Counting on a Quick Economic Recovery? Read This First

On Wall Street, happy days have returned. The emergency liquidity injections have worked, the credit crisis is history (R.I.P. Bear Stearns!), and it's off to the races again. In the second half of the year, this theory goes, we'll have a rip-roaring "V-shaped recovery."

Or so the theory goes.

Before you bet your business (or portfolio) on this happy dream, read what market gurus Jeremy Grantham and Peter Bernstein have to say. Jeremy's lived through every recession since the early 1960s. Peter lived through the Great Depression. Neither of them are buying the "V-shaped recovery" stuff.

From Clusterstock:

Most of Jeremy Grantham's note this quarter (login and PDF) is devoted to eviscerating Alan Greenspan, Ben Bernanke, and other approval-seeking Fed chairmen (Jeremy does it better than most). But Jeremy does save some powder for the "V-shaped recovery."

As we've noted, analysts are somehow imagining that S&P 500 earnings are going to accelerate to 70% year-over-year growth by Q4, despite the paltry rate of earnings recovery in even the last, shallow recession. Jeremy's take? Ridiculous.

Look at the amazing earnings estimates for the S&P 500! On January 1, the first quarter estimate was +12%. It is now -8%. Was the credit crisis still hiding on Jan. 1? Even now the forecast for this year is +15%. Plus 15%! What is going on? With denial skills of this magnitude, it is surely not a surprise that subtleties within the equity market such as quality versus junk have been misjudged.

The good news, from Grantham's perspective, is that prices on high-quality stocks (low debt, strong profits, good growth) have now come down enough that they are priced for a 4% real return over the next 7 years. The bad news, for those plunging lock, stock, and barrel into speculative stocks, is that they're priced to return -4% (real) per year.

And when does Grantham think the overall market will bottom? He's sticking with 2010.

Also from Clusterstock:

Eighty-nine year old Peter Bernstein isn't buying any of this dreamy "V-shaped recovery" stuff. He lived through the Depression, and today's environment is the worst he's seen since. Excerpts from the E.S. Browning interview in the WSJ:

Mr. Bernstein: When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That's part of the problem going forward. You don't have a high-growth exit from this, as you've had from other kinds of crises. We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U. The reason for that is that people aren't going to get caught in this bind again...

WSJ: How long do you think this whole process will take, before we get back to normal?

Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong...

WSJ: Can you explain the reason you think it will take a long time?

Mr. Bernstein: We have to go back to a moment when people have the courage to borrow and lenders have the courage to lend. Until credit is going up instead of down, you can't have growth. Housing has got to be a very important part of that; it always has been. You have to reach a point where somebody says, "This house is cheap, I am going to buy it," or where some businessman says, "This is a great opportunity for us to expand our business. Everything is available to us."

The good news: Both Jeremy and Peter regard high-quality stocks as better bets than real-estate these days. Not that that will forstall an advertising recession.

See Also: Sorry, the Stock Market is Still Screwed

Comments

[BlackbirdHighway]

The stock market always recovers!

It recovered from the crash of '29........ in 1955.

People who were invested in '29 and planned to retire in '30 just had to wait a while longer, another 25 years!

That's a "U" with a very wide, flat bottom!

We're probably in for a very bumpy ride from here on out.

[Bobotheclown]

We are simply starting to see the outlines of a slow economic decline that began after the Vietnam war. That was the original "guns and butter" debacle that started the decent into debt that we are still dealing with two generations on. We have not paid for Vietnam yet. Imagine what has to happen to the economy to ultimately pay for Iraq, the second Vietnam?

Our government has tried to manipulate monetary policy (Nixon going off the gold standard, Clinton's globalization, Bush's easy money bubbles) to inflate our way out of debt like the European countries have done for centuries. The problem is that our leaders were afraid to do it fast enough to make it effective (they would be turned out of office for doing it) so they implemented a slow decline and hoped voter's would not notice. But now people do notice that their children have lower expectations than previous generations. And for the first time we have a president who is just too incompetent to preside over a stable decline and has precipitated the rapid decent we see today.

This will get a lot worse than anybody here thinks.

[Henry]

04/30/08
"The Commerce Department said on Wednesday that gross domestic product or GDP expanded at a 0.6 percent annual rate in the first quarter, matching the fourth quarter's advance and handily topping a forecast for 0.2 percent growth in an advance poll of economists by Reuters."

[GreedyOldPsychopaths]

0.6%! Wow, that's one hot economy there Henry.

FROM THE BEA's website: http://www.bea.gov/newsreleases/national/gdp/2008/gdp108a.htm

"The Bureau emphasized that the first-quarter "ADVANCE" ESTIMATES are based on source data that are INCOMPLETE or SUBJECT TO FURTHER REVISION by the source agency (see the box on page 3). The first-quarter "PRELIMINARY" ESTIMATES, based on more comprehensive data, WILL BE RELEASED ON MAY 29, 2008."

