There's no shortcut to recovery

By Bill Fleckenstein

It was back in May 2004, at a speech at a conference, that I introduced "the next time down." The staple of my thesis:

I believe the economic rebound has peaked, the economy will slow down in the second half, and we will ultimately slide back into recession. I believe we are headed for a large slide in the stock market, as well as a resumption in the decline of the dollar. These developments will tend to be self-reinforcing and especially damaging -- if and when housing prices join the decline. . . .

As this scenario unfolds, in whatever variation, we will experience the next time down. The realization that the market is going down again, and with it the economy, will force people to come to grips with the fact that the interlude of the last year was just that. This will deal a crushing blow to confidence, causing the public to finally comprehend that the Fed can't save them. Once the business of clearing away the excesses begins again in earnest, your guess is as good as mine as to how ugly it all gets.

I was obviously a few years early in my initial analysis. The collapse in lending standards and the reckless use of leverage -- which powered the real-estate ATM -- created an immensely dangerous environment that kept the party going far longer than I could have imagined in spring 2004.

All of that ensured that the already preordained speculative calamity would be drastically worse.

The next time down bears down on jobs

Those excesses resulted in the near meltdown of our financial system and the consequences we see all around. Hundreds of thousands of workers in a variety of industries have lost their jobs as a direct function of this next time down.

And (though I have been sanguine about the prospects of a temporary stock market rally) job losses are going to be a huge problem for the country for quite some time. For the past 10 years we've engaged in too much speculation and spent too little time building viable businesses and industries.

Meanwhile, the hope that "the government can save us" is what's liable to be the engine for whatever rally the market can manufacture; witness the positive market moves as news of a government-backed "bad bank" solution leaked out.

Prosperity is not 'printable'

America is now well down the path of trying to print its way to prosperity. Of course, the reason we are trying to print our way to prosperity is because initially, in the late 1990s, we tried to speculate our way to prosperity via the stock bubble. After that didn't work, we attempted to borrow our way to prosperity during the real-estate bubble.

Those two bubbles ended in the epic disaster of today. Now the United States and other countries will attempt to print their way to prosperity, which also won't work.

But we are in the early stages of papering the world with dollar confetti, and it's unlikely to "not work" just yet.

Continued: IBM and Microsoft

 1 | 2 | next >