On Wall Street, happy days have returned. The emergency liquidity injections have worked, the credit crisis is history (R.I.P. Bear Stearns!), and it's off to the races again. In the second half of the year, this theory goes, we'll have a rip-roaring "V-shaped recovery."
Or so the theory goes.
Before you bet your business (or portfolio) on this happy dream, read what market gurus Jeremy Grantham and Peter Bernstein have to say. Jeremy's lived through every recession since the early 1960s. Peter lived through the Great Depression. Neither of them are buying the "V-shaped recovery" stuff.
Most of Jeremy Grantham's note this quarter (login and PDF) is devoted to eviscerating Alan Greenspan, Ben Bernanke, and other approval-seeking Fed chairmen (Jeremy does it better than most). But Jeremy does save some powder for the "V-shaped recovery."
As we've noted, analysts are somehow imagining that S&P 500 earnings are going to accelerate to 70% year-over-year growth by Q4, despite the paltry rate of earnings recovery in even the last, shallow recession. Jeremy's take? Ridiculous.
Look at the amazing earnings estimates for the S&P 500! On January 1, the first quarter estimate was +12%. It is now -8%. Was the credit crisis still hiding on Jan. 1? Even now the forecast for this year is +15%. Plus 15%! What is going on? With denial skills of this magnitude, it is surely not a surprise that subtleties within the equity market such as quality versus junk have been misjudged.The good news, from Grantham's perspective, is that prices on high-quality stocks (low debt, strong profits, good growth) have now come down enough that they are priced for a 4% real return over the next 7 years. The bad news, for those plunging lock, stock, and barrel into speculative stocks, is that they're priced to return -4% (real) per year.
Also from Clusterstock:
Eighty-nine year old Peter Bernstein isn't buying any of this dreamy "V-shaped recovery" stuff. He lived through the Depression, and today's environment is the worst he's seen since. Excerpts from the E.S. Browning interview in the WSJ:
Mr. Bernstein: When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That's part of the problem going forward. You don't have a high-growth exit from this, as you've had from other kinds of crises. We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U. The reason for that is that people aren't going to get caught in this bind again...
WSJ: How long do you think this whole process will take, before we get back to normal?
Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong...
WSJ: Can you explain the reason you think it will take a long time?
Mr. Bernstein: We have to go back to a moment when people have the courage to borrow and lenders have the courage to lend. Until credit is going up instead of down, you can't have growth. Housing has got to be a very important part of that; it always has been. You have to reach a point where somebody says, "This house is cheap, I am going to buy it," or where some businessman says, "This is a great opportunity for us to expand our business. Everything is available to us."
The good news: Both Jeremy and Peter regard high-quality stocks as better bets than real-estate these days. Not that that will forstall an advertising recession.
See Also: Sorry, the Stock Market is Still Screwed