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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

What Stock Market Bears Don’t Understand

Stock-Markets / Stock Markets 2015 Mar 23, 2015 - 02:51 PM GMT

By: Investment_U


Alexander Green writes: At the Investment U Conference in St. Petersburg, Florida, last week, I argued that “The Great Enrichment” has created a Golden Age for investors.

To briefly summarize my case, economic freedom - as measured by the Heritage Foundation’s Index of Economic Freedom - is increasing worldwide. Interest rates are at historic lows. Inflation is negligible. Job creation is the strongest in 20 years. The U.S. economy is improving. The annual budget deficit is coming down. Energy prices have more than halved in the last eight months. Technological innovation is accelerating. The dollar just hit a 12-year high against the euro and an eight-year high against the yen. U.S. household net worth is near an all-time high. So are corporate profits. And so are profit margins.

Some attendees enthusiastically agreed with me. And I might add that these folks are generally pleased with how their portfolios are performing.

Others vehemently disagreed. These folks seemed unhappy - even angry - about the improving state of the world. And their portfolios? (Insert raspberry here.)

As is always the case, I preferred talking with those who disagreed with me.

And I came away with a better understanding of why they are so bitter. In short, their worldview - shaped by 24/7 pessimism in the national media and inflamed by various merchants of doom - is not being validated.

To wit, the dollar is not crashing. Precious metals are not soaring. And the world is not going to hell in a hand basket, as they expected.

Many of them don’t seem to understand that they hold dramatically incomplete and often contradictory views. For example, if you bought gold as an inflation hedge, why would you expect it to shoot higher when inflation is MIA?

And please don’t give me that guff about how the government is manipulating the numbers, hiding the true rise in consumer prices. Houses are cheaper. Cars - especially for what you get in today’s market - are cheaper. All kinds of technology - from computers to tablets to smartphones - are cheaper. Commodities are cheaper. Gasoline is cheaper. Heating your home with natural gas is cheaper. The cost of borrowing money is cheaper. Labor costs are hardly budging. Even healthcare inflation is the lowest it’s been in five years. And the strong dollar and collapsing energy prices will soon take inflation lower still.

Then they shift gears and tell me that the federal budget deficit is going up. Not so. The annual deficit peaked in 2009 and has come down every year since.

Then they tell me that the U.S. is going broke. What?

Corporate balance sheets have never been stronger. U.S. companies are sitting on more than $2 trillion in cash. Citizens aren’t going broke either. The savings rate is up. Consumer indebtedness is down. U.S. household net worth hit an all-time high last fall. That’s assets minus liabilities.

The U.S. is the largest, strongest and most diversified economy in the world. Can you really believe our currency is soaring while the country’s financial picture is deteriorating?

Likewise, is the stock market hitting new highs because the economic outlook is growing worse?

Yet these folks insist that it’s us - the optimists - who have taken leave of our senses. Sort of reminds me of Irving Berlin’s old song about a marching soldier. He called it “They Were All Out of Step but Jim.”

Look, I understand the problem of the federal debt. I’m not approving it or excusing it. It’s a risk to future growth and stability. But the sheer size of the numbers seems to cloud people’s thinking.

For example, the federal debt is $18 trillion, approximately the same size as the U.S. economy. Think about it this way. If you had $100,000 in income and $100,000 in debt you had to service, your situation would be similar. Yes, you would have put yourself in a potentially precarious situation, but if your income rose faster than your debt, the situation - while uncomfortable and potentially risky - is manageable.

Two things distort this analogy, however. No. 1, you cannot borrow as cheaply as the U.S. government, the world’s strongest credit. No. 2, you will eventually have to pay off your debts. Uncle Sam will not. No major government worldwide will pay off its debts in our lifetime or the lifetimes of our children. However, the countries that survive and prosper will reform their entitlement programs and limit and intelligently manage their debt.

In sum, financial markets look forward not back. The U.S. stock market, the U.S. currency, U.S. household net worth and U.S. corporate profits would not be hitting new highs if our economic situation were worsening.

Yet undeterred, these folks keep predicting a terrific bust.

I didn’t want to disappoint them, but it already happened a few years ago. We called it “the world financial crisis.” It was the biggest economic downturn since the Great Depression.

Apparently, they missed it.

Good investing,


Do you agree or disagree with Alex? Leave a comment below.

P.S. On March 25, Alex will be holding a free online training event. We can’t give away too many details right now (everything is still being finalized), but the goal is simple: to help you become a master at three specific investing skills. We believe these skills can greatly improve the amount of money you make in the markets, as well as minimize the amount of time you need to spend studying potential investments. If you’re interested, simply click here and enter your email address.


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