By definition (and not surprisingly), the optimists like the dreams of the future better than the history of the past, but the fault I see in using previous recessionary examples is that history (and those charts) fails to recognize that it's different this time on so many fronts but particularly as it relates to the accumulation of debt and credit. By contrast, the pessimists (who might be the realists) see the aforementioned past policies and argue (perhaps more correctly) that the past is gone, the present is full of confusion and that the future scares the hell out of them.
I went on to write that, for decades, U.S. investors have seen the hereafter as an expected gift but in reality the future is earned -- it is based on achievement. Unfortunately, never has a generation spent so much of our children's wealth in such a short period of time with so little to show for it.
In summary, there will be broad-based social, political, credit, economic and stock market ramifications from the economic and market jolts of the last 18 months. Few of these are P/E-multiple-elevating developments, and the emerging trends (if I am even partially accurate) will likely produce an uncertainty of outcomes that make it difficult to glibly conclude that the market's dramatic decline has now been fully discounted and almost certainly even questions the market's intermediate-term upside.
The message of the market remains clear:
- An economic recovery is not nearly as visible as the optimists would like you to believe. There remains a long tail to today's problems.
- Credit will remain dear, despite evidence of a statistical thaw in credit -- the three-month LIBOR stands at 2.18% (down from a peak of 4.75%), the TED spread is at 1.7% (down from a recent peak of 4.60%), two-year bank swap spreads are at 105 basis points (down from 160 basis points), the LIBOR/Overnight Spread is at 1.6% (down from a recent peak of 3.60%); all these measures are now below pre-Lehman bankruptcy readings -- as pendulums nearly always move to the opposite extreme.
- Finally, the uncertainty regarding corporate profits (i.e., the lifeblood of a bull market) remains the single most important reason why, over the foreseeable future, a sustained rally in equities seems unlikely.