This column originally appeared on Real Money Pro at 9:00 a.m. EDT on March 27.NEW YORK ( Real Money) --
"Whoever fights monsters should see to it that in the process he does not become a monster. And if you gaze long enough into an abyss, the abyss will gaze back into you." -- Friedrich NietzscheYesterday, my friend/buddy/pal Wells Capital Management's Jim Paulsen made the case on CNBC's "Squawk Box" that the Fed is holding back market prices and valuations by maintaining artificially low interest rates. Jim opined that if the Fed abandoned quantitative easing and allowed interest rates to rise (even appreciably), market valuations would move meaningfully higher. To Jim, the 1970s, 1980s and 1990s represented a distinct period when inflation was elevated and yields were almost always above 6% -- P/E ratios suffered. By contrast, Jim observed that the 1950s and 1960s represented time frames when interest rates started low (well below 6%) and rose -- valuations increased as well, rising to nearly 20x. Jim sees the inevitable rise (second half of 2013?) in interest rates (from very low levels) and a possible Fed exit as signals of an improving economy that will reinforce his case for better market valuations later in the year. Here is the tape of Jim's appearance on CNBC yesterday -- it includes not only his variant view on the relationship between interest rates and stocks but it includes a lot of interesting historical data to support his analysis. Let me start by framing this morning's opening missive with my constructive and deferential view of Jim's body of work. Jim and I are very much mirror images, and we rarely agree. In some ways, our differences are similar to my sometimes at-odds market outlook vs. Jim Cramer. (I sometimes jokingly refer to myself the Anti-Cramer.) Similar to Jimmy C., Jimmy P. has historically viewed the domestic economy and the U.S. stock market as a glass half-full, while I have viewed (especially over the past 18 months) that glass as being half-empty. Since the mid-2000s, Jim Paulsen and I have debated the market and domestic economy's prospects on "Squawk Box," "Street Signs" and frequently on "The Kudlow Report." It is important to note that recently, in those debates, Jim has been materially correct in view while I have been wrong-footed. I routinely receive Jim's research, and what I like most about it is that he backs up his conclusions with hard-hitting facts and analysis. I have even asked him for permission, in the past, to use his supporting charts in order to lend credence to some of my investment and economic conclusions and analyses.
It's Different This Time
"Some people never change, and it's fools like me who believe this time will be different." -- AnonymousLet's now examine where I disagree with Jim Paulsen's views expressed on CNBC's "Squawk Box." History might rhyme, but the domestic economy (and for that matter the global economy) is in a much different place in 2013 compared to the previous time frames that Jim has examined. Specifically, the U.S. economy is far more fragile and dependent upon the policy of easing, arguably, more than any time in history. In support of the case for sluggish domestic economic growth, watch Avondale Chief Market Strategist (and transportation expert) Donald Broughton's comments on "Squawk Box" on Tuesday.