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At the end of 2013 Wall Street appeared to be convinced that the markets were enjoying the best of all possible worlds. In an interview with CNBC on Dec. 31 famed finance professor Jeremy Siegel stated that stocks would build on the great gains of 2013 with an additional 27% increase this year. So far 2014 hasnt gone according to script. In contrast to the prevailing optimism I maintain a high degree of skepticism regarding the current rally in U.S. stocks. But opinions are cheap. To back up my gut feeling, here are six very diverse indicators that suggest U.S. stocks are overvalued.
The Muni Minefield
Municipal bonds have long been viewed as a staple asset class for conservative, income-seeking investors. "Munis," as they are known, are a large, liquid market of credit-rated securities that provide tax-exempt (from Federal taxes) income to millions of American investors. Towns, school districts, and other public sector authorities across the country have issued an estimated $3.7 trillion dollars worth of these bonds.
The Corporate Cash Myth
Despite huge amounts of cash on their balance sheets, America's largest companies are as broke as the rest of the country, and not only are they in no position to hire workers, but higher interest rates could result in more layoffs at a time when the nation can least afford it. Given these factors, economists, journalists and politicians should be applauding corporate cash reserves not deriding them. Given that a real recovery will not come until America as a country has paid down some of its debt, we should not be urging our corporations to throw caution to the wind.
Housing Will Remain a Government Program
Recently, the Obama Administration seemed to flash a rare sign of laissez-faire thinking when it issued a report calling for the ?winding down? of Fannie Mae and Freddie Mac, the two taxpayer-guaranteed institutions now responsible for backing at least 90% of the US mortgage market. In its press release, the Administration acknowledged that the private sector should be the ?primary source of mortgage credit," and that their goal is to ?bring private capital back to the mortgage market."
No, Krugman, You're Eating America Alive
Here we go again. This week, Paul Krugman, the 2008 Nobel Prize winner in economics and the go-to guy for progressives who need a morale boost, launched another misguided attack on Austrian School economists. From his New York Times soapbox, he referred to the free-market Austrian ?hard money? philosophy as a ?zombie idea? that is inexplicably eating the brains of the voting public.
Decoupling: Alive and Well
When the global economic crisis began in 2008, many forecasters doubted that the world economy could return to growth without the U.S. consumer. Whether you are looking at ASEAN, OPEC or the EU, however, it is clear that decoupling is the order of the day; the world economy is rebuilding itself with China as its engine and hub. In the old days, it was said that when the United States sneezed, the rest of the world caught a cold. This time, they might just excuse themselves and move to the next car.
Don't Doubt the Double-Dip
A few weeks ago Nouriel Roubini, widely regarded as one of the more pessimistic figures on Wall Street, made headlines by raising his forecasted likelihood of a 'double-dip recession' to a terrifying 40 percent. The vast majority of 'mainstream' economists described these predictions as far too gloomy. Roubini, however, may be right. As the high from last year's monetary and fiscal stimulus wears off, there is a good deal of evidence suggesting that the U.S. economy is weak and deteriorating, and that a renewed contraction in GDP is a near certainty.
Happy Birthday Social Security?
In his weekly radio address this past Saturday, President Obama happily commemorated the 75th anniversary of Social Security. This milestone, however, is nothing to celebrate. For although the president spoke earnestly about the 'obligation to keep the promise' of Social Security, in reality, the program will wreck the government's finances within 10 years.
Chinese Workers Force the Issue
Chinese factory workers and other laborers across the country are going on strike, thus defying the orders of their government-run unions and risking dismissal by their employers. The Chinese government must find a way to nip their labor issues in the bud. The best policy approach would involve yuan revaluation. By reducing the rate of inflation of the Chinese yuan, the purchasing power of the yuan will increase, thereby allowing Chinese workers to better enjoy the fruits of their labor. As living standards rise, worker unrest will subside, and the impetus to strike will vanish.
Key Indicators of a New Depression
During the Great Depression, the U.S. was on the gold standard like everyone else, which forced the country to live within its means. Unfortunately, because of the responses of the Obama Administration and the Federal Reserve, this recession could develop into something far more devastating than its predecessor: a hyperinflationary depression. As bad as the current downturn has been, inflation would make it immeasurably worse. It would require an honest accounting of the problems we face today to avert the disaster we see coming tomorrow.
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