In my last blog, I commented on a recent Wall Street Journal article entitled “Pivot Point” that discussed how the stock market mentality is changing to become more negative on stocks as a long-term source of portfolio growth.
I think that article is touching on a much more fundamental change that will be occurring over the next year or two which will fundamentally affect investors’ views toward stocks as an investment.
The change will be much like the profound shift in people’s views toward housing a good investment that has occurred in the last few years.
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I also mentioned that the work of economists Ken Rogoff and Carmen Reinhart were cited in that article. I said I would comment on their work in “Part 2” of the blog because I think it is highly relevant to the current stock market and the Aftershock.
These two economists have risen to prominence due to their book, “This Time Is Different: Eight Centuries of Financial Folly.” The book covers their research and analysis of financial crises through the last eight centuries and how they relate to today. In brief, one of their key points would be that financial crises in the past have taken far longer to exit than people believe. Hence, when people say they will get out of a given financial crisis, such as this one, very quickly, because “this time is different,” their research shows that very often, it’s not.
What I like about their analysis is that they tend to take a more skeptical view of the current situation and our ability to quickly recover.
However, what’s more important is the fundamental view of this situation as simply another financial crisis like so many in history. So many people and economists, such as Nouriel Roubini, look at what we are going through as simply a financial crisis.
The 2008 financial crisis and the current debt crisis in Europe are obvious examples of this. What they are missing is that the financial crisis is only a small part of a much bigger problem. The bigger problem is the long-term buildup of a multi-bubble economy. This multi-bubble economy changes our economic situation from a simple financial crisis to something much, much bigger.
Because of this limited view of the current economic situation, economists like Roubini or Rogoff will not be able to forecast much of what is going to occur in the future. They will be better than most, but still way off.
More importantly, they won’t be able to focus on the key solutions, which involve much more than trying to prevent financial crises, they involve more fundamental changes to our economy to significantly raise productivity.
It is important to recognize that part of the reason Roubini and Rogoff get so much attention is that they have this very limited view of our economic problems. This makes them much safer and more comfortable to readers even if inaccurate. This is why we call them “comforters” despite their somewhat bearish outlook. They are in effect Teddy Bears, not real bears.
This is why so many people, such as Ben Bernanke, sing the praises of their book. It’s not a book that would upset Ben Bernanke in the least.
However, a truly piercing analysis of the current economic situation would be enormously upsetting to Mr. Bernanke since it would very much contradict his view of the economy.
Also important is their overall view that this is just another financial crisis, like so many others in history. This is very much a cycle view of the economy. The cycle view, which so many people hold, says that we are simply in a financial crisis cycle that we will simply cycle out of. Some say we will cycle out quickly and some, like Roubini and Rogoff, say we will cycle out more slowly.
Unfortunately, this is not just another cycle. The multi-bubble economy makes this very different from any other financial crisis the United States has had in the past.
The very different world economy and the very different financial institutions (remember there was no Federal Reserve or European Central Bank 100 years ago) all combine to make this a significantly different situation for the world economy as well.
Yes some things may be similar, but so much has changed and those changes are critical to understanding how our current economic situation will evolve.
It is far more than a financial crisis, or a down financial cycle, which we are about to find out.
About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $120 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here
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