SYNOPSIS: The evidence of a recovery is at best incredibly thin, and the recent surge of stocks is likely a symptom of bubble mania

The big rise in the stock market is definitely telling us something. Bulls think it says the economy is about to take off. But I think it's a sign that America is still blowing bubbles — that a three-year bear market and the biggest corporate scandals in history haven't cured investors of irrational exuberance yet.

Or, to put it another way: it's hard to find any real news to justify the market's leap. Instead, investors seem to be buying stocks because they are rising — which is pretty much the definition of a bubble.

Before the Iraq war, optimists attributed the economy's weakness to prewar jitters. They predicted a great postwar economic surge: oil prices would plunge, reassured consumers would open their wallets and businesses would start investing again.

We're still waiting. Oil prices are off their prewar highs, but they're still higher than they were last fall. Consumers seem to be spending a bit more, but we're talking about fractions of a percent. And businesses are still more interested in cutting costs and laying off workers than buying new capital goods.

There have been some pieces of good news — a not-too-bad manufacturing survey here, a pretty good housing-starts number there. But there has also been bad news, especially regarding employment. Payrolls are still contracting; since the U.S. economy has to create 80,000 jobs a month just to keep up with a growing working-age population, the already miserable job market continues to get worse.

Don't tax cuts and low interest rates create the conditions for an economic rebound? Well, interest rates have been low for a while. And everything that has happened since 2001 suggests that Bush-style tax cuts — which, because they are targeted on the very affluent, basically give people with plenty of cash to spare even more cash to spare — provide very little employment bang per deficit buck. Meanwhile, desperate state and local governments are continuing to slash services and, in a growing number of cases, raising taxes, undoing much or all of the stimulus from the federal government.

Does the collective wisdom of the investor class perceive an imminent, vigorous recovery that is invisible in the data? The market isn't always right. It wasn't right when it sent the Nasdaq to 5000; it wasn't right in the fall of 2001, the summer of 2002 or the late fall of 2002 — three would-be bull markets that fizzled. And selling by corporate insiders hit a two-year high in May.

Meanwhile, the average stock is selling at 31 times earnings, twice the historical norm. And if you take into account pension liabilities and the cost of stock options, that number goes above 40.

A few months ago, some analysts began to argue that because interest rates were so low, even today's very expensive stocks were a good buy. I don't agree, but that's a long discussion. What's clear, however, is that investors' big move back into the market has been driven not by careful comparison of returns, but by the fact that stocks are rising — and the fear that if you don't buy stocks, you'll miss out on a good thing. The new bull market isn't forecasting anything; it's just feeding on itself.

Could the story I'm telling be wrong? Of course. Maybe a vigorous, though still invisible, economic recovery will deliver the sustained, double-digit earnings growth that analysts — apparently not chastened at all by recent history — are once again predicting.

But even if that happy scenario comes to pass, it's hard to justify current stock prices — because if the economy booms, the low interest rates that might conceivably make stocks worth buying at 30 times earnings will soon go away. If and when businesses start borrowing again, they'll have to compete for funds with the federal government, which will be running $400-billion-plus deficits as far as the eye can see. Meanwhile, foreigners won't keep lending us $500 billion each year; in fact, private investment inflows into the United States have already dried up.

Oh, and the banana-republic policies now being followed in Washington won't just drive up interest rates; they'll probably generate a full-blown fiscal crisis one of these years. That can't be good for equity prices.

In short, the current surge in stocks looks like another bubble, one that will eventually burst.

Originally published in The New York Times, 6.20.03