Nassim Taleb was on Bloomberg TV yesterday making an interesting point (his TV appearances have been less interesting in the last couple of years) that although made many time before in many places is still important.
The objective behind much of the Fed, Treasury and government policy has been to try to avoid the full consequence of recession and crisis but what has actually happened is that recession and crisis have gone on much longer than the otherwise would have. Saying "recession and crisis" is not the most accurate description but we have not had a proper recovery from the recession and crisis of 2008.
My view all along has been that if the US had done the difficult thing (let the banks fail, let equity and debt holders face whatever came and only protected depositors) we would have seen real and organic recovery by now. Although the US has far more moving parts, Iceland offers an example of a country that actually fared worse than the US that then did the difficult thing and started to show signs of real recovery in just a couple of years. The US is now four, five or even six years on (depending on when you start counting) and we have many data points that are still weighed down from the crisis.
Of course none of this has prevented the stock market from soaring. I saw somewhere that investors lost $16 trillion in the Great Recession but have now made $13.5 trillion back. To be crystal clear, regardless of anything else stocks have done very well in the last four years, there's no doubt about that.
In many blog posts I have talked about the need to at least capture most of the effect. The market doubled in about three years from the 2009 low and that type of lift doesn't happen often. Not missing a huge move needs to be balanced out with understanding the world today. The market is up a lot but it is up without the normal fundamental strength that goes with economic recovery and expansion. The bull market is now long in the tooth at 47 months and there is quite a bit of positive sentiment. This could continue for many more months of course but it makes sense to especially alert for any subtle signs the the bull is ending. The first signs are always subtle.
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10 comments:
Do you really think that's a fair comparison(Iceland/U.S)? Aside from the size of the economies and the worldwide impact of permitting US failures vs that of Iceland, Iceland has a very comprehensive social welfare system already in place.
Per Wikiversity.org:
The majority of the citizens are employed, but the ones that are not are taken care of by the state. Their primary concern is alleviating poverty and have a phenominal system that seems to be set up to promote equality or at least equal opportunity. The hospitals and schools are state run and therefore all citizens have adequate access to health care and eduction.
Agree with 10:46. I fear the social upheaval from random's 'tough love' approach would haunt the US and possibly the world for years if not decades to come, and at the very least would lead any president who tried this to be 1-term.
The tough love would have been for investors, you think investors (as opposed to depositors) should be bailed out?
Would depositors have been bailed out? Can you be sure? Can you be sure the sight of a few major banks being allowed to fail would not cause a run on the remaining banks? A LOT of uncertainty, and when/if things started to go south unexpectedly, it may not be possible to prevent total chaos.
For all the billions they printed to bailout AIG and the like that could have just as easily had the sole function of shoring up the FDIC and SIPC (money market balances only). There might have been runs on banks but depositors would have been covered.
I can see the headlines now when President Random's tough love approach goes south:
"President: "Well, it worked for Iceland!!!"
When the Foxes guard the coop, ie Goldman etc. makes the policy and in fact the money is the government and regulators, you think there could have been any other outcome. Media was used to scare people. Risk was rewarded without any downside. Many other countries have gone thru same process including Sweden and rebounded quickly - Japan and US chose to go this route. Sorry guys I agree with Roger.
10:46 et al
And how many third world - style gulags reside in Iceland vs. our urban areas?
Easy to have a comprehensive welfare state when there is a population that actually values work and has a societal anchor.
Why Shouldn't the market be on a four year tear? $110 S&P earnings support the present print IMO. The question should instead be, why do/did so many people hold so much cash when the world was on sale?
9:27,
Agreed. And further, I cannot understand Roger's logic of selling when the market is below the 200 DMA and buying when the market is above it.
Makes little sense to me.
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