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As I point out in "Greenspan's Bubbles," aside from the lift given to the economy via the stimulus that came from the money homeowners extracted from their equity, the last recovery essentially wasn't one. And, given that about 40% of the job creation in that "recovery" was related to real estate, now that this source has been drained, there's no way you're going to convince me that the recession that comes out of that will be some mild event that is manageable, contained and pretty much behind us. It just makes no sense.
The recession after the equity bubble was milder than I would have expected, but that was because it was positively impacted by the beginning of the housing bubble. This housing bubble (as I pointed out while it was under way) was destined to leave bad debts in its wake, crippling both the lender and the consumer.
Bulls still in charge (for now)
Back to the multitrillion-dollar question: From a trading standpoint, one has to be cognizant of the fact that the folks who believe everything will be OK have more votes and more money than the folks who are in the other camp. (Witness how quickly General Electric's (GE, news, msgs) pullback was forgotten as folks latched on to Intel (INTC, news, msgs) having "made a number" that had been twice reduced.)Thus the tricky part -- for me -- is figuring out when to express, by taking short positions, the bearish view.
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Fleckenstein on CNBC: Grading GreenspanBill Fleckenstein and Doug Roberts of Channel Capital Research comment on former Federal Reserve Chairman Alan Greenspan's defense of Fed actions during his tenure.
As the financial world supposedly teetered on the brink of demise on the back of the Bear Stearns collapse, I thought we were either going to have an enormous meltdown or, if it became clearer that the Fed had stemmed the tide, we would experience a big rally. As it became apparent that the latter was the case, I cut back my shorts (though I recently reinstated many of them).
What I can't know is: Once we get near the end of earnings season, will the bullish contingent once again run the tape back up because bulls are convinced the worst has been seen -- yet again? I expect they will. So I'll probably cover shorts during earnings season. Then I will look for one more rally to really short into.
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The big money on the short side is going to be made when the bullish folks now awaiting the promised land realizes they're trying to look past not just some small ravine but a chasm as wide as the Grand Canyon. Once they understand that, we will see the combination of the stock market, the economy and the real-estate market feed on each other -- and we will finally experience the next time down.
When that will happen is not yet knowable, but as I have said, there is no doubt in my mind that this outcome is inevitable.
At the time of publication, Bill Fleckenstein did not own or control shares of any of the companies mentioned in this column.
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