The Great Bull-Bear Disconnect

Includes: AAPL, HL, MUX, RBYCF
by: Paul Nathan

If lately you've been thinking there is some kind of weird disconnect between the economy and the stock market--you are right. We have an economy exhibiting anemic growth, manic-depressive prices, huge government deficits, and political leadership in total disarray. Yet the stock market has doubled from its lows and continues to climb higher.

Despite the incongruence, there is still a case to be made for investing in the market, even if it doesn't appear to be accurately reflecting the economy. Invest in the market and you tie your fortunes to a productive asset - a profit-making enterprise. Most companies will survive the coming years regardless of what happens to the economy. In fact, if there is a recession they will do as they did in 2008 and 2009 - downsize and profit.

Against inflation they will hedge and make money in real terms. Increased government regulation will be responded to with plants and entire businesses being relocated offshore. Higher taxes will see the money head offshore as well. And when prosperity comes, these companies will prosper with it. That is the case for investing for the long-term in solid companies despite the current disconnect.

Recent unemployment figures are revealing. They show employment declining in the public sector but increasing in the private sector. There couldn't be two more different worlds. A public sector that is in debt, overextended, and in decline versus the private sector flush with cash and rich businesses reporting record high profits and ever improving prospects. And that is a big part of why the stock market isn't a reflection of the economy at large.

A perfect example of this is Apple (AAPL). To invest in Apple's stock is to invest in a company that is safer than most nations' sovereign debt. And as a corporation they produce more than many governments and localities around the world. And a company like Apple isn't married to the success of any one nation, as they truly profit internationally in a myriad of markets. Things have changed, and perhaps the safe bet is not so much the money of governments, but the shares of productive companies. Stock certificates have become safer than most currencies.

Another cause for confusion is that current bearish reports look only at the public sector's woes to support their stance. They see the financial nightmares within government and conclude that as go governments, so goes the economy. But that may not be the case. It can be argued that the balance sheets of American companies are just as important as the Federal Reserves. Bears discount this since in their thinking the government will eventually drag the private economy down to its level, and the whole system, private and public, will go broke.

But bulls see the disconnect differently and view it as evidence that while companies are of course affected by the economy, they're also proven survivors who even prosper during recession and extended periods of slow growth. Companies today are increasingly tied to the world's economy, not just America's. The American stock market is one of the best performers in the world precisely because of American companies' ability to compete on a global scale.

The long-term bear is betting on collapse and financial turmoil. Long-term bulls bet on the bad times being temporary, and plan on things returning to normal. After all, every nation that's fallen into the abyss has ultimately risen from it. Argentina, Vietnam and Germany are examples of recovery and a return to prosperity despite severe setbacks. I've been betting on a similar return to prosperity in the long-term and have chosen to invest in resource companies like McEwen Mining (MUX), Rubicon Minerals (RBY), and Aurizon Mines (AZK), that will increase as world growth and prosperity do so.

I consider myself a realistic, but a cautious bull, and count on the demand for resources to act as a defense against irrational government policies. Gold and silver are, by default, becoming the world's new money, and are in demand by individuals, institutions, and the world's governments. Copper will also move up with world growth. Likewise, agriculture and potash along with it, increases in demand as prosperity and populations increase.

There is no question we will always have ups and downs. But long-term, the direction is generally up for companies that can compete and produce. In effect, by accumulating shares in stocks, I have gone long on free-enterprise ingenuity and short government incompetence.

Disclosure: I am long MUX, RBY, AZK.