They are sentries at the stock market’s wall of worry, warning investors to prepare for another epic crash for debt-laden economies.
But with U.S. equity markets on a tear since early October, hitting levels not touched in several years, most of Wall Street isn’t seeing much cause for alarm.
Instead, increasingly optimistic buyers have pushed the Dow Jones industrial average above 13,000; the Nasdaq composite index over 3,000, and the Standard & Poor’s 500 index past 1,400.
The gains extend beyond stocks. Gold may be off its September 2011 high of $1,907 an ounce, but is still in the respectable mid $1,600s, and oil remains above $100 a barrel. Meanwhile, yields on both the 10-year Treasury note and the 30-year bond are around a percentage point lower from a year ago, boosting bond values.
Also, the greenback is rising. The U.S. Dollar Index, a measure of the dollar against six other major currencies, is up sharply over the past 12 months.
It’s enough to make a confirmed pessimist downright gloomy.
After all, what’s a doomsayer to do when it seems everything — even Europe — is rallying? Do you stand your ground in cash, or join the crowd and closely eye the exit?
Of the five market skeptics interviewed for this article, four are reluctantly going along for the ride.
The consensus among this group is that the rally is not sustainable — just another big party before an even bigger hangover. They see stock prices as being artificially inflated by Federal Reserve policies of quantitative easing and low interest rates, and that to put out the fires in Europe, the European Central Bank has gotten in on the act.
But, these strategists say, while these monetary drugs are palliative to markets, they require bigger doses for progressively dwindling results and will eventually fail.
FIVE SHADES OF GRAY
1. Peter Schiff • Peter Schiff, chief executive of Euro Pacific Capital, said the worst investment now is bonds, because it’s the one asset that hasn’t been crushed. The second-worst is cash, because the Fed insists inflation isn’t a threat, he said.
Schiff said the Fed can be in denial about inflation for only so long and eventually will have to raise interest rates.
“They’ll keep (rates) low until the market forces them,” Schiff said guaranteed pay day loans. “It’s like trying to hide it when you’re pregnant, you can only do it for so long.”
2. Harry Dent Jr. • Harry Dent Jr., head of research and forecasting firm HS Dent, said the recovery is “artificial” in that it’s being fueled by quantitative easing measures in the U.S. and Europe.
Aging baby boomers are no longer fueling U.S. economic growth, he said, and younger generations can’t keep the momentum going. “The government and most economists are in denial when the largest generation is spending less and paying down their debt,” he said.
3. A. Gary Shilling • Economic consultant A. Gary Shilling said stocks are vulnerable because the consumer is worn out, and that puts businesses, and the broader economy, on weak footing.
Shilling has long predicted that Fed measures to stimulate the economy will fall short and believes the global economy is in a long period of deleveraging marked by anemic growth.
“If the consumer pulls back, there’s nothing else in the economy that can sustain growth, and if the consumer retrenches, we have a recession,” Shilling said.
4. Charles Biderman • Charles Biderman, who heads TrimTabs Investment Research, said he’s bullish on stocks given that the Fed’s cheap money is levitating prices. But, he added, at some point stocks are going to drop.
A day will come, Biderman said, when the Fed will pull the plug on cheap money. Then he sees the Dow tumbling to financial crisis lows in the 6,000 range. For clues, watch what companies are doing with their cash, he said. “If buybacks slow,” he said, “that would be the time to start getting out.”
5. Robert Prechter • Robert Prechter, head of market forecasting firm Elliott Wave International and the most bearish of the five, said investors should shun every asset class popular now, including stocks, commodities, metals and bonds.
“Hold cash, and keep it safe,” Prechter said. “There will be another buying opportunity, probably about four years from now.”
He added: “When investors are afraid again, and when stocks are cheap again, that will be the time to buy.”
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