"The increase in real GDP in the first quarter primarily reflected positive contributions from PERSONAL CONSUMPTION EXPENDITURES (PCE) for SERVICES, PRIVATE INVENTORY INVESTMENT, exports of goods and services, and federal government spending that were partly OFFSET BY NEGATIVE CONTRIBUTIONS from RESIDENTIAL FIXED INVESTMENT and PCE for DURABLE GOODS. IMPORTS, which are a subtraction in the calculation of GDP, INCREASED."

"The increase in real GDP is the same as in the fourth quarter, reflecting an upturn in INVENTORY INVESTMENT that was offset by an UPTURN IN IMPORTS, and DOWNTURN IN NONRESIDENTIAL STRUCTURES, in PCE for DURABLE GOODS, and in PCE for NONDURABLE GOODS."

So, private industry built up inventories ('cause thery're not selling their products), and personal consumption of servcies increased. But, residential investment decreased, imports increased and personal consumption of goods, both durable and nondurable, decreased. Yes sir Henry, this economy is smoking hot. Not a chance of recession anywhere.

[Henry]

Too much coffee this morning? Did I say smoking? Please, if you'd take note, this was in quotes, it was taken from Yahoo as a piece of information.
You will know, of course, that a recession is two consec quarters of gdp in negative. We have not reached that yet, to my knowlege. (If I am wrong on that point please correct me)

[GreedyOldPsychopaths]

Not a coffee drinker. Do you not recognize the facetious nature of my reply?

1st Quarter numbers are premature. A downward revision is likely to follow in the May numbers. No, negative GDP is not a prerequisite to a recession. A DECLINE of GDP (not necessarily negative) for two or more quarters or negative real ECONOMIC GROWTH is normally stated. GDP is not the same as real (inflation adjusted) EG. More specifically, the NBER (National Bureau of Economic Research) defines a recession as follows:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

There are many problems associated with reliance on just GDP as an indicator of economic conditions. GDP is by no means an absolute.

[WIpatriot]

Moot point, Henry.

Everyone is using the Ministry of Lying Statistics for supporting data.

[joebhed]

My earlier comment (??)
Thank you, Mr.Bernstein.
I definitely agree on that extended "L__________" economy.
Rather than the "L¦._)".
Alphabetically speaking.

Mr. Bernstein notes both a lack of a driver out of the bottom and a growing "risk-averse" kind of psychology about the American public, if not the bankers.
There is the question of when the bottom of that L-curve will begin to turn up, and why.
The great prognosticators grasp at some new data coming in to identify the coming trend. All the more smarter of them to get the right bets down on the emerging markets. The futures. Anybody?

But not Mr. Bernstein.
Not anytime soon.
Not any time soon enough to say exactly what it is, or what it will be that will become the dominating force to over come that psychology for not taking financial risks.
So, 2010 has become the date for the definite recovery.
Based on what we know right now, there seems to be agreement on that? Not 2011.
Most analysts agree there will be much greater losses in the continuing shakeup of the financial services industry. So, to some degree, the timing of the "recovery" will be dependent upon the size of the additional losses yet to be played out.
And, on how the financial markets respond to that shakeout.
And on how long this more stability-oriented, and risk-averse, kind of psychology will last, and what form it will take in the future.

[Novista]

I was born in hard times (1936) and have a slightly different take on 'what really happened' .

I don't buy into the "it's all Reagan's fault" when the backstory is more important,. I'm led to believe, the end of World War 2 saw America with a large surplus of gold, 'that barbaric relic'. America had a generation of prosperity based on that gold, and in 1971, Nixon trashed Bretton Woods -- no redeeming by foreigners. float the dollar on oil.

That prosperity was bought with gold in sleight-of-hand. America's been flailing around with fiat dollars since.

Factor in loss of manufacturing jobs, which served America well. And, more current, 'creative investment vehicles' and bubble after bubble, thrust on by ill-advised monetary policy. Not to mention throwing bad money after good on Empire. Contemplate a housing market that was 70% over the trendline when the bubble peaked, and experts believe it can be fixed 'if only you believe' ...

The housing market will bottom when it meets reality. I predict 2010.

I'm not sure when the stock market will come back to earth. Any sub-culture that can rally on bad news is either crazy or has help from the Plunge Protection Team (a.k.a. Men in Black) and that probably qualifies me for a TinFoil Hat. But consider, the DJIA was a day or so ago up and with a current P/E ration of 57:1.

[Henry]

Novista,
I think you have made a mistake in stating that the p/e of the DOW is 57. I attach a link that has some information for this, it's more like 15:

http://www.djindexes.com/mdsidx/index.cfm?event=showavgstats

[drblack]

While it is no one persons fault, Reagan stopped the Public development of Alternative energy and started the deregulation and lack of any oversight of business.
The Reagan legacy will be that he postponed the USA'a switch to alternative energy and almost destroyed the country.
Energy is everything. Regan's first act of office was tearing the solar panels off the White House.
If the US gets scientific and creates an infrastructure around new ways of creating and storing energy we can become more powerful than ever. We could become a new manufacturing powerhouse.

