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Mitch Feierstein

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The Bull Market That No One Believes

Posted: 03/12/2012 12:02 pm

It might not feel that way to you, but we've just lived through one of the greatest bull markets in history. Almost exactly three years ago, the S&P 500 stood at 683, a decline of more than half from its highs of 2007.

It wasn't hard to understand that decline. Wall Street was bust. General Motors was bust. AIG was bust. All but a handful of Main Street banks would have been bust too, had it not been for an extraordinarily vigorous response by both federal government and the Federal Reserve.

The panic of that winter of 2008-09 may now be a distant memory, but the problems facing the country have hardly gone away. Europe continues to tremble on the edge of crisis. In the housing market, there are still huge levels of foreclosures, distressed selling and a scarily large stock of shadow inventory, waiting to be sold. Yes, joblessness is beginning to edge down, but it's still at very high levels -- and, worse still, the percentage rate of unemployment needs to be looked at skeptically in view of the more than one million dispirited workers who have exited the jobs market altogether.

You wouldn't be able to guess any of that from the stock market, however. The S&P celebrated the third birthday of this current bull market by racing up towards 1,400, more than double where it was three years back. Facebook is hoping to launch an IPO that will value it at some $100 billion. Apple is now worth more than $500 billion. General Motors has staggered from bankruptcy to a healthy market value of $40 billion. However, GM shares still are trading well below the price the government (taxpayer) paid for them and well below the IPO price.

Which all raises a question. Did investors panic unduly in 2008-09? Or are financial markets overheating today?

The question matters if you're an investor, but it matters almost as acutely if you're not. The economic and financial news you listen to is strongly skewed by the state of the stock market. If stock markets are hitting new highs, if IPOs are being boldly launched, it's hard to argue that the economy is fundamentally weak -- yet the real economy and its financial shadow are two very different things. And it doesn't help that so many financial commentators either work for the sell-side firms (Goldman Sachs, Morgan Stanley and the rest) or on firms that depend on those companies for their business. To a striking degree, the financial coverage we get from the media reflects the views of Wall Street, not the health of the nation.

The bulls have a fairly simple argument. Yes, they can point to some real strengthening in the economy and the sheer panic which was present three years ago is gone today. But mostly, the bulls rely on an even more basic argument. The prices of all dollar-based financial assets key off the price for U.S. Treasuries. Since the yields on U.S. Treasuries have recently plunged to lows not seen for decades, that means that the prices of U.S. Treasuries are close to their all-time highs. (Remember that bond prices are inversely related to interest rates. So low interest rates are always correlated with high prices.) And since U.S. Treasuries are trotting along at exceptionally high levels, the equity markets are dragged upwards too. It's not that investors are unaware of the various weaknesses in the economy, just that they can't help but respond to the massive gravitational force exerted by the bond market.

I've been in the financial markets for around 30 years, and for around 27 of those years, I'd have bought that argument too. If the price of one commodity rises then the price of a closely related commodity needs to rise as well, and vice versa.

Only these aren't normal times. The government bond market has been prey to manipulation on a wholly unprecedented scale. I'm not talking about anything you're not already aware of. I'm talking about Ben Bernanke's Quantitative Easing, a process which involves the massive purchase of government bonds by the Federal Reserve. Since the Fed can simply print limitless quantities of money to acquire those bonds, the price for them can't help but shift. So to justify the current euphoria in the stock market by pointing to the jubilant bond market is simply perverse. It's using the price of one blatantly mispriced asset to justify the price of another.

Even that might not matter if the rise in the bond market was permanent. But it isn't and it can't be. It can't be because, over the long term, there is an almost one to one relationship between the supply of money and the level of prices. Since the Fed has been printing money like crazy (to buy all those bonds), inflationary pressure on the economy has increased. That pressure may not yet have fully manifested -- because firms and consumers are still stressed -- but it's there, biding its time. The 40 percent rise in crude oil may largely be attributed to QE or money printing.

In the longer term, therefore, financial gravity will operate as it always does. U.S. Treasuries will find their own proper level. A level which will reflect a dysfunctional political system, frightening deficits and ever-increasing levels of debt. That repricing will have a calamitous impact on the stock market. It simply can't play out any other way.

And countless investors know this. Most financial firms have money in the affected securities -- stocks and bonds -- because they need to park their case someplace, but that doesn't mean they think those things represent good value. If you want a real indicator of the health of our economy, you need to forget about bonds, and forget about stocks.

And the global Ponzi Scheme which almost buckled in 2008 is once again alive and well. Global growth since 2002 has been 4 percent. According to my own calculations, the global growth in debt has been 12 percent. One would hope that some lessons were learned from the excesses of credit and leverage when the crisis started in 2007. Yet it appears that leverage and credit are being increased by shifting the Ponzi assets to the central banks balance sheets (taxpayer). This leads us to fairly conclude the price of gold gives you a fairer measure. The higher it is, the more scared investors are. The return on your money if you bought gold a decade ago: more than 500 percent. It's a statistic which says you shouldn't feel bullish. You should feel terrified.

Mitch Feierstein is the CEO of Glacier Environmental Fund and author of Planet Ponzi.

 
 
 

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