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Tuesday, August 31, 2010
When people viewing the market say "this time is different," it is generally met with a chuckle and a look that says the speaker is naive. In many cases, for good reason. The most recent example was 2000 where bricks and mortar were declared dead because all businesses were going on the internet. Never mind that p/e ratios were sky high. Old valuation methods were obsolete-"this time it's different." We know how that turned out.
Before that, it was Japanese equities that became overvalued. It was said that, in contrast to the West, they took a longer view. Again, the old way of valuing equities was obsolete - "this time it's different." Today, as we look back, their economy and markets have still not pulled out of their tailspin.
These experiences could get one to easily dismiss the thinking that things might be different. After all, "There's nothing new under the sun" seems to be a widely held belief.
I think we have to be careful here. I think there are times when things are different and investors need to be alert. Consider the housing bust. Most investors fell woefully short of seeing its final severity. Why? Because things were, in fact, different. We've had real estate market downturns before. In many instances, as Greenspan and Bernanke argued, they were localized. Furthermore, the economy snapped back as Fed policy was eased.
This didn't happen this time because banks created toxic securities, put them off balance sheet, and received triple A ratings by an insurance industry that went wild insuring derivatives. This time it was different. Significantly different.
Looking at today's recession, a voice in the back of my head is saying that it might be different again. Simply, when we have been in similar economic situations in the past, we could see it as an investment opportunity because Fed policy and fiscal policy were aggressive in the background and would, in effect, bring a diving airplane out of its tailspin. We felt confident that investors who were negative on the market were making the mistake of looking in the rear view mirror where all the news was bad.
To put it mildly, this doesn't seem to be happening today. Congress passed a massive stimulus program and, in the process, drove the deficit to $1.4 trillion; and the Fed pushed short-term rates to practically zero. Bernanke has promised to keep the Fed balance sheet at unprecedented levels and still - no sign that any of this is having an impact. In fact, it looks like we may be rolling backwards down the hill.
As we look back at history, today's prices in the equity market have to be viewed as attractive. Bond yields appear to be at levels where investors could be hurt badly.
But the question is : "Is this time different?"