Nassim Taleb was on Bloomberg TV yesterday making an interesting point (his TV appearances have been less interesting in the last couple of years) that although made many time before in many places is still important.
The objective behind much of the Fed, Treasury and government policy has been to try to avoid the full consequence of recession and crisis but what has actually happened is that recession and crisis have gone on much longer than the otherwise would have. Saying “recession and crisis” is not the most accurate description but we have not had a proper recovery from the recession and crisis of 2008.
My view all along has been that if the US had done the difficult thing (let the banks fail, let equity and debt holders face whatever came and only protected depositors) we would have seen real and organic recovery by now. Although the US has far more moving parts, Iceland offers an example of a country that actually fared worse than the US that then did the difficult thing and started to show signs of real recovery in just a couple of years. The US is now four, five or even six years on (depending on when you start counting) and we have many data points that are still weighed down from the crisis.
Of course none of this has prevented the stock market from soaring. I saw somewhere that investors lost $16 trillion in the Great Recession but have now made $13.5 trillion back. To be crystal clear, regardless of anything else stocks have done very well in the last four years, there’s no doubt about that.
In many blog posts I have talked about the need to at least capture most of the effect. The market doubled in about three years from the 2009 low and that type of lift doesn’t happen often. Not missing a huge move needs to be balanced out with understanding the world today. The market is up a lot but it is up without the normal fundamental strength that goes with economic recovery and expansion. The bull market is now long in the tooth at 47 months and there is quite a bit of positive sentiment. This could continue for many more months of course but it makes sense to especially alert for any subtle signs the the bull is ending. The first signs are always subtle.