How many deck chairs are on the deck of this sinking ship? It seems the Wall Street bulls are spending a lot of time rearranging these chairs while the boat they are on is sinking. Almost daily I see articles and interviews where they speak of how long recession are, when the stock market comes back in relation to the end of a recession, how much money bulls make during Democratic administrations and all kinds of other stuff that doesn't address the current situation. I heard one today say stock hadn't been this cheap in 30 years. I don't know what he was doing 30 years ago, but I doubt he was buying stocks.
3 months ago, the talk was avoiding a recession. Who would even speak of such an idea other than an economic idiot or someone who had something to sell? Clearly these people went through much of the same socialist economics instruction I did and failed to educate themselves as to the real causes of massive economic downturns. In any case, the idea one can spot the end of the recession or even guage when the stock market makes money from the current price level based on the past is absurd. This isn't a past type economy unless y0u want to go back to the 1930's or over to Japan in 1990 for a comparison.
Back in the 1980's, there was much insolvency in financials, mainly out of bad loans in the oil patch and the devastating effect on interest rates and fraud in the S&L industry. When these institutions were closed and recapitalized, save a couple of large banks that went down during the mid 1980's, it had been known for a few years that this problem was going to need to be addressed. When action was finally taken around 1990, most of the damage had been known since 1987. The entire landscape of that bailout was different. They didn't rush a bailout through Congress just prior to recess for the elections, but instead had a long term debate and discussion on what they were doing. There wasn't an emergency, just loose ends in debt to address. Not this time.
This time we had a situation blast upon the scene. For those that have been watching this mess in process for several years, this emergency wasn't unexpected. I think for myself, I was surprised at the force at which it hit, as what we just witnessed was a stock market crash that wasn't a panic, but a financial collapse. Just 2 years ago, bank profits were records, the financial industry made up 40% of the profits in the US and most thought the industry was bullet proof. The whole idea of a $700 billion bailout being needed in September 2008 on January 1, 2007 was next to impossible to envision. There wasn't any planning allowed as there was in 1990, just a sudden demand for money or the entire world was going to belly up.
Now we are being told that stocks are cheap at 14 PE's, if you believe looking back is better than looking forward, with dividends at 3% on the SPX and a busted financial system with no plans to restore the past. The analyst that said they hadn't been cheaper at any time in 30 years must forget that the SPX paid over 6% at one point in the early 1980's and clearly doesn't know how financial values are determined. They are cheap because this is the cheapest most of these 30 somethings and early 40 somethings have seen them, forgetting on which side of the peak we are on. I would be at a minimum, 60 years old to have worked through the 1966-1982 bear market at this stage. You can bet stock at the start of 1970 or whenever that recession was hadn't been cheaper since the early 1950's, but they got cheaper for over 10 years.
The last bear market lasted 3 years if you count the bottom in 2003 as the real bottom. This one is a year old and the problems surrounding this one are much more dire than anything we saw in 2000-2003. I believe at that point, we were coming out of a raging bull and needed some time to adjust, but we also had a raging housing market that benefitted from dirt cheap mortgage rates not seen for 40 years and a financial mania crazed public. Mortgage money floated us out of that otherwise market crash. In fact, I believe mortgage credit around the world floated the entire world economy and that the 1990's stock bubble was also created out of mortgage money.
This started out as something that was going to be contained to the subprime market, mainly in California, Arizona, Nevada and Florida. The bulls had this problem over before it started, in August 2006. They have yet to acknowledge the truth here, that we built an excess of 6 to 8 million single family homes between 1995 and 2007. This is a potential 10 year supply under boom conditions and the special financing to have these homes owner occupied isn't there now. Real estate prices have a long way to fall and they will start falling in areas of the country that have not been affected yet.
The other thing was the disconnect idea, that fast growing areas in Asia and Europe would skip this recession. Either we are being led by economic idiots or liars, but we aren't be led by ethical and educated people in this matter. Maybe one or the other, but not both. These are the people pushing the stocks on Wall Street and selling the investment banking products around the world and their business depends on moving these products. Never forget Wall Street isn't in the business of buying stocks, but in the business of selling stocks. They are like Walmart. You don't bring your stuff to sell to Walmart unless you want to sell wholesale. When the market turns bad, Wall Street is like a pawn shop. This is why we are seeing such big down days.
