Where Are We Again In This Financial Crisis & Recovery?

http://paul.kedrosky.com/archives/2009/10/road_to_recover_1.html37875Road%20to%20Recovery%3A%20Yo%2C%20We%26rsquo%3Bre%20Good

I have posted this chart before from Paul Kedrosky's excellent site. As the chart only looks at the recovery from the aligned lows of each crisis, the first year's recovery was most pronounced, and as usual when it recovers the naysayers during each of these periods were vocal. What is more significant is that the recovery carried on into the second year just by looking at the various charts - and that to the naysayers would be unthinkable at the moment. Markets have a nice way of shocking us - are we all drilled to look at the wrong indicators? I am still thinking 10,800 to 11,000 is easy for the Dow by year end. I would term the most appropriate indicators for each of these crisis were:

a) how much cash was thrown into the system - this crisis wins it hands down
b) how widespread / global were the effects - looks about the same for all except the depression
c) how concerted was the global effort - this crisis wins hands down again
d) how did interest rates behave or were managed - the tech crisis saw Greenspan dropping rates quicker than a bullet (and was the start of the financial mayhem in properties, packaged loans, and the leveraged derivatives on those assets); this time, most of the global central banks are still keeping rates very low coupled with massive stimulus left, right and center.

As argued before, its not that the central banks want rates to be low as that will fuel the property side for the less affected countries, and indirectly push liquidity into stocks when risk aversion mood drops - but its for the greater good because corporate spending, hiring, investments in R&D are not recovering fast enough. Hence they all will tolerate a seemingly higher and hard to justify stock market valuations for the sake of the real economy. The real economy is expected to catch up to equity valuations, maybe they will, maybe they won't. But when you keep rates low enough and you have glimmers of recovery, that will set the momentum.

Are we putting ourselves into another bubble, ... yes... but this one will last some time yet. Its the making of a bubble, we are nowhere near boiling point yet.

Bear Markets, Rebound Rallies, Follow Up Correction, Trading Range Bound

This fascinating composite chart below is courtesy of the Strategy desk of Morgan Stanley Europe. It shows what the average of the past 19 major Bear markets globally have looked like:

>

Typical Secular Bear Market and Its Aftermath

>

The Chart represents typical secular bear markets based on MS’s sample of 19 such bear markets as shown after the jump. Can we trust what is typical, or are all bear markets alike? The chart should serve as a benchmark to have an idea of where we are at this point in time, and to really seek out if and when there is a subsequent correction in the works.

This table shows Secular Bear Markets and Subsequent Rebound Rally:

>

Is This Rally Too Much?

Is this rally or bear market rally or recovery rally just a tad too much, ... too much hot air, too exuberant, too optimistic? Is the market running way ahead of itself. I found the following chart from dshort.com which places where we are in the recovery process, compared to the most severe crises of the past. The current path is marked in BLUE. The current recovery is already more "exuberant" than the recovery path taken by the internet/tech implosion in 2000. However, it is still within fairly safe territory when compared to the recovery path taken following the nasty oil crisis in the early 70s. Bottom line, its not too exuberant ... (yet).

While many were jumping up and down that we are headed for the Depression again, well the gray line tells us what hell they went through in the 30s.

Our economic and financial crisis will always be there and will haunt us every few years, but the recovery process in the present days will ensure that the recovery process will be relatively quick because: we have a much better understanding of the usage and effects of monetary and fiscal policies; we have a more transparent decision making process by most governments, and whose decisions will be critiqued and deliberated instantly via the net and media - urgency and clarity; and we have most governments being more proactive and willing to attack economic and financial crises together.

[via dshort]

p/s photos: Haruna Yabuki