The Economy Stinks
The Economy Stinks
The rise in the markets amounts to “hold your nose and buy” (crap) dear citizens of Fernandina Beach. The Fed released its Beige Book for August yesterday. The Beige Book contains information on economic conditions derived from interviews with key business contacts, economists, and market experts. The report was less than stellar.

Consumer spending remains weak. Loan demand remains weak. Credit markets are tight. The labor market is weak. Wages are frozen in most industries and the cost of raw materials is higher.

There was a slight up-tick in real estate sales, much of that at the expense of lower housing prices. There was also a modest improvement in factory output, spurred in large part by the Cash for Clunkers program (which looks like it only cost taxpayers $81 billion – yippee).

None of this is news, really. We all know the economy stinks. We all know the only sectors that show any improvement are those where the government dumps billions or trillions of dollars. Yet the stock market continues its moon shot higher.

“Why?” you ask. Well, the best I can tell is stocks are moving higher because stocks are moving higher.

Everyone feels pressure to get in on this rally. It’s not because stocks are a good deal right now and represent good values. It’s not because growth in the economy or in corporate earnings justifies paying 20 times the earnings or more for stocks. People feel pressured to get in because stocks keep moving up. Everyone else is making money in the market. If you’re the only one at the Labor Day barbecue not sharing stories of untold riches from investing in AIG, Fannie Mae, or Freddie Mac, it gets increasingly difficult to nod politely and compliment fellow partygoers on their investing acumen.

“Hold your nose and buy” is the theme of the day.

We’ve seen this movie before, however, and the ending is always the same. Florida real estate always appreciates… until it stops. Internet stocks always move higher… until they fall, and the stock market always moves up… until it doesn’t.

I don’t know exactly when “doesn’t” will finally occur. I thought it would have happened by now. Instead, stocks are approaching their highs for the year. Every attempt to sell off is greeted by willing buyers. And anyone foolish enough to short stocks is quickly forced to cover and take a loss. It all seems a bit backward, especially in the face of lackluster economic statistics.

History has proven many times that paying 20 times earnings to buy a stock is rarely a good idea, and I’m sure history will prove that point once again. For now, though, the Beige Book remains beige… and the bears are black and blue.*

*outtakes from Jeff Clark at the Growth Stock Wire.

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