In recent days, I've been having similar "flashbacks" to the last few months of 1998. For the most part, I advocated riding along on the coattails of the great bull market in stocks that accelerated in the last half of the decade. Sure, valuations were getting silly; however, momentum and liquidity were clearly on stocks' side. In addition-even though we did find out later that much of the "wealth" was fleeting-the bull market's role in bolstering everyone's balance sheets was still much in the economy's favor. Businesses spent with abandon, millions of jobs were created, and a virtuous cycle carried the economy and stocks farther than most would have dared dream when the decade began.

There was one notable exception to all this for Yours Truly, however. By the late Summer of 1998, I had become convinced that the great bull market was over. Stocks had labored during much of 1998 with wobbly legs under them; among other things, the previous Fall's Asian crises were a fairly fresh and troublesome memory. Adding to the market's woes next were the Russian collapse and, then, that of the now-notorious hedge fund, Long Term Capital Management. By all appearances, the equity bubble was bursting, and the long-awaited deflationary meltdown had begun.

Led by what was, at the time, the most aggressive injection of liquidity by the Alan Greenspan-led Federal Reserve since the 1987 crash, though, the markets quickly stabilized. Come Hell or high water, the central bank was not going to let the party end without a fight-and fight it did. With the markets here and elsewhere convinced that Greenspan had everything under control, stock prices resumed their long term bull market.

Before long, I was forced by the reality all around me to concede to "The Maestro's" seeming infallibility. By the end of 1998 I had increased my recommended exposure to stocks, as well as added a number of new individual stock and mutual fund recommendations. Adding a bit of a mea culpa, I led off my January, 1999 forecast issue by saying, "Repeat after me: I will never again underestimate the power of liquidity, even on the most overvalued market in history." By the time my February issue came out, I was table-pounding bullish on stocks; not because they represented a great value, but because of the Fed's success in postponing the peak of the bubble. Adding even more fuel, I pointed out, would be all the foreign money pouring into U.S. markets generally due to Y2K fears. Such a combination could have no outcome but dramatically higher prices in 1999 so, I advised, why fight it?

That brings us back to today, and to a question I am compelled to ask myself. Have I again underestimated The Maestro? Can it really be that Greenspan's halo is still in tact, and that he is in the process of snatching victory from the jaws of defeat once more (even if this time around has taken three YEARS instead of three months?)

There are two ways to answer this. I'll start with the easiest of them first.

I have no doubt-and never have had-that Greenspan's Fed would, as I've quipped previously, push on the proverbial string with a bulldozer. The amount of new credit and liquidity made available to the system the last few years has been extraordinary. Short-term interest rates have been cut 13 times. Long-term interest rates were recently at their lowest levels in half a century. The inevitable result of all this, exploding budget deficits and the like has been an erosion in the dollar's value. Taking Greenspan early on and, now, the Bush Administration at their words, I have strongly advocated those areas sure to benefit from the dollar's decline: chiefly (so far) gold, energy and foreign government bonds.

Clearly, though, I underestimated the broad rally for the stock market generally, one I suspected was over not long after the Dow crossed the 9000 mark. Though the just-mentioned dollar-contrary areas and the added great success some of our individual stocks has still given us a very nice year, it might have been better. Hindsight being 20-20, it would have been both better and easier to just load up on the QQQ's or technology-related mutual funds and gone fishing; at least, up to this point. The question now is whether there is sufficient justification to do what I did in late 1998, admit I was too cautious on stocks generally, and say, "Let's not leave any more money on the table."

Unlike back then, the only answer I can come up with to that question today is NO.

This is not to say that the current giddiness on Wall Street and the technical strength still inherent in the market won't take the averages a bit higher still. However-unlike the economic environment that accompanied the recovery from the 1998 scare and helped to give the market enough chance of an extended move higher-today's economic realities are decidedly different.

Back then, the U.S. economy was still enjoying considerable momentum in its own right, even as it had to grapple with the previously-mentioned problems of Russia, Asia, Long Term Capital, et al. Sure, the economy's strength was all pretty much credit-induced. However, that creation of new credit had already established a cycle of strong earnings for business, incredible (even excessive, in some areas) capital spending and the creation of several million new jobs. The economy was firing on almost all cylinders. Even the continued shedding of manufacturing jobs was overwhelmed by the huge numbers of jobs-with their healthy salaries-created in the technology and service areas.

Thus, the financial shocks that buffeted the market five years ago ended up being "market events," rather than anything else. With the economy still humming along it was relatively easy to bounce back from such a thing, given the Fed's injection of liquidity and timely reduction of interest rates, and the solid-looking backdrop.

Today's economy is radically different. Capital spending by business has been in the dumps. Consumer spending-or, more correctly, their proclivity and ability to use their home as an ATM machine-has peaked.

Instead of trying to move higher still while having a job-creating economy providing a tailwind, the stock market must now extend its advance in spite of the drag to the economy of 2.7 million lost jobs over the last three years. Further, it must do so after having been virtually guaranteed that the U.S. economy will see little if any job growth into the future, even as the job markets in India, China and elsewhere thrive at U.S. workers' expense.

Finally, stocks are being asked to reach higher peaks even as the nation's very financial structure has also been transformed in the last five years. Large federal budget surpluses have become record-and still rising-budget deficits. Our balance of payments deficit is at an all-time high.

Finally, the dollar hegemony that for much of the 1990's helped to either hide or cure most other ills has changed. Already, the greenback has lost more than a quarter of its value since its March, 2002 peak, with nothing to show for it except a higher gold price and fears of much bigger declines lurking ahead.

None of this is conducive to stocks' chances of ending the secular bear market that started in 2000. Instead, this cyclical bull market will finish its work, draw in the last few suckers-and then be over with. It might happen next week courtesy of a dramatic escalation in hostilities in Iraq, Syria or elsewhere. It could happen next month if the dollar's decline turns into a rout, and/or long-term interest rates exceed their recent trading highs. As in 1987, all the negative factors may continue to be ignored for a while longer until one day it looks as though someone simply flipped a switch, and traders were jerked back to reality.

Whatever the course, the outcome is certain-and thus argues against trying to chase this stock market higher, at least from its present levels.

Chris Temple
www.nationalinvestor.com
October 16, 2003

For more information and to subscribe, visit www.nationalinvestor.com.