Monday, August 24, 2009

Watch This!

Any testosterone enhanced male knows that, "watch this!" are often the last words spoken before a trip to the emergency room. Last week central bankers across the globe were declaring the recession in retreat with the chest thumping certainty reminiscent of the last time I ever stood on a diving board. (yes it ended badly).

Level of consumer spending that gave us giddy investment returns is not likely to return anytime soon, if in our lifetimes. So we should expect sub par growth as personal balance sheets are repaired over the coming years.

The talking head debate now is about the shape of the recovery. "W"? "V"? or my favorite recent description "square root symbol", which is a quick rebound and then a long period of flat activity. One could argue that we are already in the long flat period as the market has gone nowhere (if a rollercoaster can be said to go nowhere) for ten years. Throwing up your hands and squealing with delight and just plain throwing up notwithstanding.

Historically, secular markets, those acting on major underlying economics last a generation. I would argue we are about half way through the current secular bear market and another decade of stumbling is very likely. Japan's Nikkei average last saw its historical high in 1990 at which point wild exuberance and real estate speculation brought market fun to an end. At the time Japan's broad market average was nearing 40,000. Today it is flirting with 10,000 after twenty years. Closer to home, from 1964 to 1981, the Dow Industrials rose an eye popping one point. Seventeen years with no return, excluding dividend yield.

Relative valuations matter. Alternative returns in other assets matter. We live in a different world of volatility encouraged by crazed derivative activity but the long term reality is the same. We remain in a time when giving up opportunity will have less negative impact than giving up capital.

This is an extraordinarily warped market as government intervention plays the tune. The fundamentals come out of Washington now, and as Keynes once said, "the market can remain irrational, longer than I can remain solvent."

John Barnyak