weekend commentary - genuine economic upswing or 'calm before the storm' ?
(snip)"Many analysts look at the market's current upswing and conclude the US economy has escaped with merely a drive-by downturn. Common sense suggests they're wrong.
By Bill Fleckenstein
It would appear that the recent strength in the stock market has reinforced the opinion of those in the bullish camp that the worst has been seen for the economy.
The thinking goes this way: The stock market cratered in January on the panic over French bank Société Générale (FR:GLE, news, msgs). That bottom was successfully tested during the Bear Stearns (BSC, news, msgs) debacle, which was handled thanks to the "skills" of the Federal Reserve.
The subsequent rally (since markets look to the future) is prima facie evidence to bulls that the U.S. economy is on the mend. Thus negative economic news is ignored, as it's now been fully discounted -- or so the story goes.
Apparently, not much thought has been given to the idea that perhaps the stock market and the bullish contingent are reading the facts incorrectly, just as they did when they interpreted the first payment defaults on 2007-vintage subprime-mortgage paper as likely to lead to nothing more than merely a speed bump in economic growth, or a "pause that refreshes."
It would seem that folks of this mind-set have taken a page from the shoddy appraisal tactics of the real-estate bubble and have concluded that all the economy will experience is something on the order of a drive-by recession.
Taking the measure of a bubble's aftermath
But does that really make sense? What's occurring is a debate about the future, and we cannot be certain of how it will look until we get there.
However, I believe we have a framework with which to try to handicap the upcoming economic period: comparing the potential damage inflicted by the bursting of the real-estate bubble to the bursting of the prior stock-market bubble. Obviously, both periods were fueled by intense speculation, albeit in two different asset classes.
But there's an immense distinction between the periods. In the case of the most recent bubble, massive debt was applied to that asset class as folks borrowed against homes to make ends meet. (That's now created an economic problem for both borrower and lender.)
That's something we didn't see in the stock bubble. Nonetheless, the undertow from the stock bubble was so potent that it took 13 interest-rate cuts and three tax cuts to finally ignite a real-estate bubble to bail us out of the stock bubble.
The Fed began cutting rates in January 2001. Although the official recession data show the downturn was quite short, it was not until spring 2003, after the U.S. had invaded Iraq, that the stock market and the economy really started to recover.
Feverish impersonation of a recovery
But it wasn't much of a recovery if you strip out mortgage-equity extraction -- otherwise known as the housing ATM -- and gauge it by historical standards.
In addition, the "recovery" was rather lopsided, as up to 40% of all jobs created were real-estate related, i.e., construction workers, real-estate agents, appraisers, mortgage processors, etc. For all intents and purposes, the last recovery was essentially nothing more than a wild real-estate bubble. Yes, the economy functioned, but not as it did in past recoveries.
In some ways the rebound still seemed better than it was. That was due to the extraordinary riches that rained down on Wall Street and hedge funds as financial engineering and the securitization process allowed some folks to hit the mother lode. Nonetheless, despite some sensational headlines, the economic recovery wasn't so spectacular.
Now we are forced to deal with the fallout from that period of speculation -- the potency of which can be seen by how swiftly the landscape devolved from a stock market that was hitting highs last fall to a financial system that just a few months later was on the verge of implosion (according to the authorities) as Bear Stearns came undone. That spurred the Fed to create the alphabet soup of special facilities and a record-setting pace of rate cuts.
Crying 'bottom' without looking below
As noted, the credit crisis has abated to some degree since the Bear Stearns emergency. Now a growing chorus of pundits and investors feel we've seen the worst.
That brings me back to my earlier question: Is that a reasonable expectation, given that mortgage resets will continue to increase (especially in the Alt-A mortgage universe between subprime and prime, which is far bigger than the subprime universe was), housing prices continue to weaken and there is no possibility of a new housing ATM to resurrect the consumer?
According to an estimate by National Bank Financial, the inventory of unsold homes is so vast that "close to 5% of all housing units in the United States are vacant." The homeowner component of that number has soared dramatically above the average of 1.4% from 1956 to 2005.
When one considers the length of time it took to dig out from the last bubble and real estate's key role in that process, it would seem the height of folly to expect that in this go-round we would experience a recession both milder and shorter than the last one. Common sense suggests that we ought to handicap this version as longer and deeper, as opposed to shorter and sweeter.
In fact, the big difference between what we experienced after our stock-market bubble and what Japan experienced after its bubble burst in 1989 was that Japan's bubble was primarily a real-estate bubble -- fueled by enormous debt creation. That is one of the reasons Japan's real-estate market declined in excess of 80% over a decade and why it took so long for the Japanese economy to recover.
Folks like to say it's because the Japanese authorities didn't allow price discovery. There's some truth to that argument, but then again, that's exactly one of the fantasies we are pursuing here. Those who are expecting a drive-by recession are liable to find that what we're really experiencing is the calm before the storm."(snip)
from
Re: weekend commentary - genuine economic upswing or 'calm before the storm' ?
Quote:
Wall Street faces the growing risk of an equities bloodbath in coming months as the credit crunch spreads to the wider economy and earnings crumble, according to a pair of grim reports issued by Goldman Sachs and Wells Fargo.
http://www.telegraph.co.uk/money/mai...cngold114.xml&
Re: weekend commentary - genuine economic upswing or 'calm before the storm' ?
If you are Dollar Cost Averaging, this is good news. You collect cash producing assets cheap. In fact if your retirement horizon is anything more than 20 years, you pray that equities are depressed for the next 15 years
If you are buying for the next 20 years, you better buy stuff cheap than overpay for it