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by david927·17y ago·view on hn ↗
I think we'll be hearing a lot of this now, and it's my feeling that it's a sucker's rally. Every single one of those who correctly called the financial crisis are quite clear: it's not over by a long shot. The fundamentals have to return, and to do that we have to pay off debt and start having savings again, which means not spending (i.e. liquidity trap), which means that we'll go through a period of undervaluation, both in terms of assets and labor, before the smoke clears.

There's no happy six month reversal here; just a dead cat bounce. And those who are selling you that it's the end of the depression are those who sold you the whole Ponzi mess in the first place. Shame on them.

6 comments
I'm afraid you're correct. I wish people would just pick up and read a history book. The Great Depression didn't start overnight. People have this misconception that things just got really sh*tty one day after the stock market crashed. Reality proved to be different. Things got a little better, then a little more worse. Rinsed and repeated until the Dow Jones lost 90% of its peak value. Couple this with a severe drought, the U.S. calling in its WWI loans from Europe, and a couple of other protectionist decisions, and you had yourself a depression.

Wishful thinking got us into this mess. And right now, we may as well view the stock market like a slot machine. It'll pay out a little, drag people in, and then take a lot of their money.

The other problem is that when lots of people start focussing on aggressively paying off their debt in bad times, it actually ends up temporarily hurting the economy. This is precisely what happened before the Great Depression. Why? Because they stop spending the money, and instead give money to big banks which do nothing but hoard it because the banks have lost paper money on the stock market. As the banks look to replenish their stock piles they largely refuse to loan the money out again. In a way, it's like chemo therapy in that the treatment for people's financial ailments might actually be the thing that kills them. But eventually the huge swaths of cash that the banks build up from debt repayments will come back into the market and there'll be a surge in investment activity, but that won't happen until the banks themselves are comfortable on their own feet, which is far from the case right now.

Oh, and here's the source for my pessimism. I've been following this website for a while now. The guy that runs it is a computer hacker to boot! I'm a big fan of his analytical skills and refusal to make predictions, just provide the numbers.

http://dshort.com/

Don't forget the balanced budget attempt in '37.
" Every single one of those who correctly called the financial crisis are quite clear: it's not over by a long shot."

Who are these people that correctly called the financial crisis? It could be that they are perpetual pessimists. A broken clock if you will...

These broken clocks had reasoned arguments to justify their claims, similar to their claims as to where the bottom is. That's different than just being a pessimist.

Also, it's overly optimistic to presume those predicting this recession were just lucky.

Some of the people that called the financial crisis are perpetual bears. That said, many of their reasons for this bear market are sound. The bleeding has slowed a bit but the fundamentals just aren't there. Unemployment is still high, credit is still in a crunch, and banks are still over-leveraged. All that AND we haven't been hearing about the coming Alt-A mortgage flood.
Just because the bubble lasted longer than "perpetual bears" thought it would, does that mean their analysis was wrong? For instance, Andy Beal, the banker Forbes profiled (that was at the top of HN), saw the crazy deals being made in 2004 and got out of the market. If for the last 4-5 years you'd heard him argue that the fundamentals did not justify the credit bubble, would you call him a perpetual bear? The same happened with George Soros in 1997. He recognized that the stock market had become an enormous bubble, and he began shorting it. He lost a huge sum of money because the bubble went on for three more years. Was his analysis incorrect?

No one likes to hear that the party is over, or that things won't go back to the way they were in our lifetimes. During the bubble, people try to marginalize those opinions by calling them "perpetual bears". But we're finding out that they were right. It will probably take years for banks and households to fix the holes in their balance sheets. Even if GDP stops contracting, a "recovery" will likely be so anemic that it will feel like a recession. And job losses will continue to pile up. I'm afraid we haven't hit bottom yet - and maybe aren't even particularly close.

"And those who are selling you that it's the end of the depression are those who sold you the whole Ponzi mess in the first place. Shame on them."

I hope you don't include the Economist.

I could not agree more. I am a regular reader of The Economist, and they have been talking about the housing and credit problems for years. This magazine is certainly not one to make wild predictions.

I also find it annoying that article's title was significantly changed from "A faint sound of applause" to "The recession may be lifting". These do not remotely say the same thing, and this article is not saying that the recession is over, unless I am misunderstanding this quote: "Yet even if the bottom in economic activity is in sight, a robust recovery almost certainly is not."

Your reaction to this article makes no sense to me because the author is telling us how we are not leaving the recession any time soon. Your post post seems to imply that the author has something good to say, and I just don't see that at all. Quite simply it says that we have very small good signs, but most of the fundamentals are rubbish.

Some choice quotes: "Yet even if the bottom in economic activity is in sight, a robust recovery almost certainly is not."

"The National Association of Realtors estimates that up to 45% of existing homes sold were “distressed” properties—those in, or close to, foreclosure." (This whole paragraph is explaining that the unexpected rise in property sales is attributed to homes being sold in distress)

"The tonic of lower interest rates has been dulled by the dysfunctional financial system."

"That is bad news, not good news: banks are lining up to repay the money to free themselves from political interference, even though the loss of capital will constrain their lending. That increases the odds of a multi-year, Japanese-style credit crunch."

Jeremy

I think the pessimists are missing one thing. India and China's economy, while hurt, still have positive GDP growth. While the US might continue to crater, 2.5 billion people are going to have higher standards of living next year, and the year after. That didn't happen in the depression.
That's a good point, and I think India and China will do well through it all. But remember that a lot of demand for manufacturing and production in these countries comes from Europe and North America. So while they won't dip nearly as low as, say, the States, it will still hit even these rising stars.
"Dead Cat Bounce"...you took the words right out of my mouth :)