Jeff Smith noon, Sept. 16
Bailout Bubble -- Watch Out
The Saturday/Sunday (June 13-14) Wall Street Journal has a "must read" article, and I am not saying that because the Journal is agreeing with the thesis that I have been propounding on this blog and in columns for some time. The article begins on page 1 with the headline, "Stocks in the Black on Gusher of Cash." Basically, it tells how a "bailout bubble" has been created. Commodities and stocks are zooming around the world because of the biggest combined multi-government stimulus the world has seen in modern times. "All that money that was printed has to go somewhere," says one analyst, and commodities and stocks are getting it. Silver is up 59% from December lows. Copper is up 90%, corn 45%, crude oil 113%. Stock markets in the Ukraine and Vietnam are up more than 100%. Analysts predict that markets around the world could go higher, floating on all this liquidity.
Consumers are 70% of the U.S. economy, and they are deleveraging and cutting their spending -- a red flag. The bailout bubble could end badly, warns the Journal. Personally, I see no meaningful recovery signs in U.S. residential and commercial real estate, capital spending and exports. Thus, the U.S. commodity and stock markets are ONLY floating on government liquidity. Stocks have never been more than 30% of my portfolio. In economics, you can see something horrendous coming, but you don't know when it will come, and what form the bubble-bursting will take. Now I am only 20% stocks (mostly dividend-paying utilities) and the rest is in bonds (mostly munis) of short and intermediate maturities. The bailout bubble is certain to burst. But when? I still think the Dow will end the year at 9,000, but it will be entirely because of liquidity. The recession won't end this year, in my judgment.