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The Sanguinity Chronicles.
That's how I might title this week's column to capture the changing perspective of three once-wary market observers. I respect their views and include them here to update the bull/bear debate I began last week.
Let's begin with money manager Steve Leuthold. I note that he has joined the camp of former bears who are now sanguine, though not downright bullish. He has upped his equity exposure, saying current valuations make it seem less interesting to be bearish.
Similarly, Jim Stack of InvesTech Research appears to be a bit more constructive, which surprised me. His rationale: A decent chunk of gains from the prior bull market has already been surrendered, which he thinks is a notable development. Stack put it this way: "The lesson here is that unless we are in a heart-thumping generational bear market, then over half the damage has likely been done."
He said the recognition of recession -- witness so many headlines -- means we might be well along in the bear market. Having said that, Stack changed his investment stance only a bit, though his verbiage seemed a little friendlier. He isn't actually bullish, as he's written a lot about the housing bubble.
He and Leuthold have joined the Dow Theory Letters' Richard Russell, who is the most optimistic, in leaning toward a constructive view. (Russell's reason is the market action more than anything else and the refusal of the Dow Jones Transportation Average ($DJT) to make a new low thus far).
To reiterate my view: Those who are really bullish, as opposed to being open to a potential bullish resolution, do not completely understand the ramifications of the credit/housing bubble and what the unwinding means.
Doesn't suffer feds gladly
Someone who does grasp the ramifications and remains quite negative is GMO's Jeremy Grantham, who was interviewed in Barron's recently. His beliefs parallel mine and echo points I made in the later chapters of my new book. Grantham commented:"People think the Federal Reserve can stop a bear market because they can throw money at it and lower interest rates. It is even more certain we can collectively stop a bear market if some fiscal stimulus is thrown in. To which I say, 'Oh, you mean like 2000 and 2002?' -- when they threw what I call the greatest stimulus in American history, an unparalleled series of interest-rate cuts, cumulating in two, almost three, years of negative real returns, real interest rates coupled with a really substantial tax cut, which would never have happened without 9/11.
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"The combination would have gotten the dead to walk, and it stopped the bear market eventually. But the Standard & Poor's 500 ($INX) was down 50%, and the Nasdaq ($COMPX) -- which was all anyone talked about back then -- went down 78%. And a puny five to six years later, people are saying there is not going to be a bear market because the Fed is going to lower rates and because the government is going to have a stimulus package. But we have just been there, done that, and we had a nice bear market." (Click here to read the interview.)
To which I would just add a point that I have made regularly regarding the difference between the two bubbles: We now have bad debts. The lender has a debt he can't quite collect on. The borrower has a debt he can't service. That is a much different proposition than what we dealt with in the wake of the stock bubble.
Continued: Cash amid credit trash
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