This blog post originally appeared on RealMoney Silver on Feb. 2 at 7:57 a.m. EST.
People are getting the mood of the age in their inboxes. How many emails have you received the past few months from acquaintances telling you in brisk words meant to communicate optimism and forestall pity that "it's been a great ride," but they're "moving on" to "explore new opportunities"? And there's a broad feeling one detects, a kind of psychic sense, some sort of knowledge in the collective unconscious, that we lived through magic times the past half-century, and now the nonmagic time has begun, and it won't be over next summer. That's not the way it will work. It will last a while. -- Peggy Noonan, " Look at the Time," The Wall Street Journal editorial (Jan. 30, 2009)The terra is no longer firma. We have likely entered The Great "Decession," something worse than a garden variety recession but better than The Great Depression. As Peggy Noonan described in her WSJ editorial on Friday, it's as if we have moved from a magical period over the last 50 years into this not-so-magical place. Though their ranks are thinning, Polyannas and perma-bulls who, despite growing odds, continue to expect a midyear economic recovery should leave their rose-colored glasses in a drawer. Consumer debt loads remain too elevated, the momentum of job losses and business and consumer confidence are difficult to stem, household net worths have taken a whack (which will be difficult to offset in a period of lower real wages), and our financial institutions will remain risk-averse for some time (even after a "bad bank" rescue package). Given the general lack of visibility, any calculation of corporate profit growth for 2009-2010, one of the important foundations of valuation, remains soft and uncertain. So, it should not be surprising that a thaw in the credit markets, a rapid fall in energy (and other commodities) prices, a massive stimulus package, a "shock and awe" monetary policy (and lower mortgage rates), the promise of a program aimed at ring-fencing bad bank assets and a patchwork attempt to shore up bank capital in order to unclog the transmission of credit have all failed to inspire investors and have also failed to stabilize domestic economic activity. Unbridled and poorly regulated free market capitalism has failed or, at best, has stumbled badly; our domestic economy and the U.S. stock market reflect that failure.
After a 20-year consumption binge, an unrealistic dependency on asset appreciation in home and stock prices and what Oaktree's Howard Marks terms "a willingness" to take on risk at all levels of our economy, the future is one of higher savings and a lower standard of living, one of reduced expectations and, in all likelihood, substandard investment returns. It is not the end of the world, but it is a different world.
"The two most powerful warriors are patience and time." -- Leo TolstoyThe heavy economic and policy lifting lies ahead. The "great unwind" of debt and the toxic holes in the capital of our financial intermediaries, coupled with a "cooked" U.S. consumer whose leverage was at an all- time high going into the downturn and whose net worths have been devastated by lower home and stock prices, pose as powerful headwinds and suggest that there is no quick fix. As investors, we are now on heightened alert as we no longer should consider what might go right with our investments, in our asset classes and/or with the companies in which we research/invest. Our first task, now and for the rest of the year, is to consider what might go wrong. At any moment, a reasonably strong rally could develop. Indeed, the downbeat tone of this very column could be reason enough to be more optimistic and to conclude that negativity has been materially discounted in share prices. My hope and the hope for the markets remain centered around the new administration's announcement of a comprehensive and coherent approach to cleaning up our banks' toxic assets, arresting foreclosures and successfully unclogging the transmission of credit. I suspect that the deliveries of such proposals are close at hand and, depending on their scope and acceptance, may represent a positive for the oversold stock market.
That may be President Obama's most important bailout task: to educate the country that there is no easy escape here, except taking our medicine, getting our fundamentals right again and working our way out of this, brick by brick, by getting back to making money -- what was that old Smith Barney ad? -- "the old-fashioned way" -- by earning it. -- Thomas Friedman, " Elvis Has Left the Mountain," The New York Times op-ed (Jan. 31, 2009)The public sector's cleanup of the private sector's mess represents a monumental and complex job. The "great unwind" of the leveraging-up of our economy will remain a structural issue and headwind for some time to come. Moreover, it's already February. Do those folks looking for a midyear economic recovery really suspect that a "bad bank" project can be implemented swiftly enough to have an effect by the end of second quarter 2009? For now, patience (waiting but not passively waiting), perseverance (amid downbeat news) and perspiration (most likely tons of it!) hold the ingredients to a successful strategy in our economy and in our stock market. From my perch, regardless of the scope of the government's initiatives, it remains difficult to see a sustained upside move in equities against the deleveraging process and against a worsening and uncertain fundamental backdrop. Expectations for our domestic economy and for our investments are being reset, to borrow a term used by Microsoft's ( MSFT) Steve Ballmer in last week's earnings call, to lower levels. Over the past several months, we have begun to taste the early stages of investor disinterest and apathy and societal pressures as the acceptance phase of large investment losses in individual, institutional, charitable, pension and endowment portfolios develops. The recent Madoff and Satyam ( SAY) frauds have only served to further reinforce a general loss of trust. As well, the broadcasting of Congressional committee meetings and testimony and the vivid picture of political partisanship and their incoherent policies have likely further contributed to a deeper erosion in confidence. Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.
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