By BRETT ARENDS
Have investors lost their moorings -- or their minds?
As the economy hurtles towards the "fiscal cliff," the stock market is going up, not down. Standard & Poor's 500 is buoyant and is now within a few percentage points of a new, post-Lehman high. The Russell 2000 index of the smallest, riskiest stocks has risen 7% in just a few weeks.
Hello, McFly?! Is there anyone home?
I am going to say two things right now that absolutely nobody else anywhere in the media is likely to say. I could be disbarred for saying it, so don't rat me out.
I have absolutely no idea whether we are going to go over the "fiscal cliff" of tax hikes and spending cuts at the end of this year.
Nor does anybody else.
I doubt even John Boehner and Nancy Pelosi know what's going to happen. But what is as obvious as a kangaroo in a dinner jacket (to steal from the late, great Raymond Chandler) is that there is a significant risk of us going over.
And yet investors are acting like there's no worry whatsoever.
Josh Strauss, money manager at the $1 billion investment firm Pekin Singer Strauss in Chicago, puts it well. If you look at the stock, bond and gold markets, he notes, they are telling you three completely different things about the economy ahead.
The booming stock market "is telling you that the problems of the world are resolved, and we're going to be just fine." Meanwhile, the collapse in bond yields is signaling almost the complete opposite: That we are heading into "deflation and no growth" -- and possibly a nasty recession. And gold, which despite a recent easing remains well ahead over the past six months, is signaling the risk of inflation, financial crisis or both down the road.
At the risk of stating the bleeding obvious, all three of them can't be right.
Strauss notes that in the past, when these markets have disagreed, "it's been the bond market that's been right." This is only half the story, though.
If U.S. stocks were cheap, there would be a case for buying them right now, fiscal cliff or not. Investors who focus on value, rather than predictions, almost always do better down the stretch.
But stocks aren't cheap. The S&P 500 trades at about 21 times average earnings for the past 10 years, according to finance professor Robert Shiller at Yale. The median since 1900: About 15 times. The current dividend yield on the market is just 2.4%. Since 1900, the median is about 4.1%.
And then there is the chart to the right, which shows the S&P 500 going back to 1950. Hardly anybody on Wall Street ever looks at long-term charts. (Their idea of "long-term" or "historical data" is 10 years.) I find it hard to look at this chart and be cheerful.
After adjusting for inflation, we're still about a quarter below the madness of 2000 -- surely the biggest bubble in Western history -- but it still looks to me like we're in Bubbleland and due for a nasty return to reality. The first two bubbles ended in disaster. Third time's a charm? Really?
There are a lot of risks out there. And with stocks at today's elevated prices, investors really aren't being paid very much to take them.