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« Yoram Bauman on the Financial Crisis | Main | Negative Revisions in Government Data »

May 12, 2009



Mike C -- Thanks for your typical well-argued comment.

I am not going to take on the entire Lehman counterfactual here, although I might in a future article.

I object to the "humming along" idea. Pre-Lehman, we were on track for a mild recession. There was a need to reduce leverage to "normal lending." It was not necessary to go through a complete seize up of credit markets to get there.

The fact that this course was followed had an impact on everything -- businesses could not get commercial loan, etc. You can look at any economic data series to see the effect.

No one can say whether this experience was inevitable, but most think it was not. You are welcome to take another viewpoint.

Wiser policy could have reduced leverage, avoided stupid mark-to-market rules, and cushioned the decline. We will all pay for this mistake, but we will get back to trend.

It may not be "humming along" but I think that the pre-Lehman levels in the economy, corporate earnings, and stocks, are reasonable first targets.

These are still mild recession levels.

Thanks again --


Mike C

We seem to be at a point where those who accurately predicted an extreme market decline are all geniuses and anyone who did not is either an idiot, or like Warren Buffett, has "lost it."

I'm not sure about "geniuses" and "extreme" but I suppose it depends on "the why" one thinks we are at this point.

Maybe I'm mischaracterizing your view here Jeff, and please correct me if I am wrong, but my sense is your position is that if the Lehman collapse hadn't occurred we would be humming along just fine right now with the S&P still up around 1400-1500 and SPX earnings at $80-$90. That it was this single anomalous event that brought everything down and was just an accident of history and not an inevitability.

In contrast, here is what Grantham says in his most recent quarterly letter:

"The financial and economic collapse that I described as “the most widely predicted surprise in the history of finance” about 18 months ago is behind us. More precisely, we believed that bubbles had formed in global profit margins, risk premiums, and U.S. and U.K. housing prices, and that all three were “near certainties” to break, with severe consequences for the economic and financial system.

I would emphasize his words of "most widely predicted" and "near certainty". Are we at this juncture simply because of the Lehman event, or because there was an unsustainable bubble in credit and corporate profits that will take some indeterminate length of time to unwind (debt) and rebound (profit).

At this point, it isn't important anymore who the "genius" and who the "idiot" is, but it is very important I think to figure out the real reason behind "the why" because it has direct implications for the next 1-2 years.

Are we in the infancy of a long-term sustainable economic and corporate profits recovery and thus multi-year bull market, or are we in a temporary short-lived bear market rally?

Grantham says:

"So by analogy to the normal Presidential Cycle effect, driven by stimulus and moral hazard, we are likely to have a remarkable stock rally, far in excess of anything justified by either long-term or short-term economic fundamentals.
My guess is that the S&P 500 is quite likely to run for awhile, way beyond fair value (880 on our revised data), to the 1000-1100 level or so before the end of the year.

But such an event – a true lasting bull market – is
most unlikely. A large rally here is far more likely to prove a last hurrah … a codicil on the great bullishness we have had since the early 90s or, even in some respects, since the early 80s. The rally, if it occurs, will set us up for a long, drawn-out disappointment not only in the economy, but
also in the stock markets of the developed world."

There is no hedging in those words. It is clear where he stands. What is done is done, and truthfully it would be interesting to get your take on the long-term multi-year outlook if you have one, especially if it is the bull case as I am sincerely interested in hearing a well-reasoned long-term bull case.


Mark -- Nice work on your site, which I will certainly follow.

We should get together and compare some ideas.

Thanks for commenting.



EQ -- Back in the day, we had a guy in our office, let's call him "Fred", who was always wrong. He was very valuable!

If you think I am like Fred, you are free to invest accordingly. Keep reading and keep commenting.

Meanwhile, you might note that I have posted an official posture -- bullish, bearish, or neutral -- on tickersense for a long time. I am among the few who really go on record.

You have your finger on a good point. One can be correct in certain quantitative analyses and it might not translate into market success -- at least not in the short run.

We seem to be at a point where those who accurately predicted an extreme market decline are all geniuses and anyone who did not is either an idiot, or like Warren Buffett, has "lost it."

I suspect that a year or so from now it will not seem to simple.

Thanks for raising an interesting question.

How would I implement this? Hmm.. Every day I ask what I think and then do the opposite? :)

It is a good question!



I think you might be an interesting sentiment indicator. you pumped this market quite vigorously before the collapse. And, you cited the brilliance of your quantitative work.

Mark Hines


From one Naperville guy to another... I really like this article. Good Work!

-Mark Hines

Kent @ The Financial Philosopher

The crowd is "right" more often than not. My $0.02 worth is that most bloggers are not money managers and they are more interested in displaying their knowledge and confirming their own biases than in arguing both sides of a point for the sake of prudent risk management.

"Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof." ~ John Kenneth Galbraith

Jay (market folly)

gotta love the wall of worry. so many cliches we could throw at this. fear and greed drive wallstreet, etc.

My favorite right now has to be regarding panic. There is panic on the downside as everyone tries to avoid losing their butt. On the upside, their is also panic as no one wants to miss the rally and "the bottom.' This is especially true of benchmark performers who are underperforming while the market heads higher.



Just to play devil's advocate, isn't it also true that some of the biggest value investors out there, Buffett, Bill Miller, etc. have been fighting the bear since it first showed up and doubling down on companies that are as far removed from value as can be. They have been wrong for only a year or so. Why should we expect that they will be able to get away with only 50% loss? If the reversion to the mean rule truly does hold true, should we expect Warren Buffett to give back all of the gains he has racked up since the beginning of the credit bubble in 1971?


There sure is a wall of worry out there. A substantial pull back now would make life easier for a guy like me.
Interesting thought using SA as an indicator.

I do use sentiment on discussion forums in a similar way. Though doing so sometimes makes it hard to filter out the noise and keep to your plan.

Still loving your work.

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