On the other hand, many red flags remain. Stock prices as a percentage of gross national product, a macroeconomic indicator favored by Warren Buffett, remain surprisingly high, about where they were just before the severe bear markets that began in 1929 and 1973. Buffett is, according to his letter recently published in the Berkshire Hathaway 2002 Annual Report, understandably not interested in purchasing new equities now, saying his company can find few if any good buys.
He adds that the extent, complexity, and interdependence of derivatives now likely exceed the highly leveraged margin buying excesses immediately before the Great Depression, and represent a "time bomb" threatening America's financial health as much as significant potential acts of terrorism.
In a recent issue of "Scientific American," the April, 2003, issue ("Defining Poverty," by Rodger Doyle, p. 31), it is pointed out that our nation's official poverty threshold (currently about 12%) criteria are outdated. Likely for political and bureaucratic reasons, an updating of the threshold factors has not been done since the early 1960s.
The magazine suggests that accurate criteria, taking into account working mothers' child care costs, higher Social Security and other taxes levied on the working poor, cost of living differences in various parts of the country, savings needed to cover short-term emergencies, actual liquid wealth (cash and other liquid assets less debts), and other factors, would show a much more bleak picture of our country's capacity for robust growth and readily bouncing back from recession, with 40-45% of households either now in poverty or significantly at risk of being unable to get along without charitable or welfare assistance.
Economists report that the average U.S. consumer's debt vs. annual income level has never been higher.
And then there's SARS (severe acute respiratory syndrome), already a tremendous damper on commerce and tourism in Asia. It seems likely we have not yet seen the worst effects of this disease.
Nor is the current stock earnings yield to government bond yield ratio all it's cracked up to be. Earnings projections turn out to be routinely inflated. Buffett indicates that aggregate earnings increases cannot for long be sustained above the growth level of the gross domestic product. Yet forecast earnings average about 150% or more of GDP growth.