04/26/2006
Is all of the stock market revelry we've seen in recent weeks a bit too good to be true? Are we wandering blindly into another repeat of the carefree days of the late 1990s? Well, one of my respected colleagues thinks that may in fact be the case.
I recently had the privilege of interviewing Pete Navarro on the weekend edition of Making Money with Doug Fabian. Pete is a really smart guy. He's a Harvard-educated economist, who now teaches economics at the University of California, Irvine. He has written frequently on economic, energy and environmental issues, and he's the author of five books on economics and public policy, including The Dimming of America, The Policy Game, and If It's Raining in Brazil, Buy Starbucks: The Investor's Guide to Profiting From News. His website is www.peternavarro.com.
Pete had some really interesting things to say about the current state of the markets. He says the current climate reminds him of what happened right at the end of the 1990s -- that's right, in the months just prior to the fierce selloff in stocks. Here are a few of the highlights from Pete's market commentary:
Navarro's Big Economic Picture: The Ratchet Effect
"In the fourth quarter of last year, the GDP growth rate fell to an anemic 1.7%, sparking fears of recession. However, all signs are now pointing to a strong rebound in the first quarter GDP numbers due on April 28. Based on this anticipated rebound, there is a growing presumption that the economy is 'back on track.' It is important, however, not to be deceived by robust growth in the possible last stages of an expansion. The following figures explain why, and also why this economy feels a lot like the 2000 economy.
In the first quarter of 2000, let's remember, real GDP growth fell from a knockout 7.3% to a meager 1.0%, sparking fears of recession. However, in the second quarter, growth bounced back sharply to 6.4% and most everyone once again breathed a sign of relief. That was premature. By the next quarter, GDP went negative and really never breached 3% again until the second quarter of 2003.
The possible parallel to the current situation should be obvious. Even if we get a blowout GDP number for this quarter as a rebound from last (estimated as high as 5% or more), that doesn't mean that higher interest rates, higher commodity prices, a persistent oil price shock, and a slow motion collapse in the housing sector won't bring a repeat of the slow-growth 2001 scenario -- and validate the yield curve inversions signaling trouble ahead."
Navarro's Big Economic Picture: Is it 1994 or 2000?
"This economy and market are just screaming at me, 'late stage expansion' sprinting towards the precipice -- just like in 2000. On the other hand, the bulls are saying that this is an early-stage economic expansion just like we saw in 1994 that set the stage for the glorious bull run and tech bubble of the 1990s.
In my world, I see a sustained energy price shock and supply side inflation building as commodity prices reach for the moon. I see the Fed chasing its inflation-controlling tail as it ratchets up interest rates to 5% on its likely way to 5 1/2%. I see a yield curve finally rising on the long end but still flatter than an IHOP short stack at only 25 basis points. I see a housing market rolling over like the Poseidon. I see Asian capital at some point deciding not to accommodate our budget and trade deficits and sending the long end soaring. I see employment rising as a purely lagging indicator and additional evidence that corporations often hire too late into an expansion at premium wages.
In the bull's world, they see a belated rise in the long end of the yield curve as a signal of demand side inflation and prosperity rather than supply side troubles ahead. They think that the consumer will keep spending through thick and thin, regardless of whether personal income or wages rise and even if their housing equity goes negative or falls.
I don't know who will be right in the end. I do, however, note this one crucial difference between 1994 and 2000. Beginning in 1992, oil prices fell from $27 per barrel to as low as $14 per barrel in 1998. Then, the crude hit the fan as prices spiked up to $31 in 2000 -- and helped trigger the recession. Now we have another spike -- so I'm thinking it's more like 2000 than 1994, at least in the oil world."
Some provocative thoughts indeed from Pete Navarro, and that's at least one voice echoing some of the same things we've been warning about for quite a while. Like Pete, I don't know how things are going to shake out. What I do know is that whichever scenario plays out, we're prepared to profit from it.
Pete Navarro's latest book is The Well-Timed Strategy, which shows how the best companies in the world strategically and tactically manage the business cycle. You can listen to my complete interview with Pete Navarro at the archives section of DougFabian.com by clicking on the link below:
http://www.dougfabian.com/radio/previousdaily.jsp
We talk a lot on the radio show and in the pages of my newsletters about choosing the right cohorts in your battle to achieve wealth. Let's face it, there are a lot of charlatans, knaves and scoundrels out there in the financial kingdom, and most of them are out for the quick buck and they don't take prisoners.
Fortunately there are many good companies helping people protect and grow their financial assets at a fair price. Every now and then I like to give these companies a little love in the cyber pages of the Making Money Alert, and in the old-fashioned pulp pages of my Successful Investing and High Monthly Income newsletters.
Here are a few of my favorite brokerages, mutual fund companies and life insurance providers. All of these companies provide their clients excellent service at a fair price, and in most cases their services will be well below industry averages.
| Fabian Recommended Brokerages | Web Site Addresses | Toll Free Number |
| Scottrade | www.scottrade.com | (800)619-7283 |
| TD Ameritrade* | www.tdameritrade.com | (800)454-9272 |
| Fidelity Brokerage* | www.fidelity.com | (800)343-3548 |
| Schwab | www.schwab.com | (800)435-4000 |
| Fabian Recommended Fund Families | ||
| T. Rowe Price | www.troweprice.com | (800)638-5660 |
| Fidelity | www.fidelity.com | (800)343-3548 |
| Vanguard | www.vanguard.com | (800)662-7447 |
| Rydex Funds | www.rydexfunds.com | (800)820-0888 |
| ProFunds | www.profunds.com | (888)776-3637 |
| American Century | www.americancentury.com | (800)345-2021 |
| Insurance: Variable Annuities & Variable Universal Life Products | ||
| Ameritas Direct | www.ameritasdirect.com | (800)555-4655 |
| *Note for existing clients different phone numbers | Phone Number for Existing Accounts | |
| TD Ameritrade | Former Ameritrade accounts investors | 800-669-3900 |
| Former TD Waterhouse accounts | 800-934-4448 | |
| Fidelity | Brokerage, Mutual Fund | 800-544-6666 |
OK, now that you know who my troops are, don't you want to find out more about my battle plan? If so, click on the link below:
http://www.fabianssuccessfulinvesting.com/order.php?offer=12
Note: Ameritas Direct is a sponsor of the Making Money with Doug Fabian radio show. We have no other financial relationship or arrangements with any of the other companies listed above.
"In the old days the promoters wanted more and more from me. They wanted me to jump or spill my blood and break my bones. Every time they wanted me to jump further, and further, and further. Hell, they thought my bike had wings."
-- Evel Knievel
Trying to push your investments further and further can lead to the same amount of pain that motorcycle stuntman Evel Knievel experienced during his years in the spotlight. When it comes to investing, you've got to know your limitations. You've also got to know when it is safe to twist that throttle, and when you are better off leaving your bike in the garage.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.