Economic & Market Dislocations
by Bryce
The short-term attention span of many people and similarly the media with respect to investing never ceases to amaze me. As mentioned by Forrest in “Has anything Changed,” are companies worth 20% more than they were two weeks ago? The common sense answer is no and yet their values as reflected by the equity markets indicates otherwise. I am by no means complaining about the recent rally but I would like to provide some perspective.
Historically, the equity markets have bottomed a few months before the end of a recession and if history proves correct, this time should be no different. The chart below compiled by Ned Davis conveys this idea. The green line represents the ’stock market’ with 100 as the basis for a recession. As you can see by the data compiled, the stock market typically recovers approximately 4 months prior to the end of a recession.
Those who know me, will know that I have harped on the excessive credit used by both America and her citizens long before the current crisis came to fruition. While we have witnessed ‘the great de-leveraging’ as some pundits have called it, I would argue that we have a long ways to go. Consumption represents some 70% of the American economy and that has largely been driven by excess credit. The chart below depicts both how far we have come historically and (in my humble opinion) how far we have to go before we stabilize. I would argue that until we establish some genuine means of economic growth (perhaps the much touted ‘Green Economy’) that our current level of debt to household income and therefore our level of consumption will fall precipitously. As both of these decline, a negative feedback loop will prolong the agony allowing one to profit off of commercial real estate trades as mentioned by Forrest.
I don’t mean to sound overly pessimistic, in fact the opposite. I have great faith in the productivity and innovation of the human population and believe that we will see better times ahead. As such, below are two charts with brief commentary for some inspiration.
The spread between corporate bonds and treasuries is near an all time high with investment grade corporate bonds yielding in excess of 6%. Over time, fear will subside and the spread will return to normal in which case an investor should profit handsomely. Corporate bonds can be bought individually or through mutual funds or ETFs such as LQD.
Below is a chart that should speak for itself. While I am saying stocks will not go down further, I am suggesting that they are relatively cheap by historical measures. Be greedy when others are fearful!
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