Fear and volatility continue to dominate stock markets as the economy sinks into recession and profits estimates suffer from deeper downgrades. But how bearish should investors really be?
Warren Buffett writes in today’s New York Times that now’s the time to buy. He writes, “Be fearful when others are greedy, and be greedy when others are fearful.” He advises investors to get out of cash and get into equities. He then argues, “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”
While Buffett is betting on America in the long-run, there even are two short-run positives amidst the credit crisis.
One is that the Fed is finally pouring new cash into the economy. Over the last five weeks it has jammed in nearly $900 billion of fresh liquidity, doubling the size of its balance sheet. So after being flat for more than 18 months, the Fed’s reserve-bank credit is now growing at a 24 percent annual rate.
One economist who supports the central bank’s money creation is Art Laffer. He argues that falling interest rates amidst the credit squeeze has created a huge appetite for cash. And he is pleased the Fed is supplying enough new money to accommodate that appetite.
Incidentally, while the Fed is cranking up the money supply, the dollar continues to rise and the bond-market inflation spread continues to fall.
The second positive is the collapse of oil prices and the end to the energy bubble. A lot of this is from the U.S. recession. But a lot of it is simply the bursting of a speculative bubble as hedge funds and others keep selling into a declining market. It was bound to happen.
But the really good news is that the energy plunge is a huge tax cut for consumers and businesses. In the past three months retail gas prices at the pump nationwide have dropped about 25 percent, to $3.04 from $4.11. The futures market suggests another 25 cent decline is on the way. All this while the world oil price in dollars has collapsed to near $70 a barrel from nearly $150.
Mark Perry of the Carpe Diem blog estimates annual consumer savings of $188 billion from the fall in gas prices over the past three months. But that’s not all. There’s also a pronounced drop in the price of home heating fuel, natural gas, and many distillates that will provide business and consumer savings. Additionally, corporate profits will improve as a result of the steep decline of energy costs. All of this dwarfs the big-spending stimulus plans being cooked up by the Democratic congressional majority.
I think of the Fed cash injections and the energy tax cut as planting mustard seeds that will bloom into a future bull-market recovery. The mustard seed, of course, is a New Testament reference. My friend Jerry Bowyer fleshes it out: “The kingdom of Heaven is like a grain of mustard seed, which a man took, and sowed in his field: Which indeed is the least of all seeds: but when it is grown, it is the greatest among herbs, and becomes a tree, so that the birds of the air come and lodge in the branches of it.” That’s from Matthew 13:31:32.
So there is hope for optimists like myself.