Deck the Halls With Boughs of Economic Folly

Anyone who thinks the U.S. is headed back to normality in terms of economic growth and employment is simply not looking at the facts.
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When push comes to shove, pistols with blanks are useless.

The same can be said about the ballooning ranks of economic dreamers -- those self-professed financial experts who keep pounding the table and tell us that we're out of the woods. One of their arguments -- which cannot be dismissed -- is the rebounding stock market, a frequent harbinger of a peppier economy. Currently, though, the dreamers could be setting us up for a nightmare.

One member of the club is New York City mayor Michael Bloomberg, who recently hopped aboard the bandwagon of economic dreamers (some describe them as economic buffoons), which includes such notables as Ben Bernanke, Alan Greenspan and Timothy Geithner.

Bloomberg, a billionaire businessman turned politician, an effective mayor and supposedly a pretty savvy guy, declared pretty affirmatively on TV the other day that the economy has stopped getting worse. That may be so in the more affluent city restaurants Bloomberg frequents or in the land of Oz, but certainly not nationally in the U.S.

Clearly, you don't become a billionaire by being economically gullible. But some market pros argue the current undeniable facts of economic life suggest Bloomberg is not looking at the economy with a full deck. For example, as well reported, disturbingly on the rise -- in some cases sharply so -- are the number of welfare recipients, the use of food stamps, job losses, foreclosures, mortgage delinquencies and extended unemployment claims.

Any way you look at it, such bleak signs are not ingredients of an economy that has stopped getting worse.

Likewise, within blocks of where Bloomberg lives on the Upper East Side, empty stores and restaurants and vacant commercial space hungry for tenants abound. So, too, does a slew of holiday bargains at unusually lofty 50% to 80% discounts throughout New York City's top shopping streets.

On top of this, third-quarter GDP growth, originally reported at 3.5%, and then revised downward to 2.8%, was just knocked down again to 2.2%.

In contrast to Bloomberg's economic buoyancy, Donald Trump recently took a more sobering view of the economy, telling CNN'S Larry King "there's something wrong." Trump also took note of friends and tenants who he says are squeaky clean financially, have impeccable credit, but who can not get a loan. Likewise, Trump pointed to some of his CEO friends who tell him they're doing terribly, but whose stocks are going through the roof and they don't understand why.

JC Spender, professor of economics at the open University Business School in Milton Keynes, U.K., opts for what he thinks are the more rational views of Trump. He notes that the real estate mogul is wired into economic events, while Bloomberg's focal point is dealing with reality of being a politician rather than a successful businessman, and is therefore taking on a more optimistic tone when talking to the public.

Anyone who thinks the U.S. is headed back to normality in terms of economic growth and employment is simply not looking at the facts, Spender says. There is no indication, he observes, that there is any path between where we are now and where we have to be to get the economy to where it should be. The chief dilemma, as he sees it, is "what the hell the banks are doing with our money" -- notably, they're lending to each other for a fee and to Wall Street for the best of the deals, but not to Main Street.

Without bank lending, he says, the economy and the stock market should stagger along the downside in 2010. "I think we've turned the clock back 100 years," he tells me. "How," he asks, "are people supposed to find work when banks won't lend?"

West Coast liquidity tracker Charles Biderman, the skipper of TrimTabs Investment Research, who was overly negative and missed much of the 68% rally from the March lows, is convinced 2010 will be a bummer both for the economy and stock prices.

For starters, he notes declining wages and salaries, as well as falling take-home pay (currently down 11%-12% year over year) and lack of purchasing power, will plague the economy going forward. Further, he points out, there's nothing to drive final demand, job growth and a more robust housing market, and no job growth means no income growth.

Further, at some point, he says, the government will have to stop throwing money at the economy (such as the purchase of mortgage-backed securities) and the stock market and interest rates will rise. Biderman believes that somehow government money has leaked into the market, spurring the stock and bond rally.

But the market. he says, can not keep going up on better than expected results. You need revenue growth and without job growth that can't happen. TrimTabs' online job postings index has shown no appreciable increase over the past five months, meaning those who have lost their jobs are finding it difficult to find a new one.

As such, Biderman thinks the rally is on borrowed time, and he sees a significant market decline in 2010. "In the 1930s. we saw sharp rallies followed by sharp declines and we should see more of the same now," he says.

His favorite investment, designed to guard against higher inflation, are TIPS (treasury inflation-protected securities), which are currently yielding 3%.

Jeffrey Saut, the chief investment strategist of Raymond James, also offers some concerns, noting "things could become more difficult." Some of the headwinds: Loss of some of the stimulus money, the likelihood of higher taxes, government intrusion into corporate America, more difficult earnings comparisons, a probable pickup in inflation, which should raise interest rate fears, and election jitters.

Another of Saut's key concerns: The 68% rally from the March lows has stripped away some of the margin of safety.

Institutional investment adviser Bill Rhodes of Boston-based Rhodes Analytics, Also hoists cautionary flags. "We're still relying on liquidity provided by the government, which is keeping interest rates low. but that's never a good thing," he says, "because it's indicative of stress in the financial system."

As Rhodes sees it, it's time to consider taking money off the table by reducing exposure in the market's weakest sectors -- financials, energy and consumer staples.

It's worth noting noting that weakness in the financials is synonymous with declining stock prices.

The bottom line: Beware of halls decked with boughs of economic and market folly.

What do you think? E-mail me at Dandordan@aol.com

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