what's it good for?'
Commentary: War could trigger fourth bear market year
B. Farrell, CBS.MarketWatch.com
Last Update: 12:02 AM ET Dec. 10, 2002
LOS ANGELES (CBS.MW) -- Much like a Sienfeld sitcom, everyone from Bush and the Congress down to your barber is trying to convince you that there's nothing to worry about in the coming war with Iraq.
Remember the episode where Jerry convinces a gullible Elaine that the original title for "War and Peace" was "War, What's it Good For?" Without meaning to, this classic show "about nothing" raised an interesting question. What is war good for?
Certainly not your portfolio.
America moving in two parallel universes
Sometimes I feel like I'm the only one who feels that we're living in a schizophrenic world -- simultaneously hearing two very distinct, yet very contradictory, messages from a confused and ever confusing leadership.
In one we hear an emerging new conventional wisdom speaking of economic recovery and a return of the bull market. In the other is the rapidly approaching war that could add massive, uncertain costs heaped on top of an already fragile and vulnerable economy.
Does anyone else feel like America is living in two parallel universes, occupying two different time continuums? One, filled with cheerleaders hyping the good times ahead. The other, a soft voice warning of the coming darkness.
Scenario No. 1: Time for normal cyclical recovery
First: What's America's emerging new conventional wisdom? The cover of Money magazine says it all: "Stocks Will Rock, Bonds Will Bomb and Cash Is King!"
Here's how we're supposed to see this drama play out:
Coach Bush now has a new economic team ready for a two-year reelection run. Cheers. History tells us that the third year's a charm in a president's term. Besides, markets recover on average 25 percent one year after a war.
Next: Factor in warnings from the nation's top bond fund managers, Pimco and Vanguard, that the bond rally is over. So dump bonds. And "buy stocks," is the message we've been hearing from money managers like Laszlo Birinyi and Ken Fisher for months.
In fact, there's evidence the rush is already on: The euphoria surfaced in a nice little rally the past couple months.
Corporate insiders are buying big-time, always a hot sign. Plus Internet stocks are back up into the 70 to 200 P/E stratosphere.
A bit high, but overall "P/Es are just fine," says Wharton economist Jeremy Siegel, who's now telling us to jump back and join the fun!
And that's the new conventional wisdom being fed to a gullible public desperately seeking good news: Economic recovery and a new bull market in 2003!
Scenario No. 2: Extended war, historic 4th year of bear market
Unfortunately, we're downplaying war costs.
In fact, in the hype we're downplaying the added costs of everything. A federal deficit that's already over $200 billion and huge scary state deficits. Then there's rising consumer debt, a looming healthcare crisis -- to name a few.
A hundred billion here, a hundred billion there. It all adds up. The war could push us over the edge. Except we downplay it.
War is something "out there" for most Americans. Distant. It happens to other nations in 30-second sound bites. CNN sanitizes war, editing out the gory details so as not to offend our sensitive natures.
Or you can flip the remote and, presto, you're watching war on "Alias," "24 Hours" and "Agency," where our heroes win the battle in less than an hour.
War, what's it good for?
How much will it cost? It depends on how long the war takes.
But who can comprehend estimates between $600 billion and $2 trillion? Including reconstruction costs and fighting terrorist retaliations in other locations. That's about $2,000 to $6,000 per American. Unfortunately, the cost is not registering.
The truth is that psychologically, America is tired of bad news. We've had enough of this rotten three-year bear market. We're ready for a recovery. Good news is really all we want to hear, so we tune out the bad news that just may push us back into a recession and a historic fourth year of a bear market.
Equity-income funds ... best of both worlds
American investors should move cautiously. Jumping on the "buy-now" bandwagon is as dangerous a strategy as ignoring the impact of war costs. If you have a well-diversified portfolio, now is not the time to react.
If you have too much in cash and bonds, you might want to rebalance and shift 5 percent to15 percent into dividend paying stocks. That idea came to me from David Gaddis, an adviser with Edward Jones in Pismo Beach, CA.
They're coming back in favor. And they'll look even better if the Bush team gets new legislation reducing the tax impact on dividends.
Equity income mutual funds invest at least 65 percent of their assets in dividend-paying stocks. Several are no-loads averaging over 10 percent annually the past decade, according to Morningstar.
Equity income funds such as Parnassus Equity-Income (PRBLX: news, chart, profile), Gabelli Equity-Income (GABEX: news, chart, profile), T. Rowe Price Equity-Income (PRFDX: news, chart, profile), Fidelity Equity-Income II (FEQTX: news, chart, profile), and Vanguard Equity-Income (VEIPX: news, chart, profile) work well in bull and bear scenarios.
Pray for scenario No. 1, prepare for scenario No. 2
"War and Peace" reflected Tolstoy's view that all life is predestined. We act as if we have free will, we take responsibility, even appear powerful, but ultimately, we are impotent to deny the inevitable flow of history - much like Bush's march to Baghdad.
That thought may be offensive and unacceptable to the average American, but not to a political historian such as Kevin Phillips, author of twenty-five books since working as President Nixon's chief strategist. In his latest book, "Wealth & Democracy," Phillips warns that America is on the verge of repeating some bad history.
Over the centuries, Phillips says, most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out.
I hope he's wrong. But he could be right. (That's me talking from two parallel universes, trapped in both with the rest of America).