Tags: Zell | Dow | Market | Artificial

Sam Zell: Dow Should Be at 9,000, Market Is 'Artificial' as US Nears Recession

Tuesday, 02 Oct 2012 09:35 AM

The United States is in danger of falling into another recession, as monetary-stimulus measures are artificially pumping up stock prices well above where they should be and doing nothing for the fundamental economy, said billionaire real-estate magnate Sam Zell.

The Dow Jones Industrial Average is currently trading around 13,515, thanks mainly to Federal Reserve intervention, but strip out monetary support and the index would likely fall more than 4,000 points if corporate and economic fundamentals truly reflected share prices, said Zell.

"I think the environment is tough, confidence is low," Zell told CNBC.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

Add to a lack of confidence the tax breaks scheduled to expire at the end of this year at the same time cuts to public spending kick in, a one-two punch known as a fiscal cliff that could send the economy sliding into recession next year if left unchecked by Congress.

Even if Congress does manage to steer the country away from the fiscal cliff, uncertainty over how much businesses of all sizes will be paying in taxes is keeping expansion and hiring at bay.

The Fed, meanwhile, announced recently it will buy $40 billion worth of mortgage-backed securities from banks a month to pump the economy full of liquidity to keep interest rates low and spur recovery.

Such a monetary policy tool, known as quantitative easing but widely referred to as printing money out of thin air, pushes up stock prices but is powerless to tackle fiscal uncertainty.

"Based on the fiscal cliff and all of the headwinds, the stock market should be at 9,000 and not 14,000," Zell said.

Nevertheless, a combination of Fed stimulus and widespread business uncertainty has investors chasing a limited number of stocks, thus sending the Dow higher than where it should be.

"We are beginning to see the excess flow of capital; we're seeing too much capital chasing too few opportunities," Zell noted. "We're creating artificial numbers."

Turning to politics, Zell said re-electing President Barack Obama would make pushing through economic reforms the country needs much more difficult.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

Obama has unveiled a slew of regulations and measures to prop up the economy and the housing sector instead of allowing many sectors of the country to correct and recover on their own.

"I think that the last five years has been all about somebody sticking your finger in the dike. They didn't solve the problem. They stuck their finger in the dike and we know the dike's eventually going to go. And so all I'm saying is we have to address and solve problems," Zell said.

Letting the market clear would have been produced a more vibrant recovery today.

"If the single-family housing market had been allowed to fail, as you would use your term, we would have a viable, terrific housing market today because it would have cleared. By virtue of not allowing it to clear, we have 4 million or 5 million houses in purgatory."

Meanwhile, as corporations continue to delay projects and new ventures, the chance of a recession increases.

"Nobody wants to make commitments beyond tomorrow. We run a company that does a lot of corporate enterprise installations and one of their triggers is when the enterprise projects start getting delayed, we're heading for a recession, and that's exactly what you're looking at right now," Zell said.

"You're looking at capital expenditures across the board being deferred, and they are being deferred for a very good reason. They have no confidence."

While fiscal uncertainty is keeping capital spending at bay, fears of rising inflation rates are doing likewise.

Quantitative easing often evokes inflation fears on grounds that increasing liquidity levels and low interest rates will send prices rising down the road, especially when the economy eventually improves.

For now, however, the policy has had a muted effect, sparking neither inflation nor growth, former Fed Chairman Paul Volcker said.

“It’s not going to have a profound effect on the economy and it’s not going to have any effect on inflation in the short run,” Volcker told a forum sponsored by Bloomberg Link at the New York Athletic Club.

“The basic situation is not an inflationary situation.”

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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