Mailbag: Minyanville Bear Trader writes: Answers question of Observer on when to wear Rally Caps-----

(Ed.note: This is a sample of sentiment of investors that have written the Observer and is not intended in any way to be investment advice. Writer is a bear. The charts referred to were not able to be converted to Blog format.)


"Here is the spreadsheet I mentioned where the SP500 is corrected for inflation. Look at chart #1. The inflation calculation is the pre-1980 CPI algorithm. Notice that inflation (chart#2) using the pre-1980 CPI calculation is much higher than the current index. Also notice that the SP500 has been nearly flat for years. The peak in the 1990's was caused by the "dot.com" bubble, which in turn was caused by reckless Federal Reserve activity. Notice that there has been no real return on the SP500 since 2003 and that the current SP500, adjusted for inflation, is the same as it was in 1987.

Corrected for inflation the SP500 doubled from 1982 to 1996, 14 years, for an annual, after inflation, return of about 5.3%. Those were the days.

I've run some studies on the historic Treasury yield curve. They show Federal Reserve activity nicely. What a mess. They really could not have done more damage. The middle class was being destroyed and no one seemed to notice.

The greatest stability with reasonable inflation happens at about 50 - 100 basis points between the 3 month T Bill and the 10 year T Bond. Recently , Dec '04, the yield curve went inverted (Bernanke trying to defuse Greenspan's time bomb), and stayed inverted into 2006, marking the beginning of the credit "crisis". Borrowing short term to service long term obligations stopped being a gusher of money and went into the red. This is what killed the banks. Well, stupidity, greed, vanity, etc. of course, too, and an utterly incompetent voting public (stupidity, greed, vanity, etc.) . As far as when to be bullish in the market, the BKX going up along with Google has been working since the January lows. Banks plus high beta stocks, essentially. The big turn around in stocks is very much unknown, but it could be really low if the foreigners pull out for real. They are definately thinking about it. The only places to put money are pretty poor worldwide though."