[joebhed]

Whoa !
I posted my earlier comment before I read the comments.
I'd say there actiually is a consensus on the L________________ theory of so-called financial recovery among the commentors.
"HUFFPO Bloggers Sour On Recovery".
Which is great for giving me the chance to ask, recovery to what?
And to which I reply, as usual, a new honest, public money system in this country.
A new money system.
I don't need to post that link anymore.
When the FED crapped us out in '29, political leaders thought hard and serious on the Chicago Plan for a new monetary system.
It was a public, debt-free money system.
The administration's rejection of the Chicago School plan in the '30s was the one bone Roosevelt threw to the monied interests.
It is time to go back and revisit the Chicago Plan.
It is more of a framework than a full-blown monetary strucure.
Here's the thing.
Either it's OK to screw the shit out of the general public, a.k.a., middle-American, every ten or twenty years, or it isn't.
If it isn't, then we better rise up with our own solution, and not depend on the political parties and their financial services groupies of economics advisors to consider any real solutions.
Thomas Jefferson, Abe Lincoln, Congressman McFadden and others have all laid out a certain truth that is the foundation of public money.
Let's get on with it.
http://www.monetary.org/chicagoplan.html

[dzoner]

How in the name of Mithra any analyst or economist still thinks this will be a V shaped recession when the King of Saudi arabia and the Russian oil minister came out last week and said flat out they won't be growing crude production to meet demand is eyond the dreams of rationality.

How much more PROOF is needed to convince them oil production has peaked and in consequence, global growth and production with it.

Hell, peak everything, oil, water, ocean biomass, soil, arable land, and soon natural gas and coal.

Morons.

[swift_goat_pet_for_truth]

The American economy will not regain its former strength until the middle American worker regains access to the levels of disposable income they once had.¨¨Our post-WWII economy was built on the disposable income of middle Americans who used it to buy cars, them new fangled TVs, refrigerators, stoves, toys, etc.

After REAGAN gutted the unions and shifted the tax structure to strangle middle class Americans and benefit the rich (who soon became the uber-rich), the American worker's disposable income slowly decreased, but the spending was buoyed by financial events like the tech boom (and bubble) and the housing boom (and bubble), facilitated by easy credit.¨¨

Well, that is not happening now. And corporations have squeezed their workers to fatten their bottom lines (and CEO paychecks) about all they can. What is really needed for American corporations to grow is top line growth - SALES. And sales ain't happening if the middle class is spending all their money on food, gas, their health care, and paying off credit card debt.¨¨

The growth of the middle class was signaled last century by businessmen like Henry Ford paying their workers way more than the going price so that they could afford Mr. Ford's new cars. Until that happens, I do not see American businesses, or Americans, doing particularly well.

[Rockyman]

I think you are right on the money!

[dadw5boys]

You guys have not seen hard times. I pray many of you will learn quick how to grow your own food where ever possible and get organized quickly and learn how to save your meager dollars. I have lived thru very hard time and belive me there are a lot of guns out there and if people get really hungery look out!

[FreedomCorpse]

Oh, it will be V shaped alright. When you look at the chart of price of gold versus the Dow index sideways from the left, it'll look just like a V, as in V for Vendetta for horrific economic policies and zero regulation. At the point the gold price matches 1:1 with the Dow index, then it'll be time to go into equities. We can see how 'well' NASDAQ since the dot.com implosion...NOT...nor ever.

[GreedyOldPsychopaths]

Not a "V". Not a "U", Not even an "L". The ongoing credit crisis is a symptom of a broader and larger issue: stagnant and declining incomes and increasing debt. Until wages catch inflation (fat chance) disposable income is simply marginal at best. Consumers are tapped out and in debt. And as gasoline inventories haven't bottomed out, but will shortly, we can anticipate gas prices to climb to parity (>$4.00/gallon) based on current oil prices. Ending the credit cruch will not fix the lack of disposable income or debt. With an economy (GDP) based on more than 2/3rds consumerism, look for an "" shaped "recovery".

[WIpatriot]

Waiting for my 'backslash' comment to show up from several hours ago, Greedy.

No bottom in sight, no recovery, either.

[GreedyOldPsychopaths]

"Backslash": exactly Patriot. Uncharted territory ahead.

[outnow]

A "V" is very unlikely, in my opinion. Even a "U" is unlikely. I see an "L" for a long time. The reason is that there is too much risk, lack of transparency, too much leveraging, lack of confidence in the markets, lack of oversight, fear to lend to borrowers with too much debt, a shaky real estate market, perpetual wars. Other than those things, every thing will be back to normal soon. By the way, jobs are scarer than hen's teeth around San Diego but the real estate is still high-priced. As debt and deficits drown us, there are still bulls. Go for it!