Mardi Gras Is Over?

At 6:00 most mornings, I check business headlines, futures, overnight trading in Asia, the 10 year Treasury, and the dollar. This morning I was greeted by this headline, “Birinyi Buys as Biggest Bull Rally Since ‘55 Hits Third Year.” What followed was one of the most bullish series of arguments I’ve read in a few years. As my regular readers know, while we are always nearly fully invested, we have been cautious and suspicious of this recovery. This Birinyi article made me rethink my caution again.

Trillions of dollars have been swept into the US Economy over the past two and a half years by the Federal Reserve, Congress, and the administration. The immediate result of the aggressive actions was that a collapse of the financial markets, especially the overnight liquidity markets, was averted. A longer-term consequence was that those trillions of dollars caused the economy to swell. While this swelling was heralded as resilience, it was not. It was the direct effect of an injection.

(Chart source BEA and CBO)

The goal and hope of this emergency economic re-inflation is that it will lead to stronger headline numbers (which it has), greater consumer and investor confidence (which it has), and therefore, a recovery that will find traction of its own and continue in a self-sustaining way (which it may but hasn’t yet.)

Laszlo Birinyi is a very smart guy and has made a lot of money as an investor. He is a numbers guy who is devoted to data. Other big names like Barton Biggs, Byron Wien, and Ken Fisher added to the article’s bullish conclusion.

My concern is that while the current data mirror the data we’ve seen during most historical recoveries, NONE of those recoveries was fueled so exclusively nor so extensively by Keynesian government dollars. The increasing national debt and ongoing deficit spending, the resumed fall in housing prices, the precarious position of the banks, and politicians desperate to do SOMETHING that will be meaningful (while not risking votes) are considerable risks that I believe are being ignored by the venerable big-named bulls.

So, we continue to do research, analyze financial statements, , and deploy our investment dollars into what we believe are very solid businesses that are growing and selling at reasonable prices. We are not willing to take the “just-go-for-it,” “nothing-will-go-wrong” risk that our colleagues advocate. Farr, Miller & Washington will always risk losing an opportunity rather than risk losing a client’s money.

The jury is still out. Maybe our caution will prove a mistake. There are precious few clear answers. Investors are tasked with discerning opportunities and weighing risks. Mardi Gras is over, and the faithful are wearing ashes today. “Laissez les bons temps rouler,” are words to live by on Bourbon Street but are not very helpful with your long-term investment portfolio.

Hang in there.