Two thousand eleven has been another banner year for apocalypse, has it not? We started this year in pretty much the
same macroeconomic place we began 2010, i.e. with the near certainty (if you consulted the catastrophist media) that the entire global financial system was about to melt down...because the euro zone was about to melt down...because Greece, whose GDP was about the same size as Maryland's, was on the brink of default. But how would an essentially silly and inconsequential economy like that take down the whole world? Why, the domino theory, of course. In this cartoon fantasy, Greece was Lehman Brothers: the tip of the iceberg, and the seam at
which everything would blow.
The beauty of the euro zone financial crisis-which is no more or less than the inevitable and indeed welcome collapse of European socialism, lest we here in the United States go any further down that doomed path-is that journalism can potentially keep the story running for years: when Greece bites the bullet, the crisis migrates to Italy, then to Spain, then perhaps to Belgium, and so forth. Meanwhile, U.S. banks have had plenty of time to shed (or just hedge out of) their exposure to the euro zone. And the great companies in America and the world, seeing that Europe's economy is going to flat-line or worse for some time, can re-double their efforts in fast-growing areas like China, India, and Brazil.
The European catastrophe story grows daily more shrill, even
as Europe grows daily more irrelevant. Here at home, we've had sky-high unemployment, along with a soaring federal deficit and a runaway national debt. For months, we were instructed to be
terrified that a meaningful resolution of the debt ceiling crisis might not be reached (in the event, it wasn't), and that if it weren't, our sovereign debt might get downgraded (in the event, it did). Next, we were told throughout the third quarter (when Warren Buff ett was investing some $24 billion in stocks and convertible debt) to fear a double-dip recession. The mere fact that there has never been a double-dip recession should not and did not enter the narrative of journalism, but that's a petty quibble which pales before the more important fact that...you guessed it...the recession didn't happen. Instead, industrial production accelerated sharply.
Most recently, we were told that the economy would fall off a cliff, the stock market would crash, and the dollar would turn into scrap paper as gold soared if the Supercommittee didn't reach an accord on debt reduction...which of course it didn't. One can go on and on like this. Have I missed any other news of consequence during this dismal year of serial catastrophe?
Well, I certainly haven't missed any bad news, real or imagined.
But there was one pesky, annoying trend I haven't covered, and which financial journalism has tried its hardest to ignore,
because it doesn't quite square with the reported imminence of Armageddon. It's that the earnings, cash flows and cash
positions of the great American and global companies have continued to march- quarter by quarter in 2011-into new all-
time high ground. (Dividends, which were reduced as companies pulled up the drawbridge during the 2008-2009 financial crisis, are also recovering smartly, though they're still not as high as they were.) The result? Well, on the day I write-a very blue Monday before Thanksgiving, with the equity market down nearly two percent yet again-the S&P 500 has managed to close just about five percent below where it ended in 2010.
When you look at the litany of serial disaster trumpeted by the media this past year-and especially at that "End of America
2011" video, ads for which have been all over cable news channels-it's no surprise that the market isn't up. What seems incredible is that the market isn't down-indeed, hasn't crashed as the legions of doomsayers forecast with such conviction all year.
You're left with a couple of scenarios from which to choose.One is that you know something the market doesn't know, i.e. that the crash is still coming-must be still coming-and has only been delayed.
The other is that the merchants of gloom and doom are wrong (as indeed they have always been in the long run), and that it's the earnings, cash flows and cash positions of the great companies that are telling the truth. None of this is meant to minimize the significant macroeconomic problems which Europe and the United States face, or to suggest that those problems are in the process of going away. They aren't, or at least not yet. Nor are the stock prices of the great companies ignoring these problems: the price/earnings ratio of the S&P 500 has actually halved since 1999.
In your year-end consultation with your financial advisor, you may wish to discuss the possibility that the market is fully cognizant and respectful of the world's macroeconomic difficulties and has, in whole or large part, already priced them in. You may say that almost no one around you thinks that to be the case, and you are surely correctin this. My question, then, is: have you ever known most people to be right?
Annual Financial To-Do List
As always, if you have any questions or comments, I would be happy to discuss them with you.
Sincerely,
