Beware the Obama Stock Bubble

Presidential history can be pretty interesting... with odd coincidences and ominously repeated date, economic and other patterns. For example, Ronald Reagan's presidency is notable for breaking Tecumseh's Curse. The curse apparently started in 1840 when President William Henry Harrison came to office. He defeated a great Native American chief in battle... and, himself, subsequently died in office. Thereafter, all presidents who were elected (not sworn in) in a year ending in zero... died in office... until the curse was broken when Reagan survived assassination attempts and ended his two terms alive and kicking. George W. Bush became president in 2000 but is alive and well today... so Tecumseh's Curse is broken, thank heavens!

But, ironically, while Reagan broke Tecumseh's Curse, he may have set in motion another curse... this one economic in nature... where two-term presidents assume office during an economic downturn, preside over a strong economic recovery... and see that recovery grow to bubble proportions and end in a market crash.

When Reagan assumed office, the economy was in pretty bad shape with double-digit inflation - unheard of previously - and the highest rate of unemployment after World War II. Then Reagan went about fixing the economy and the Dow soared 150% from below 800 in mid-1982 to over 2,000 by early 1987... and then, just a year before the 1988 presidential election, the Dow suffered its largest one-day drop in history, falling 22.6% on Black Monday - October 19, 1987.

Bill Clinton's two term presidency, with Alan Greenspan as Chairman of the Federal Reserve Bank, saw the Nasdaq rise seven-fold in only six years, to over 5,000 by March 2000... only to burst spectacularly with the dot-com bust... which took the Nasdaq back down to 1,000 by late 2002.

George W. Bush walked into the messy economic aftermath of the dot-com bust but soon had it much worse with the 9/11 terror attacks in 2011 - then Bush used massive tax cuts, easy monetary policy and massive government spending on defense and domestic security to pull the economy out of its slump. During the Bush years, as most of you will remember, housing boomed to fantastic bubble proportions and the Dow hit a record high in 2007, only to flameout with a spectacular housing bust and a Wall Street banking crisis of unforeseen proportions... which we still have not recovered completely from.

So now we come to Obama, our latest two term president... Obama inherited the housing bust and financial collapse... which he has fought with near-zero interest rates, government funded bailouts and massive quantitative easing... but instead of creating jobs, this money has fueled a rally in stocks to eye-popping valuations... which many predict will inevitably end in a severe bust. With the Fed now printing $85 billion every month, word on the street is that the Fed will continue easy monetary policy without worrying about a stock market bubble. What's different this time, though, is that interest rates are as low as they can go and... with our national debt at an all-time high... we have little fiscal ammo to combat future economic problems.

Basically, all this money that the Fed is printing is inflating the stock market... with very little trickling down to create new jobs and capital investment for long-term economic growth... and this is what worries market watchers.

Well known fund manager Bob Rodriguez has little confidence in the Federal Reserve's ability to anticipate and ward off bubbles... Rodriguez predicts severe economic turmoil in the 2014-2018 timeframe because of low government liquidity - with a large chunk of government funds going to pay-off interest on $21.3 trillion in federal, state and local debt. Rodriguez believes this is a good time to stay out of stocks because valuations are driven by unsustainable monetary and fiscal policy. His firm, First Pacific, is also a net seller of bonds because rising interest rates could kill bond prices.

... so while I am a strong proponent of long-term equity appreciation, I also think it makes sense to not get too carried away or too greedy... perhaps making this a good time to consider cashing in gains or seeking income through strategies such as covered calls, and holding off on buying stocks unless you think they are very attractive on fundamental valuation... and on the latter, I'd urge you to dig deeper on earnings growth to see if it is long-term sustainable. If earnings growth is driven by artificially low interest rates and low wages, current share prices may not be sustainable.

It's always hard to predict where the market's headed, especially when the Fed is artificially printing and pumping boatloads of cash every month, but by being diligent and doing your homework, maybe you can prevent the toil and trouble of this witches' brew!

at 7:43 PM
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