This blog post originally appeared on RealMoney Silver on Oct. 28 at 10:06 a.m. EDT.Last night, I did an interview with Melissa Lee and CNBC's "Fast Money" team, and I had a lot of fun doing it. Here is the tape of the segment. Melissa started by referencing my generational bottom call back in March and asked where do we go from here? I said that I am sticking to the call. I don't believe that we will see 666 on the S&P 500 again in our lifetime or certainly not before Karen Finerman's two sets of twins give her grandchildren! We have achieved my precise S&P March objective of 1,050-1,070, which seemed an insanely ambitious target back then. (Not surprisingly, we recently overshot that target to the upside last week.) That said, I mentioned that I have gotten progressively more bearish in recent months. That view has been premature. So few people admit to being wrong, especially on CNBC, but I admitted that I had been wrong as I underestimated the appetite for risk and the market's animal spirits. With so much liquidity flowing into the capital markets, one could say that central bankers have put a curse on cash. I also underestimated the effect of cost-cutting on corporate margins, but I warned that this has the potential downside of creating an adverse structural change in employment that will weigh on future economic growth. Finally, I expressed that the fear of being in, so vivid seven months ago, has been replaced by the fear of being out today. The markets now see the certainty of good and steady corporate profits and self-sustaining growth. By contrast, I see far less certainty.
The problem, as I see it, is that, following the panic in March, the base and consensus economic expectation now seems to embody too much optimism in the belief that the recovery will be self-sustaining, that we are entering a normal recovery and that S&P earnings for 2010 will in a range of $72 to $73 a share, up from maybe $62 or so this year. This is a smooth scenario that almost denies that the credit crisis even occurred and that the prior crisis won't have any negative reverberations in the years ahead. I expressed that I am doubtful not only of this consensus view and favorable outcome but also frankly am doubtful regarding the precision of any forecast when our economy is facing so many uncertainties. If we take into account the amazing market rally of the past seven months, the increased cyclical pressures (from rising oil prices, a still elevated jobless rate, the likelihood that interest rates will be higher in the months/year ahead, etc.), the emergence and weight of so many "nontraditional" headwinds, a still cooked consumer and a tentative housing recovery, I simply can't share the optimism of a lot of "Fast Money's" prior and normally bullish guests. I went on to warn that we are rapidly approaching a pivot point when stimulus will be withdrawn or, at the very least, when investors will begin to discount this withdrawal. The sights of policymakers will move toward reducing the deficit -- this means much higher marginal tax rates -- and investors will begin recognizing that this also means that economic growth may not be all that robust next year and that the growing consensus of a S&P earnings forecast of $72 to 73 a share is in jeopardy. To me, these are all P/E-contracting events.
I concluded by saying that it is different this time as numerous nontraditional headwinds will weigh on the economy and on the markets and thwart the self-sustaining thesis:
- The consumer remains the Achilles' heel to growth. Consumers entered the downcycle exposed and leveraged to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.
- Cost-cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited lifespan.
- The credit aftershock will continue to haunt the economy. The securitized lending market is still malfunctioning, and the shadow banking industry remains adrift.
- Municipalities have historically provided economic stability -- no more. They are in disarray. I mentioned New York Governor David Paterson's appearance on "Squawk Box," during which he cited that the state's finances are so bad that it's considering letting prisoners out of jail before their time is up in order to save money, as an example! Melissa, as a New York City resident, was scared!
- Federal, state and local taxes will be rising as the deficit must eventually be funded and high-tax health and energy bills also loom.