Longer term readers will recall I have been using the 1932 - 37 period as an analogue
for the current recovery. Not only did the decline of US industrial output clearly reach
depression levels, but the recovery was supported by powerful quantitative easing and
a nearly zero T-bill rate. The stock market rebound from the lows in 1932 was very
strong, and by early 1937 at an interim peak, the SP 500 commanded a p/e multiple of
18X. Then the roof fell in as the Fed ended QE, the economy went into recession and
the market dropped 55%. As a bow to 1937, Bernanke has opted for a QE taper rather
than cold turkey in the hope that a transition to more normal open market activity will
avoid a bust. This is a pure experiment as there is no evidence it will work. Even now,
the private credit system, which must pick up the liquidity slack as the Fed winds down
QE, shows scant signs of life.
Investors have put their faith in the idea it will work and that the economy will self -
sustain expansion as confidence in the markets and with households, businesses
and banks rises to make it happen. That's what stock players are paying 17x current
earnings to see and that's what you read in most of the market commentary presently.
For me, this is a momentous time. I hope the Fed is correct and a taper period is just the
right medicine to move the economy to self sustainability rather than a deflationary and
highly risky period. As we enter 2014, we see that there is current strong liquidity
support, slightly improved momentum in final demand and continuing jobs growth.
We will also be five years out from the deep trauma of near financial and economic
collapse, and so one hopes the post trauma stress syndrome will have eased sufficiently
to allow the US to get on with its business on a firmer footing.
If the Fed's plan works, there will be a battery of new issues to concern ourselves with.
However, recovery from individual / group trauma is a psychological / sociological
affair and not a primarily econometric one, so if I seem to be running a little behind the
herd, it is because I am going to continue to study how well the US can get past this
final, emotional checkpoint.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!