Tuesday, January 06, 2009

Everyone is bullish

Ain't it surprising? It is almost as if the turn of the calendar has confined the banking crises to history. I can understand if Jeremy Grantham says that stocks are cheap from a seven year view. But that means two things for lesser mortals:

a) That we will be able to hold stocks for seven years through thick and thin. 
b) That we will be able to identify which companies will survive and which ones will buckle. There is a survivorship bias in Grantham's statement. 

The bullish argument is basically this: Stocks are down 50%. Government will save everything. Let's buy. 

To be fair, this is the first time in over a year that stocks, credit and commodities are priced in line with each other. Over the first 9 months of 2008, equities and commodities were painting a completely different picture than what credit markets were saying.  Now, that is not the case. The latest equity market rally has come in the backdrop of credit markets rallying since Dec 16, when Fed said that it will print money and buy MBS. 

This is a good paper on the history of banking crises, just in case one gets too bullish. We are still in the middle of one. 


Econlogic said...

1. Also note the following from the IMF's World Economic Outlook: When Bubbles Burst

"Hence, during 1970–2002, even though housing price busts involved much smaller price declines, they were associated with output effects that were about twice as large as those of equity price busts. The worse-case output effects of housing price busts exceeded those of equity price busts by a substantial margin. Moreover, the slowdown after a housing price bust lasted about twice as long."


2. Credit is certainly improving, but I am not sure equities and credit "are priced in line with each other". U.S. credit – both HY and IG - is still priced for a much worse economic scenario than is the case for equities. The risk-reward for playing the reflation trade remains far better in the U.S. credit markets.


Nice tale on a interesting company.