to 1982, when you could buy all you wanted for only six times earnings. The whole Dow could be purchased, at one point, for only a single ounce of gold.

Well, we were right…and we were wrong. As to the recovery, it has been a dud, just as we said it would be. Americans have gotten poorer every year since 2007. What kind of recovery is it when disposable household income goes down? It is no recovery at all. And who would be so dumb as to invest in such a market?

But as to the stock market, the dumbbells were right. It didn’t retrace only half of its losses, as we predicted. It retraced 100%…and kept going…doubling investors’ money, and more.

But wait. What kind of stock market is it that doubles even though the economy on which it depends barely limps along? Whence cometh a bull market, if not from the growth and prosperity of the society it serves?

It was not a boom you could depend on, we reasoned. It was a precarious and dangerously manipulated boom…a boom driven by the feds’ policies, not by real growth.  It was just a matter of time, we guessed, before it blew up.

And so our poor ‘Crash Alert’ flag got hoisted up for months at a time…soaked in the rain…bleached in the sun…the poor thing is now in tatters.

Even so we’re afraid to bring it down! If stocks were risky in 2008…they’re more than twice as risky now!

But so what? Prices have gone up. That’s all that matters, right? The bulls were right. The bears were wrong…and we were wrong along with them.

Still, without genuine economic growth, what made US companies worth twice so much more money?

Well, two things.

First, earnings rose. But behind that story lurked another sordid tale. Nearly two-thirds of the extra earnings came neither from higher sales nor increased productivity. Instead, they came from lower financing costs. Corporate America is a debtor. It benefits from lower interest rates, while savers lose.

Second, as interest rates fall, the value of a fixed stream of income – corporate earnings or bond yields – goes up. At 10% interest, you can earn $100 with just $1,000 of capital. At 1%, it will take you $10,000 to get the same earnings.

Between these two things – not to mention the implicit guarantee by the feds to rescue any major company in trouble – stocks rose to over 15,500 on the Dow…an increase worth about $8 trillion to investors.

Let’s get this straight. Corporations were not really selling much more product. They weren’t more efficient or more productive. They weren’t paying higher wages…thus expanding the base of potential buyers for their products.

What was really going on was that America’s whole capital structure was tricked-up by the feds. And now, maybe…perhaps…probably…could be, but who knows…it is headed for disaster.

And yet, dumbbell stock owners more than doubled their money since 2009. Too bad we weren’t among them.


Bill Bonner
for The Daily Reckoning Australia

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Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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2 years 11 months ago
Too bad indeed. Problem is I saw high yield financials in Australia and ploughed in (NAB, BEN, BOQ, SUN, IAG, and QBE). QBE fooled me. After the last dividend at such a low yield, I sold out, only to watch it go mad. (U.S earnings apparently). At the same time, I also followed the advise of various contributors to this web site, and invested into miners. ERA and PDN have been very painful, so too have my Gold investments with NME and KCN. AGO hurts, but was speculative at the time so not a big buy in, and they are… Read more »
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