Are stocks really cheap?

December 2, 2008

Some people still seem to expect a gradual return to the golden days of this decade, but I believe they’re deeply mistaken. We’re going to go through a protacted bear market, or at least a highly volatile but eventually stagnant one for the next 3-5 years. Here are the reasons:


  1. Companies thrive in an environment of deregulation. Regulation is not only costly, but it also prevents “innovative” CFO’s from getting the best performance from extraordinary accounting methods. Regulation is best when it can prevent bubbles from forming, but where there’s no overconfidence, no euphoria, and no stupidity, people are less willing to take risks, and less risk means less growth, less profit and more volatility.
  2. A lot of people have been very badly burnt in the recent economic collapse. History shows that in the aftermath of an event as severe as this, people save more, spend less and take greater care of how they allocate their savings. All this results in less leverage, and consequently slower growth.
  3. Economical events of this scale are usually followed by periods of political instability, and international turmoil. Political instability is never a friend of the stock market.
  4. It’s highly likely that the severe damage that many economies suffer and will suffer from will result in increased protectionism in many countries. I already read reports of governments with high current account deficits encouraging citizens to use domestically produced goods. Protectionism is the bane of globalization, and it’s almost certainly bad for everyone. Trade has been a major stimulant of progress and growth throughout the ages. Yet after so much rampant internationalization, politicians are certain to be drawn to protectionist policies and nationalism to alleviate the people’s concerns and anger, which will lead to slower growth, and lesser profits.
  5. The banking system at the heart of the global economy, has almost been nationalized in many countries. The resurrection of the financial system will take a lot of time, and in the mean time, the lack of credit will cause stagnant stock prices, even in the best of circumstances.  
  6. Many nations have chosen to prolong the crisis by allowing bankrupt and unsustainable firms to continue their existence through government grants. This is obviously a mistake, and there’s a significant chance that these inefficient actors will reduce the global growth potential until they’re able to work through their accumulated losses which should take a long time.
  7. The bailouts across the globe will eventually have to be financed by the taxpayer. That means higher taxes, higher taxes means less consumption, and that means slower growth.

2 Responses to “Are stocks really cheap?”

  1. FastSwings said

    For the market to return its 52 week high of 13,700, the Dow would need to increase 70%! For the Dow to make that kind of a move, it would take roughly 6 solid years at normal rates of return. That is a long time to wait for your index fund to recover.

  2. Like you, I’m a permabear for the foreseeable future. Recall that quasi-public “regulators” in the Federal Reserve (that is neither federal, nor has any reserves) are largely responsible for this “bubble”. I’m following Peter Schiff closely these days

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