GOVERNMENT CLOUDS VALUE OF INVESTMENTS / THE WALL STREET JOURNAL ( A MUST READ )

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AUGUST 22, 2010, 8:44 P.M. ET.

Government Clouds Value of Investments

By PETER EAVIS

What is anything worth?

That might sound like an utterance from the book of Ecclesiastes or the title of a freshman philosophy paper. But it is a valid question for any investor right now. Gauging the true worth of stocks, bonds and real estate is extremely difficult at a time when their prices are so heavily influenced by the actions, or perceived inaction, of governments and central banks.

The dilemma crops up everywhere. Last week, Sears Holdings shares plunged on disappointing second-quarter earnings. "Appliance stimulus," or state rebate programs aimed at spurring sales of energy-conserving fridges and washing machines, didn't provide the expected boost to Sears's sales, according to some analysts.

On a far bigger scale, take the 10-year Treasury note, a cornerstone for pricing so many other securities. While the Fed's monetary-policy stance has always had an impact on government bonds, its moves have much more sway when the economy's future hinges on monetary stimulus. Just over a month ago, Fed Chairman Ben Bernanke said the economic outlook was "unusually uncertain." Since then, the 10-year note has rallied. The drumbeat is growing louder for the Fed to balloon its balance sheet further by purchasing more assets. But that would only increase its presence in important asset markets, further distorting them.

Of course, there is supposed to be a happy ending. The fiscal and monetary stimulus is meant to bring the private economy to the point where it is self-sustaining. But it is just as likely that the government remains entrenched. Government entities will likely back some 90% of new mortgages for the foreseeable future. And if, miraculously, that backing returned to precrisis levels, it would still be huge. From 1990 to 2006, 54% of all new mortgages had effective taxpayer guarantees, according to data from Inside Mortgage Finance.

Some will take comfort from the fact that it would have been a good bet to buy shares in 2002, when there was huge doubt about the economy and loud calls for the Fed to do more. The S&P 500 rose 67% from the end of 2002 to the end of 2007.

The problem is, anyone unlucky enough to buy the S&P 500 at the end of 2003 would be down today. That underlines the fact that timing is everything. And even more so in markets beholden to aggressive government action. Today's winners will arguably be those who correctly guess the Fed's appetite for shock and awe.

To paraphrase Oscar Wilde: Right now, investors know the price of everything but the value of nothing.

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