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08/05/2009
The New World of Sanity
By
Fred D. Snitzer
The 40% rise in the market since its lows of March has the entire country wondering: is it finally over? Is the worst financial crisis since the Depression now a thing of the past?
We’ve seen this pattern before. When the stock market hit its low in 1932, it returned 34% per year over the next five years. From its low in 1949, it gained 23.1% per year for the next five years. And from its low of 1982, it gained 29% per year for the next five years.
For those of us inclined to see in these patterns a prediction of the future, we should remind ourselves of the words of the great Mark Twain: “History doesn't repeat itself - at best it sometimes rhymes.”
Apropos Mark Twain, 2009 is not 1932 or 1949 or 1982.
1929 saw plenty of leverage and speculation, but no mortgage-backed securities, an inexperienced Federal Reserve, and a market that lost 80%(!) of its value (2008 saw “only” a 50% loss in value). 1982 followed a period of double-digit inflation, oil shocks, and high interest rates, purposefully jacked up by the Federal Reserve. Every period has its own unique characteristics.
Back to our original question: is it over? The best answer is: the worst is probably over, and at some point it will all be over, but only the most bullish of the bulls would declare that all problems have been fixed and that we’re now back to seeing a smooth and uninterrupted rise in stocks (as if we ever really saw that before).
Would we even want to see 34% returns over the next five years? If the Dow returned 34% per year over the next five years from its low of 6,547 it would end at 28,286, where it would probably crash to earth again. As much as we all want to see a recovery, we want to see one that is sane.
From many super smart guys, like Bill Gross in his monthly commentary that we include in this mailing, we hear the same cautious, even tepid, prediction: the recovery will be muted, prolonged, protracted, and slow. But the recovery will come. Still, what a bunch of kill joys.
The toxic assets are still on the balance sheets of the banks; inflation may rear its ugly head again (the price of avoiding a financial meltdown); our government and its politicians will make mistakes (even as it gets other things right); unemployment will remain high, threatening the recovery; deleveraging will continue; consumption will remain weak.
But, if consumption remains weak, than savings will be high, and we’ve been told for years how abysmal our savings rate is. Perhaps the monetary scientists at the Fed really do know how to withdraw all this extra cash out of the economy at just the right time, and in just the right way. Earnings have been better than expected, and it appears that the housing industry – one of the root causes of this mess – may be on the mend.
If Bill Gross and company are right, we are about to enter a new era: slower growth, more government regulation, higher inflation, and less risk-taking. Still, even if it’s slower growth, it’s still growth. As much as we’d like to see our losses recouped quickly, it probably won’t happen, and it probably shouldn’t. Welcome to the new world of sanity.
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