Friday, December 4, 2009

Wall Street Leopard

There was hope that after last year's near collapse in the financial markets that perhaps Wall Street had learned its lesson. But as the old saying goes, a leopard doesn't change its spots.

Wall Street's tendency toward reckless myopia, reinforced by the bull market which ran from the early 80s until the tech bubble burst, returned full force at the first signs of even temporary stability.

The temporary stability was brought about both by Uncle Sam 'giving' Wall Street trillions of taxpayers' dollars and also the temporary lull in the mortgage reset schedule between March 2009 and November 2009.

The eagerness of investors, large and small, to chase prevailing trends (momentum investing) and their unwillingness to concern themselves with very PREDICTABLE longer-term risks shows that nothing was learned from last year's near meltdown.

This myopic behavior, along with encouragement from the Federal Reserve, drove a series of speculative bubbles and crashes during the past decade - the tech bubble, the mortgage bubble, the private equity bubble, etc.

And here we are again in bubble land - with stocks dependent on an "expected" record rebound not only in the economy as a whole, but in corporate revenues and profits. In other words, we are right back into dangerously over-valued territory for stocks once again.

According to one of the analysts who actually foresaw the implosion of the credit markets and who turned bullish in March, Andrew Smithers, the stock market is right now overvalued by 40%! Needless to say, he has turned bearish.

A rare economist who got things right over the past few years is Gluskin Sheff chief economist, David Roseberg. He recently said, "The historical record shows that downturns induced by asset deflation and credit contraction (like now) are different than a garden-variety recession."

He waxes eloquently about how the credit deflation induced downturns typically induce a secular shift in behavior and attitudes toward debt, savings, asset allocation, spending and home ownership. We have yet to see any of these secular changes.

Mr. Rosenberg went on, "That is why people didn't figure out it was the Great Depression until two years after the worst point in the crisis in the 1930s, and why it took decades, not months, quarters or even years, for the complete transition to the next sustainable economic expansion and bull market."

There are many bumps in the road ahead for the US economy, such as unemployment - which is of NO concern to Wall Street. Do not be blindsided by all of the Wall Street optimism!

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