Two schools of thought on the economy prevail today:
First, we have the bullish crowd, who believes three simple factors are causing the economy and the stock market to continue rising. Those three factors: interest rates that are historically low, lots of liquidity in the marketplace (thanks to the expanding money supply), and plenty of inheritance money coming into the system.
The bulls believe stocks are more attractive than T-bills… that the depressed housing market is bottoming out. Finally, the bulls believe the Federal Reserve will drop interest rates like a rock should the economy get too weak.
What’s to worry, ask the bulls?
On the other side of the spectrum, we have the bears that believe all asset classes (primarily stocks and real estate) are overvalued. Unlike the bulls, the bears measure the Dow Jones Industrial Average in terms of either Euros or gold bullion. And based on this, the Dow is down anywhere from 20% to 40% today from its peak of early 2000.
The bears have three main concerns: 1. Because of too much debt and a huge U.S. trade deficit, the U.S. dollar will collapse, sending interest rates sharply higher. 2. The stock market bubble will deflate as the U.S. economy enters a recession thanks to American consumers whose debt levels have reached the danger zone (too much personal and too much mortgage debt). 3. Finally, the huge U.S. trade deficit will eventually catch up with us.
What’s not to worry, ask the bears?
The reality of the economic situation today is somewhere between the two scenarios painted above. Yes, there is plenty of liquidity in the economy. But the American dollar, the economic wild card, continues under price pressure when measured against other world currencies. Will the Fed raise interest rates to support the U.S. dollar at the cost of risking a recession? That’s the million dollar question that will decide if the bulls or the bears are right this time around.
Personally, I see too much risk in the economy. The numbers coming out of the housing market are not improving and consumers are tapped out in terms of their spending capabilities. Yes, the technical picture of the big stock market averages looks good. But, when the big stock averages are measured in gold bullion or Euros, the numbers paint a very weak picture. No, I would not be a buyer of big-cap American stocks at this point in the economic cycle, as I see the economic risks outweighing the possible benefits.