One day in the 1970s, when the stock market plummeted and investors were in trauma, a wise man (and the CEO of my Company) said, “Look, it’s not as if this is the end of the U.S. economy. The market will come back.”
Then he added, “Of course, some day it will be the end.”
The market recovered with a bang, and those who sold in fear were proved foolish. Alex was right, as usual. But I never forgot his postscript.
Today, we are trapped in Iraq. Not involved, not implicated, but trapped. There is no exit. Meanwhile, the hawks are beating their war drums on Iran. Garry Kasparov, former chess champ and political wannabe, rants against Russia in today’s Journal. Congressional hawks want us to “get tough” with China. American special ops forces are doing their thing in Somalia and the Philippines and elsewhere. There is serious talk of a military incursion into Pakistan. The neo-cons have Syria in their sights. When all else fails, escalate.
Here at home, the real estate market is in free fall. The country avoids economic collapse only because China and others fund us to the tune of two billion dollars a day. The U.S. savings rate is negative. House foreclosures are soaring. People, according to the polls, have utterly no confidence in the President or in Congress.
Despite all this, the stock market, despite a few speed bumps, charges ahead. If you are a hedge fund manager or a private equity guru, it’s a wonderful life. How wonderful? The managers of the 25 largest hedge funds earned more last year than the CEOs of all the Fortune 500 companies, combined. It's all fodder for John Edwards's populist presidential campaign.
It has always been foolish to count out the U.S. economy. Every time the market tanks, there are those who cry, “Don’t panic.” Sound advice, as a rule. Someday, though, the better advice will be “Panic.” Maybe this is the time. The odds that the game is over are still low, but they have risen from, say 2 percent during the crises of the 70s and 80s to maybe 4 or 5 percent today. Not to worry? Worry. By the time they rise to 10 percent, if they do, the markets will be in shambles.
A few weeks ago, I was chatting with an old friend who now runs a hedge fund in New Jersey. He admitted to holding 40 percent of his fund’s assets in cash these days, because he feels, as I do, that the current disconnect between the market and reality will end badly.
Another old friend, economist Gary Shilling, correctly predicted the sub-prime mortgage fallout when conventional wisdom said that it was a non-issue. Gary thinks a recession is coming later this year, and the chances are building that he will be proved right. But a routine, palliative recession may in fact be too optimistic a projection.
Meanwhile, the CNBC talking heads keep assuring viewers that any market pullback is a terrific buying opportunity. To believer Larry Kudlow, the market is bulletproof. The brokerage gurus and the analysts talk the talk. Stocks are a great buy, they insist, and you should avoid bonds. Above all, don’t hold cash. After all, how can all these people make money if you insist on keeping your assets in your mattress?
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A collection of these blogs, under the title "Searching for Joan Leslie," is available on www.lulu.com, as is "The General Radio Story."
