Stimulus Success & Market Recovery?

[hguyw]

I've been mostly lurking on here, though I did introduce myself about a year ago and I enjoy reading the collective wisdom. Like everyone else, my retirement has taken a hit and as I try to understand the causes and proposed cures for this mess, I find one question keeps bugging me. So I thought I'd run it by you all and see what you think.

Obviously, everyone wants the economy/market to recover. By recover, I assume that means a return to 12,000 - 14,000. But since *that* market was a result of consumption via obscene amounts of debt on credit cards, liar loans, unaffordable mortgages that had yet to reset, and more...IOW a house of cards...how can we reasonably expect to get back to a robust economy anytime soon? Is the expectation that, when/if the world economy finally "turns around", consumers can return to profligate, unsustainable consumption on easy credit and all will be well again? And wouldn't that put us right back where we are now?

Various media reports suggest that at some point, regulation will return to US banking and the markets...IMO, that would be a good thing, but then will a regulated market and banking industry be able to return to previous highs in anything approaching a reasonable length of time (like, our lifetimes)? If the answer is "no", then would even the perfect stimulus package be forever considered a failure simply because the results were measured with a faulty yardstick against the old economy that was built on a house of cards?

Hope this question isn't too much of a bummer, but it's been on my mind lately. What do you think?

 

[Grep]

You are correct that portions of the recent highs were the result of one or more bubbles, and that those contributions to the highs will be stunted for a good while.

However, despite being similar in raw terms (e.g., the S&P), the recent market peaks were actually significantly below the dot-com bubble in real terms. Similarly, reaching the "same" peak again will actually be less dramatic and rewarding in real terms. Reversion to the mean (some would argue) and normal growth will eventually suffice (with "eventually" being the big unknown).

The corollary is that our current lows are actually significantly lower than the dot-com bust lows, again despite being similar in raw terms. Indeed, some of this collapse may just be a final capitulation from the prior one.

Fortune may particularly smile upon those few of us who are starting from recent lows. For the rest of us, there's a ray of hope in this too, if reversion to the mean is real and applies.

As you say, many of us would just be glad to be made whole again which, in real terms, will likely not be easy or quick.

 

[samclem]

Yes, if things return to a rational foundation (e.g responsible loan underwriting, companies making money products and services rather than artfully structured financial clouds in the sky, etc) then we can expect it to take awhile for the market to return to the previously high level that was supported by nothing.

Here's the good news: With the current government deficit spending on the TARP and [-]king pork[/-] the stimulus, we'll have some mammoth inflation as more dollars chase the same mount of things and as the government seeks to pay off creditors with ever-cheaper dollars. That's the ticket to the market recovery--share prices will go up with inflation, and before you know it we're back to the previous market highs! Magic--the stimulus worked! (And a dozen eggs will be $4)