This Time, It’s Over

Wednesday, 22 Feb 2012 10:47 AM
By Robert Wiedemer

Here we are again. It’s the end of the bad dream and recovery is upon us.

We’ve seen this before.

After Bear Stearns went bankrupt, the worst was behind us and the recovery had begun.

Once the Fed started QE1 in March 2009, the worst was behind us and the recovery had begun.

Once the Fed began QE2, the worst was behind us and the recovery had begun.

Now, as the European Central Bank, the Bank of England, and the Fed are either printing more money or preparing to print more money, the worst is behind us and the recovery has begun — this time the bad dream is over and the Dow is up 20 percent since October to prove it.

It is natural and good to be optimistic. But there should be a basis for that optimism.

The current round of recovery talk brings back memories of being an Astros’ "Buddy" in Houston in the 1960s.

The Astros’ "Buddies" was a fan club for younger Astros baseball fans. It wasn’t easy being a fan back then because the Astros always lost. To keep up their fans’ spirits, the team created a marketing pitch: “THIS is the year of the Astros!”

They would run it again and again each year. “THIS is the year of the Astros!”

Needless to say, it NEVER was the year of the Astros. There wasn’t any real basis to think THIS was the year of the Astros. But, for a baseball-team fan, that’s fine.

As a fan, you are supposed to be a cheerleader, even if you never win. That’s what being a true fan means.

But as an investor, you have to look at things a little differently. Being a cheerleader is NOT what you’re supposed to do.

Even if that’s what you are naturally inclined to do — which most investors are. Jason Zweig recently wrote a good article on investor psychology in the Wall Street Journal that pointed out how quickly people can overlook 10 years of terrible stock market performance because the last few months were good.

That's not the trait of a good investor.

What you’re supposed to do as a good investor is take a steely-eyed view of the economy and investor psychology. It’s hard to do, especially when most market analysts and economists are desperately trying to do just the opposite.

What any steely-eyed view of the economy would see or frankly, any open-eye view, is that the “recovery” is being almost entirely driven by massive money printing and massive borrowing.

I rarely hear that mentioned when we talk about recovery. Yes, it is acknowledged sometimes, but rarely is it given as the primary reason for the current recovery or the past recoveries.

As I have said before, we are holding up the past stock, housing, consumer spending and private credit bubbles by inflating the government debt and dollar bubbles.

If pressed hard, many people are fine with that because they don’t see those bubbles popping at all (or at least any time soon) any more than they saw the housing bubble, the consumer spending bubble or the stock market bubble popping earlier.

In fact, even the Economist magazine, normally a bastion of reasonable viewpoints, in its most recent edition was praising the ECB for printing so much money to bail out the European debt crisis. They were even chiding Germany for being too supportive of austerity for Greece.

And, in a sense, they are right.

If you want to keep the bubbles going (and the economy growing), you should keep printing and borrowing. The motto should be “Austerity bad — borrowing and printing good.”

But, if the problem was created by Greece’s (and other countries’) excessive borrowing, then is more borrowing really the right answer? If this were a simple cyclical downturn, actually it might be right. Extra borrowing might get us through this downturn.

But, it’s not a typical downturn.

The growth that Greece, Spain and Ireland recently experienced was very much due to various excess spending bubbles and excessive borrowing. If you take those away there isn’t any real growth left.

In other words, by lending Greece more money, you aren’t going to get higher fundamental growth. The Greek economy (as well as the Spanish and Italian economies) have fundamental productivity problems that need to be addressed. Yes, these can be overlooked by simply lending them more money.

But, unless you do this forever, it won’t help.

The same is true for the United States.

Although the fundamental productivity problems are different from Greece, we also have a productivity problem. Most of our growth in the last 10 years and even before that was due to housing, consumer spending and private credit bubbles.

If you take those away, there would be no real growth. Replacing those private bubbles with government debt and dollar bubbles won’t solve the underlying problem — it just means we don’t have to deal with them for a while.

It’s very much like General Motors. GM put off solving their fundamental business problems and that ultimately was a very bad decision.

So, this time it’s not over. It’s just another cheerleading pitch to avoid the reality and hard work of solving our real economic problems. Yes, the stock market could go up this year. In fact, the Dow and S&P could hit all-time records this year. The cheerleading is that strong.

The happy talk will continue and we could even see a modest real economic recovery for a while.

Or, it may be just like last year and all the good cheerleading at the beginning of the year didn’t move the market anywhere by the end of the year.

However, economic history has rarely repeated itself exactly in the last few years. So, we’re likely to see something different this year, whatever that may be.

But, what I can say is that the cheerleaders can't claim "This time it’s over" forever. “THIS is the year of the Astros” has a limited lifespan.

Eventually, people start to see it’s just a slogan.

About the Author: Robert Wiedemer

Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.


This Time, It