And, marginmike, I in turn think you are in a bit of denial.
While its true that many areas of government exaggerate the problems they face to increase the attention and funding they get, this tends not to be true of the Fed, or the Treasury Secretary.
Both of whom are given to making calming, and optimistic statements, particularly in times of challenge or danger. They don't want to precipitate "runs on the bank".
That is why the comments out of the national and NYC Fed are so remarkable. You are right as to why they did it. To shock Congress into IMF funding. (As well as to defend their organizing of a private bailout of LTCM.)
But the real point, which you seem to be missing, is that they think the IMF funding is that crucial. And preventing LTCM from undergoing forced liquidation that essential.
Marginmike, during times of considerable risk what the markets tend to do is price securities on trailing earnings. Because the future seems a whole lot less clear. 18% trailing earnings is not in the middle of the market's historical range. Nowhere near. As I recall, the median post WWII S&P is more like 12-14%.
Let me make the counter argument for you. Because I really am interested in getting at what's likely, rather than proving some position I've taken is right. I could change my mind tomorrow, or tonight, and be happy of it -- if argument and evidence convinced me. So, here goes.
Sure, the period from 1970 to 1982 was characterized by rising inflation. The postwar period through the fifties was characterized by slowly rising valuation levels (together with very strong and rising corporate profits), as the financial world slowly recovered from the trauma of the Depression. And gradually became convinced that another Big One was not right around the corner.
But we now do have risks we haven't had in 50 years. Which we will PROBABLY escape in this country with no more than a flesh wound. But in this environment isn't it appropriate that stocks return to something a lot closer to the post WWII historical mean, based on those trailing earnings we can be sure of?
That would be 20-30% lower from here, in the low beta indexes.
Well, maybe we only fall a fraction of that. Maybe.
But I'm hard pressed to believe, based on all the objective information and perspective I can muster, that we must have reached the bottom. I think that's just wishful thinking. Based upon the fact that we're very unused to even a 20% index decline. (Which itself suggests a much bigger one is likely, if challenging conditions do indeed face us again.) And based upon the fact that when people look around them right now, the sun is still shining, people are still employed in record numbers, real estate is going up, and all the rest. (That's always how it looks when financial markets first start to anticipate a slowdown or recession, before it has actually begun.)
The higher it has gone (in valuation), the lower it has to go (in price), before it ends. When trouble looms, that is.
Doug |
