StreetTalk -- Weak Economy, Bull Market: A Cautionary Tale

Stocks are supercharging ahead, while home prices are stalled and likely to dip further. Asset prices in general are rising far above the economic reality that would rationally support them. Main Street Americans are struggling to pay their bills, while Wall Street executives are getting record bonuses. Two Americas; trust me it's more than just a campaign slogan. It's the cold hard reality.

Look at the dichotomy another way. The FHA is handing out mortgages on the basis of a 3.5% down payment. That's leverage approaching 30-to-1, the kind that brought down Bear Stearns and Lehman Brothers.

About 15 million people are competing for 2.5 million job openings. The amount of time people are looking for a job has hit a new record high. Debt to GDP is still high. Trillions in household wealth have been lost. A bull market in a feeble recovery cannot last forever.

At the Economist's Buttonwood Conference this month, some masters of the universe sounded like serious worrywarts. Billionaire investor George Soros raised the specter of the U.S becoming another Japan with no growth and low interest rates, despite the stimulus program.

The theme of my most recent StreetTalk column for Forbes.com, A Bull Market In A Weak Economy Doesn't Last, was this divide between the  booming market and the faltering economy.

In a video interview, Whitney Tilson, founder of the hedge fund T2Partners, talked with me about his investment strategy for these perilous times.

Tilson said he is buying Microsoft, Yahoo, Pfizer and other "blue chips that have one or two warts on them," warts "that make prices a little cheaper." He said he was looking for "incredible balance sheets, dominant market positions."
 
"That's what you want to own if you're worried about a pullback in the market," Tilson said.
 
Is a pullback coming? To StreetTalk, the most peculiar contrast in the markets is the way stocks rise while savers earn nothing and the dollar continues to get bombed. With foreign investments in US Treasuries increasing to record levels, a falling dollar could give even more of a lift to equities. But a bull market can't last forever in a weak economy.

Watch: More Robert Lenzner StreetTalk interviews with top investors. Click here.

 

Comments

[Billicart]

The first step to sanity is to introduce a state saving system that actually REWARDS SAVERS: An economy that can only function on mindless consumption is doomed. A state saving system is necessary to remove OUR MONEY from the existing de facto COMPULSORY free funding of Wall Street’s monopolistic casino. Speculation is not wealth generation; it’s fee generation for a minuscule band of bandits

[therealredstateblues]

30 years of low interest rates and savings interest earnings taxed as income jhave been a disincentive to save

with real inflation, you could actually lose money by saving unfortunately

we need tradtitional svaings accounts to pay decent interest above inflation, and remove the tax on savings under a set cap or income level.

cripes they don't even give you a toaster anymore for opening a savings account!

[FreeNemo]

Adopting a National Sales Tax instead of the counterproductive income Tax would automatically reward savers as opposed to spenders. The savings could then be used for real investments.

[therealredstateblues]

the problem with sales taxes are they tend to be regressive

[yappnmutt]

the current market is, like all bull markets, is liquidity driven. the liquidity is coming from the fed, treasury and the international unwind of dollar contracts. the purchase of treasuries by central banks is just the hope of making a soft landing. the market will continue to go up until the liquidity has someplace else to go(like direct investment in china) or is destroyed in another popped bubble caused by a traumatic devaluation of the dollar a la 1987. the market is in a bubble based upon earnings valuation. it will pop. if you have dollars the commodities market is the only place to be now.

[NeverUndecided]

The situation is far more serious than this artcle would have one believe:

The "emerging markets" theme is completely bogus.Chin­a was a massive bubble before this crisis hit & they have compounded their problem every bit as much as we have our own. Its (and others) "emergence" was, and is, entirely premised on the world pre-2007 - a 30-year period of economic madness. That world is gone, despite Bernanke/G­eithner/Wa­ll Street's insane efforts to compel its impossible resurrection.

We now have bubbles across asset classes, in all markets, all at the same time, and ALL premised on a fantasy belief in a US ability to act as INFINITE backstop.

The scenario of 2 terrible years followed by 5 merely bad years is the BEST case, and not the most likely. Any additional shock, of any kind and the current policy response & the false "confidence" built around it will evaporate.

The Boys had better wake up very, very soon, or what we've seen so far will seem like good times in comparison.

[FogBelter]

"But a bull market can't last forever in a weak economy."

It will last as long as the Derivative Bubble continues to expand, but once it goes "POP!" there won't be anyone around who cares about the subprime mortgage mess. That will be considered the good old days.

$500 Trillion plus will make a pretty astonishing "POP!", indeed.

[USAFree1]

We've been here before folks. The problem with capitalism is that in the long term it cannot be controlled by the rule of law. Always waiting in the shadows is the hope that a crack in the governmental structure will allow capitalism to flower into this cancer. I am still hopeful that we can reclaim our country. The saddest part is the loss of even one great mind who could cure cancer, find a way to simply and cheaply save our planet, or you name the great thing. The lack of funding for education, healthcare, infrastructure, and so on are the direct result of capitalism gone wild.

[TJCole]

We have a parasitic financial sector, they are engaged in asymmetrical economic warfare against the America economy.. the real economy which is the general prosperity­...it's a form of international financial terrorism.­..if not terrorism, piracy...a­rgh..!

[FreeSpeech4All]

I wouldn't even grant it the decency of calling it a "financial sector." Wall Street casino is more like it.

[grateful4thedead]

I think even the most bullish folks would agree that we are in a secular bear market and this is nothing more than a strong bear market rally. when the bear resurfaces (oh, he will, quite soon) people will be quite shocked.

[melpol]

A small burning ember in a wood pile takes a strong wind to create a large blaze. The wealthy if in danger of having their belongings taken away can create that strong wind. It will set in motion frustrated millions who want white power to enslave the world.

[themodernleader]

The Modern Leader Pericles in his funeral oration of 430-431 B.C. acclaimed that the Athenian Constitution had an administration the favored the many instead of the few and were led by merit and "reputation for capacity". Our forefathers established our Constitution on the same principles. Read the Preamble.
Now the Constitution is kicked aside and trampled upon. Greed has replaced altruism; selfishness has replaced selflessness; self-centeredness, class interest has replaced the common interest. Such despotic deciding can lead only to tyranny and destruction for our nation.