James W. Paulsen, chief investment officer, Norwest Investment Management Inc. -- an unconventional banking company with ownership of several investment management organizations -- has unorthodox views on the reason for the sensational stock market and underlying economy.
In sum, he sees "weakness begetting strength."
The performance of the economy has been so good because the pace of economic growth has been so weak, he believes. The stock market, following his same line of unusual analysis, has been on a record-setting pace because of the underlying "weak economy."
Mr. Paulsen's thinking, pronounced in the Minneapolis-based firm's Economic and Market Perspective report, would likely disabuse anyone who thinks he or she has heard every kind of explanation for the spectacular performance of the stock market.
Knowing his firm may help understand Mr. Paulsen's views. Norwest, by its unusual structure, seems to encourage unorthodox thinking.
Norwest Investment Management's core value equity style is managed not in Minneapolis but out of Helena, Mont., while its quantitative bond approach is managed from Fort Wayne, Ind.
Norwest Corp. owns all or part of five investment management firms, including Norwest Investment Management, has an affiliation with another firm and is open to buying interests in more firms.
Mr. Paulsen dates the economic paradox of the bull market to 1987.
"In 1987, a significant event occurred -- and it wasn't the stock market crash" of Oct. 19, he writes. "It was the debt crash.
"After WWII, debt growth escalated to higher and higher levels in every ensuing expansion. By 1987, it peaked at an annual rate of about 15%. By the early 1990s, it had crashed near a post-war low of about 4% and has languished at this record low ever since.
"The use of debt played a dominant role in ensuring strong demand. In an economy without debt, demand can only grow as fast as income grows.
"The collapse of borrowing propensities has produced an ongoing 'implosion' in total U.S. sales growth."
The death of sales -- a term he uses -- is a key to his understanding of the stock market and economy.
"Profits have soared in this decade . . . because record low sales forced corporations to widen margins," forcing companies to make severe cost reduction efforts.
"This has been a decade, like no other, premised on contraction," he contends.
"Constant cost reductions have been required to keep up with ever weakening top-line growth...(C)onsumption has been stimulated not by excessive fiscal or monetary accommodation, but rather by falling prices.
"Bizarre as it may seem, we think that a pronounced and persistent decline in top-line sales growth has been and continues to be the driving force behind the 1990s economic miracle."
Weak sales growth forced a "revolution in behaviors" among corporate executives, he believes. Instead of always thinking expansion, chief executive officers "focused primarily on making more on a dwindling sales dollar. Payrolls were cut . . . inventory was minimized . . . suppliers beaten up" and so on.
His analysis, five densely worded pages, is provocative and lively reading. What does he conclude in terms of the markets?
Because of "deflating interest rates," he thinks the rest of the 1990s "will likely continue to be hospitable for bonds," which "offer an excellent risk/reward profile and should play an increasingly dominant role in most portfolios."
As for stocks, he thinks "risks are high," but if interest rates and inflation continue to decline, "stock prices will most likely follow bond prices higher."
In terms of allocation, he advises to stay in stocks, but "move the allocation of the portfolio somewhat toward bonds," increasing exposure to yield stocks and concentrate on large-cap multinationals.
Surely, Mr. Paulsen takes an unconventional route to arrive at that asset mix.