In any case, the disconnect game is now being played out to be the biggest lie ever told. What is totally misunderstood in bear and bull circles is that American home equity got the whole world game going, that Japan would have deflated off the face of the earth without it, as would have Europe and the 1990's would have been a very dismal economy for the US as well. Instead of dismal, we got the biggest stock bubble in US history and world prosperity and a group of politicians that conspired to create the biggest financial mess in history, mainly unelected ones. Their names, Rubin and Greenspan.
This won't be about Rubin and Greenspan, only about what this is about. What this is about is the end of what Rubin and Greenspan created, though Paulson continues the Rubin creed of bailing out bubbles. What they created was a system that allowed for the derivative system to get established through out the financial arena. Home equity securitization provided the fuel and cheap interest rates along with Greenspans refusal to remove the punch bowl then having to leave it there or face collapse, which allowed for the carry trade to take place. The cheap money policy in Japan also didn't hurt.
In any case, the Wall Street alchemy which has now failed was the economy. It wasn't only the US economy, but it was the process in which money flowed around the world, as it financed a huge spending boom in the US to be spread around the world. American spending became world capital spending and all kinds of bubbles were created. In fact, most other countries around the world started their own securitization bubbles. This will be blamed on the US only because it was the elephant in the room. It won't matter there were plenty of holes kicked in the walls by the Donkeys present at the time. It was the elephant everyone saw.
Maybe one can see where I am going with this and I will be as brief as I can. Bulls are planning a recovery, but I don't know what they are planning a recovery on? This is a worldwide systematic collapse of the financial and spending structure of the world. This is a fall apart and put it back together event, not an economic slowdown. There are difficulties here that haven't ever successfully been addressed in history and what was addressed in the 1930's cannot be addressed this time, because there is no gold standard to abandon to inflate out of a collapse. There is also a much worse public financial standing than there was in the 1930's and the impact of something old won't be the same as something new.
One reason the recession has had such a hard time getting started is the amount of cash created by the bubble hadn't finished its trip around the world. It has now and the sudden end of the impact of that last dose of credit has been met with astounding force. The Chinese have been bailing out their banks as they have been going along, but they won't have a solution for this collapse. The talk of 5% to 10% growth in Asian countries is a joke, as the capacity being built will never be used. Also, the idea we have recovery around the corner in the US when in fact we haven't even felt the credit contraction yet is absurd.
I recall the slowdowns of the 1968 to 1990 period. In every case, the Fed forced a recession. Not this time, as it walked rates up 1/4% at a time. This time, the housing market collapsed under its own weight. The auto industry collapsed under its own weight. We used to have layoffs then slowdowns in auto sales and housing. Not this time. The Fed cut before the recession started, not because the recession was coming or had gotten deep, but because the system was collapsing. Remember, Greenspan kept talking about how well capitalized the financial system was, yet it starts collapsing before the recession hits.
There are several things that are of great importance that have to be overlooked if one is to justify buying stock. For one, we haven't seen the financial damage to the entire economy yet. Second, I don't believe we have seen the last of the big bank failures or bailouts and I believe at least one of the 2 major NY banks and maybe one of WFC or BAC will go under or need a rescue. Also, it appears to me that all the Wall Street brokerages left are there in name only. I am astounded that GS is going to pay out billions in bonuses in their financial shape. This is like taking a luxury vacation on your credit card, knowing you just lost your job and maybe won't get one for a long time. There isnt' a plan to get through this downturn by those in business, only downsize, but keep spending.
The biggest thing they are missing is the bubble wasn't housing, autos or stocks. It was the entire world economy. The earnings in the stock market are part of the bubble and earnings, dividends and cash flow won't look like 2007 for a long time and on a relative basis, not in the lifetime of anyone over 40 years old ever again. Thus, the 14 PE is likely a 40 PE, maybe even 50 sans the bubble and the dividend rate is at best 1.5% to 2% and more likely 1%. This means that to get to a 5% dividend level, which is needed in a no growth economy, we may need to decline 80%. I could be on the conservative side here as well.
Not only can no one tell me how we are going to get the debt level of the economy back to one that encourages long term growth, but there isnt' a way to get back to where we were other than to go back to subprime financing and recreate home equity. That is the biggest problem, the no recovery in a nutshell, declining home equity. Home equity was the bubble of all bubbles and mortgage lending was the key that unlocked it. Both are either gone or on the rocks. There won't be a recovery for a long time that will warrant stocks at current prices.