Me Thinks They Cheerlead Too Much

The stock market has continued to climb for quite a while now. We really have not had a meaningful drop in the market in about 10 months and we are looking a little overdue for one.

The market has obviously been boosted by the way Washington and Wall Street are trotting out various spokesmen, from Treasury Secretary Snow to various Fed Governors, almost daily. I don’t like to be a cynic, but all of them seem to be downplaying the plunging dollar along with budget and trade deficits, claiming there is no sign of inflation anywhere, no chance the Fed will need to raise interest rates, and what not.

I am always suspicious when officials feel the need to act so defensively and put so much effort into trying to affect investor decisions, a tactic usually employed when they don’t dare let the numbers and the facts speak for themselves.

With stocks clearly overvalued (a technical term for “not worth it”) buy and hold investors, like a herd of sheep, are being nudged toward another round of bruising losses. When it will start, no one can say, but at Hepburn Capital Management we are ready for it.

Lessons in Economics

Years ago, people would frequently berate the Japanese for their economic successes. Always the contrarian, I used to say “Thank God for the Japanese” much to the chagrin of those around me. The way I looked at it, the Japanese spent hundreds of millions of dollars to build car plants here and then they left 98% of the money they made here in the form of paychecks for American workers, supplies and parts, taxes, etc.

What really made this sweet for the U.S. was that the 2% profit that went to Japan was also sent back to us to buy our stocks and Treasury bonds. We ended up getting all of the money. Life was good – for us.

Now Japan is in a financial mess and has been for a dozen years. Like you, I find it disturbing that so many American companies are now exporting jobs by building plants abroad like the Japanese did in the 1980’s. I just hope that somewhere in the world folks are saying “Thank God for the Americans”.

Mike Glasior gave me a concise and interesting economics lesson recently. He pointed out that U.S. inflation remains very low, but never entirely slid into negative territory. There are a few pockets of deflation, however, which caused many retailers fits this holiday season, such as apparel and consumer electronics. Apparel is currently falling in price at a 5% annual rate, while consumer electronics are falling 15-20%.

If prices are actually falling 20%, then retailers have to sell 20% more "stuff" just to keep their sales figures from falling. 20% growth is no easy task in any economy, and this illustrates clearly why deflation is such a horrifying situation to economists and the Federal Reserve Board.

What is the Fed’s solution? Inflation. Get ready for it by not holding long term bonds or bond funds whose values would likely be eroded by inflation. Ditto for long term annuities, mortgages, etc. We take care of this for our managed accounts, but if you don’t know what you hold elsewhere, call and we can look it up and tell you if you have one of these vulnerable investments.

Serious bouts of U.S. inflation have occurred about every 30 years, 1918, 1948 and 1978 were all times of high inflation. These are the periods that spawn tales of retirees on fixed incomes becoming poverty stricken as their savings and pensions are devastated by inflation. Do we have another cycle coming? I wouldn’t bet against it.

Will our country survive it? Of course. But some of us who see it coming will survive better than others.


Those of us entering Geezerdom will appreciate this. For those who are not, just look at what you missed.

"Hey Dad," my son asked the other day, "What was your favorite fast food when you were growing up?" "We didn't have fast food when I was growing up," I informed him. "All the food was slow." "C'mon, seriously. Where did you eat?" "It was a place called 'at home,'" I explained. "Grandma cooked every day. When Grandpa got home from work, we sat down together at the dining room table, and if I didn't like what she put on my plate I was allowed to sit there until I did like it." By this time, the kid was laughing so hard I was afraid he was going to suffer serious internal damage, so I didn't tell him the part about how I had to have permission to leave the table. But here are some other things I would have told him about my childhood if I figured his system could have handled it:

Some parents NEVER owned their own house, wore Levis, set foot on a golf course, traveled out of the country or had a credit card. In their later years they had something called a revolving charge card. The card was good only at Sears Roebuck. Or maybe it was Sears AND Roebuck. Either way, there is no Roebuck anymore. Maybe he died.

My parents never drove me to soccer practice. This was mostly because we never had heard of soccer. I had a bicycle that weighed probably 50 pounds, and only had one speed, (slow). We didn't have a television in our house at all until dad brought home one with a 7” screen. Some neighbors had one before that. It was, of course, black and white, but they bought a piece of colored plastic to cover the screen. The top third was blue, like the sky, and the bottom third was green, like grass. The middle third was red. It was perfect for programs that had scenes of fire trucks riding across someone's lawn on a sunny day. Some people had a lens taped to the front of the TV to make the picture look larger. There was no cable. All TVs had “rabbit ears”.

I never had a telephone in my room. The only phone in the house was in the living room and it was on a party line. Before you could dial, you had to listen and make sure some people you didn't know weren't already

using the line. Shoe stores had x-ray machines that showed your feet inside the shoe. I’m surprised I don’t have 18 toes today.

Pizzas were not delivered to our home. But milk was. All newspapers were delivered by boys, and all boys delivered newspapers. I delivered newspapers, six days a week for 50 cents a day—less than a penny per paper.. I got an extra 50 cents a week if no one complained about missing papers or broken windows. On Sundays I hawked more papers at a busy intersection sort of like cold beer at Wrigley Field.

Movie stars kissed with their mouths shut. At least, they did in the movies. Touching someone else's tongue with yours was called French kissing and they didn't do that in movies. I don't know what they did in French movies. French movies were dirty and we weren't allowed to see them.

How many memories like this do you have? Pop bottles with special stoppers with holes for sprinkling water on clothes before there were steam irons. Head light dimmer switches on the floor. Ignition switches on the dashboard. Heaters mounted on the inside of the fire wall. Six volt electrical systems. Real ice-boxes. Pant leg clips for bicycles without chain guards. Soldering irons you heat on a gas burner. Using hand signals for cars without turn signals. Calculators with hand cranks.

My first Army paycheck was $92 per month before deductions. And those were the good old days.

February 2004


Quote of the Month

“The trend is up until it isn’t.”

Peter Mauthe, Spectrum Financial



Will Hepburn is a private investment manager who specializes in active investment strategies. He owns the Prescott Center for Adaptive Market Strategies, and is President of Hepburn Capital Management, LLC, a Registered Investment Advisor. He may be reached at 2069 Willow Creek Road in Prescott, AZ or by calling (928) 778-4000 or emailing

Copyright 2004. 

The information contained in this newsletter is derived from sources believed to be accurate. You should discuss any legal, tax, or financial matters with the appropriate professional. Neither the information presented nor any opinion expressed constitutes a solicitation for purchase or sale or any security.