Stock markets are speculative in nature and rely on investor confidence for price appreciation. In order for the market to go up, more investors must believe the stock market has "priced in" forward economic news than believe even more bad information is on the horizon.
So exactly what information has the stock market priced in? Unemployment at 8%, 9% or 10%? Just two months ago, worst case scenarios showed unemployment projections were 8%. Meanwhile, the Dow has gone up 1500 points during that time period. Now, two months later, some predictions are reaching into the 10-11% range. If the market doesn't go down accordingly, does it mean that the market "priced in" higher unemployment rates at the higher values? It doesn't seem plausible.
When further banks fail and the FDIC bails them out, has the market "priced in" this change? Every analyst has suggested more bank failures in 2009. But has the market figured in the government bailout of FDIC into their future projections?
When the first of many AAA rated municipal bonds default in late 2009, has the market "priced in" this new information? Or has it already priced in the Federal Government bailing out these cities and states at the expense of our great, great grandchildren's lifetime earnings?
When consumers begin to default on their unsecured debt such as credit cards and installment loans, has the market priced in this market event?
When the Big Three auto makers eventually fail; when the government takes over their health care costs; when the airline industry requires a bailout; when billions of dollars is spent on alternative fuels; when the health care system is socialized; when the dollar is no longer the world currency of international trade; when government spends 50% more than the taxes collected for 3 years in a row; when an entire system built on cheap money shifts to a system built on free market interest rates; when the average tax rate of income tax payers is at 60% of earnings, and the economy continues to falter into 2011, has the market priced this in? Again, I don't think so.
Not only have I lost all confidence in the market, but I have lost all confidence in the ability of "smart people" in Washington and Wall Street to get us out of this mess.
Here is a three part video series by the Wall Street Journal. It documents the beginning, the middle and the end of Wall Street as we know it. Pay special attention to the predictions of Wall Street executives. For those who think they can predict when this system will recover, we must just recognize that this market is extraordinarily unstable.
I have also been told by money managers that at the height of pessimism, is the bottom of the market. Not to be a pessimist, I believe the best investment in the next 5 years, is on the next great country that embraces conservative values and real, free market capitalism without the death grip of social engineering around it's neck.
RIP America.
2009
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