It’s not over till it’s over
Over at The Big Picture, Jack McHugh makes some interesting comparisons between the calm seen in the markets now as banks and investors wrap and the quarter and a year ago. His takeaway though is don’t expect a repeat of last year’s second half meltdown.
…A venerable investment bank had disappeared, stocks had set a major low in March before rallying smartly, the VIX had fallen by more than 50% off its March peak, and both Wall Street executives and Washington policy makers were claiming, “the worst is now behind us” Though it seems like a lifetime ago, the moment in time to which I refer is the end of 2Q 2008, but it could just as easily be Q2 2009. During May and June of last year, I wrote ceaselessly that the financial crisis was not “contained” and that the worst was still ahead of us….
A year later, things don’t appear all that much different. Housing is still on its backside, and Wall Street is still touting its prospects while issuing newly minted shares…Interestingly, the level of complacency among investors is almost as high now as it was a year ago…Consumer confidence readings (even in Europe) are levitating; the vast majority of stock market participants feel the bear market lows have been seen; the VIX is back to pre-Lehman levels, and options traders are selling volatility whenever it rises. Even the primary bond dealers are now confident enough to puff out their chests…
Given the similarities between June 2008 and June 2009, should we have the same concerns for a white knuckle ride in our capital markets again this autumn? It may surprise some readers who think I’m one of the “permabears”, but I have to say such an outcome — while possible — is not likely. Events this spring are not the same as they were in 2008, and while securities prices are nicely higher than they were three months ago, they are nowhere near as elevated as they were during the second quarter of 2008.
I must say, I agree that it’s hard to imagine seeing anything like last year’s fast-falling dominoes of financial heavyweights, but I’ve still got my eye on some other trouble spots- most notably California, which has to plug a $24 billion budget gap. That’s about $10 billion more than the hole it had in 2004. But back then, the state simply borrowed its way out of the crisis by issuing economic recovery bonds. That option is off the table this time around. That means big tax hikes – something the governor isn’t too excited about – or steep spending cuts. California though is not alone and the fiscal crisis in many states threatens to undermine the federal stimulus that many economists expect to boost the U.S. economy.