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"Stocks are Cheap," (yeah) Right?Craig Harris So we now have short term interest rates at 40 year lows, and the 30-year bond is history. Both of these moves were designed by our friendly financial engineers at the FED and their partners. The 30-year bond is the best inflation barometer out there... the engineers killed two birds with one stone so to speak by killing the inflation barometer (which would be likely to perk up after billions in new spending) and lowering long-term interest rates (through a lack of supply) in one fell swoop... brilliant... or was it? I read an interesting newspaper article the other day about the new plight of the retirees in Florida, my home state. This is a serious side effect of the financial engineers plans... many millions of people count on fixed income yields on their savings to finance their retirement, and yet fixed income is now providing at best a marginal real rate of return and at worst a negative real rate of return. What are these people going to do? Well, put yourself in their position... We have the people on Wall Street shouting as loud as they can that "stocks are cheap", despite the fact that the S&P500 P/E ratio is making all time highs. At current levels the stock market is arguably more expensive than it has ever been in the history of the world. I'm sure a lot of financial planners actually believe the party line that stocks are cheap (because they don't know any better), and I'm equally as sure that retiree savings are being diverted from fixed income to equity shares in the hopes of seeking a reasonable return. So, we are now developing a situation whereby much of our retired population are exposed to going bankrupt. I believe that the financial engineers "remedy" is in the process of creating the biggest equity bubble ever seen on this planet, given the fact that investors are being told across the board by wall street and on national TV that "stocks are cheap" and there is a clear lack of alternatives for the average investor... think about it... if you were a naive investor, what would you do? You'd do the same thing... you would put your money into the equity market as you were told to do... it is truly frightening to think about the level of risk these people are taking on without even knowing it. And the consequences of an inevitable collapse in share prices is even more frightening. Back to the subject of alternatives... what are the alternatives? Well, you can invest in government debt, and the main risk there is that your real return will be negative, but your principal is relatively risk free. You can invest in shares, with the obvious risk being that if the market P/E were to return to a more normal level you would lose the majority of your investment. You could also turn to the one other major asset class that people on Wall Street don't talk about much... commodities. Looking at the stock market P/E, you can see how unfashionable it is to talk about value, but is there any actual real value out there? Look at a chart of the CRB index. As the stock market makes all time highs in price and valuation, commodity prices have been in a 20 year bear market. What about a commodity that is selling for one half of what it costs to produce it? There are several such commodities trading on exchanges around the world. What about gold? Lower yields make a non-interest bearing investment like gold much more competitive. Gold is an asset close to its production cost, having been through a 20 year bear market along with most all other commodities. It also acts as a hedge against the risks I outlined in my essays "Interesting Times, part 1 and 2", and the even more horrific risks associated with an act of nuclear terrorism or a bio-weapon like smallpox. Even if the price of gold is being manipulated as some including myself believe, market manipulation doesn't work forever... and when a manipulated market breaks free, it usually makes a swift move to its non-manipulated real value. Successful investors are trained to recognize value. The whole idea of investing versus speculating is to seek value... to buy something for less than its intrinsic worth and then to sell it when that worth is realized in the market place. In these times of financially engineered markets and spin doctoring rather than objective quantitative analysis, it's easy to forget that but it's the one thing that never changes... Jim Rogers said it best... you want to "Buy Value and sell Hysteria." It's important to think independently in these interesting times. November 9, 2001 Mr Harris offers a free 30 day trial subscription to his daily market letter. For a free trial please contact bcharris@gate.net. The risk of trading commodity futures contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. If you choose to open an account with Harris Capital Management, a Risk Disclosure will be sent to you. Please read it carefully before you invest. ### Harris Capital Management, Inc. CTA is a futures broker and registered Commodity Trading Advisor, meeting the needs of futures traders worldwide. They provide a high level of personal service to discriminating clients around the world, while offering commission rates comparable to discount brokers. All clients are handled directly by Mr. Harris. Copyright ©1995-2004
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