An Eerie Similarity to 2007, Before the Bulls Were Slaughtered

An Eerie Similarity to 2007, Before the Bulls Were Slaughtered
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"I am a bull on global growth... You really cant lose investing in stocks in  the industrial sector." TrendMacro's Donald Luskin (on Kudlow & Co., Dec. 12, 2007)  

We should all learn from history. 

Last week Rudolf E. Havenstein retweeted a RealMoney column I wrote back on Dec. 13, 2007. 

I got to thinking how many conditions that existed back then exist today -- most importantly, like in 1999, when there emerged the untimely notion of The Long Boom (Wired Magazine). It was a new paradigm of a likely extended period of uninterrupted economic prosperity and became an accepted investment feature and concept in support of higher stock prices!

"We're facing 25 years of prosperity, freedom and a better environment for the whole world. You got a problem with that?

A bad meme - a contagious idea - began spreading through the United States in the 1980s: America is in decline, the world is going to hell, and our children's lives will be worse than our own. The particulars are now familiar: Good jobs are disappearing, working people are falling into poverty, the underclass is swelling, crime is out of control. The post-Cold War world is fragmenting, and conflicts are erupting all over the planet. The environment is imploding - with global warming and ozone depletion, we'll all either die of cancer or live in Waterworld. As for our kids, the collapsing educational system is producing either gun-toting gangsters or burger-flipping dopes who can't read."

--Peter Schwarz and Peter Leyden, Wired Magazine (1997)  "  The Long Boom: A History of the Future, 1980-2020" 

As noted in my column below, which summarizes my Kudlow appearance of 10 years ago, the hubris and denial of political, geopolitical, economic and valuation reality of self-confident bulls such as TrendMacro's Don Luskin on Kudlow & Company in December 2007 and other vocal economists such as David Malpass, John Ryding, Brian Wesbury and Bob Stein who filled the corridors of CNBC was a continuing feature of the times -- much as that investment and economic confidence is, in a different way, demonstrated today, as discussed in my opening missive yesterday. 

Please carefully watch my appearance on Kudlow & Company (the night before I wrote the column below, which summarized my 2007 appearance). 

Going forward, and as often as once a week, I will republish columns I wrote 10 to 11 years ago that warned of The Great Recession of 2007-2009 -- and that went unheeded by many. 

Others, such as my pals Barry Ritholtz and  David Rosenberg, issued similar warnings to me, but we were in the very small minority. They, too, were criticized and were often ridiculed by the glib optimists who saw not what was in front of our investment eyes and continuously ignored the conspicuous and emerging signposts that populated the economic data and ignored the logic of analysis and data dissection that we delivered. 

I have never written this before -- and I won't again! -- but I made a fortune being short during that interim interval (2007-2009) and I expect to do so in the time ahead.

Because, history rhymes. And now, this blast from the past: 

Kass: Permabulls Remain in Denial
Bulls won't recognize a recession until stocks are lower -- and by then it will be too late.

Last night, I appeared on CNBC's "Kudlow & Company." Here is the video of my appearance. 

As I  mentioned recently, talking with Larry about the stock market can sometimes be tough, because he is a permabull, a sincere believer in Goldilocks and a true believer that the U.S. economy/stock market is the "greatest story never told." 

By contrast, I, as I have  stated on numerous occasions, I believe that the U.S. economy is "the greatest story ever  sold." On the panel last night was Dynamic Mutual Funds' Noah "Boychick" Blackstein and Trend Macrolytics' Don Luskin. 

Both Don Luskin and Larry Kudlow, two proponents of free-market capitalism, criticized the Fed for being too meek in cutting rates and for the manner in which it communicated the liquidity injection on Wednesday morning. 

It is truly ironic to me that Don and Larry, two of the greatest devotees to the strength of the domestic economy, are among the most vociferous critics of the Fed. If all is well in the U.S. economy, why do they continue to suggest that monetary policy should be loosened dramatically, and that the Fed is not doing enough? 

By contrast, I suggested that the issue was much broader. From my perch, market participants have lost faith in both the Fed's recent actions and the Treasury Department's mortgage proposal as solutions to the deeply rooted credit problems, and this widespread vote of no confidence is producing inflation and currency fears.These moves are no longer seen as a panacea. After all, as I remarked, Libor remains elevated, equities are weakening, and the TED spread is historically high. So there is, I insisted, a growing recognition that the credit crisis has deepened. 

As I wrote yesterday: The current credit crisis emanated from the unprecedented growth in debt over the last two decades, which was accompanied by the cessation of lending/borrowing judgment.Historically low interest rates (brought to us by the prior Fed chairman) encouraged the quest for yield, and normal due diligence was abandoned. 

The outgrowth is a world awash in an unwieldy and unregulated derivative market that managed to bypass traditional banking regulation.It is a setting which patchwork mortgage proposals and/or creative Fed initiatives will not likely remedy in short order.

Most importantly, it seems that the markets are beginning to accept the notion that the financial workout will take time and, in all likelihood, can only be relieved by the natural forces of an extended recession.
I went on to say that corporate profit, business spending and personal consumption forecasts are going to be revised down by consequential amounts.

Larry Kudlow and Don Luskin attacked my assertion that the economy is at the door of recession.In support of my argument, I tried to explain the causalities I saw leading to that recession: the housing depression, the subprime contagion moving up the ladder of credit, and the delta of economic growth is clearly slowing, with third-quarter 2007 5% GDP growth morphing into 1.5% growth in fourth quarter 2007 and, as judged by Morgan Stanley ( MS), slightly negative readings in the first two quarters of next year. The other panelists considered Morgan Stanley a permabear on the economy -- a new one to me! 

Unfortunately, I was repeatedly interrupted before I could list the growing evidence of a probable recession. Some of these items include  consumer confidence plummeting, seized-up  credit markets, weakening retail sales -- the November strength was bogus-adjusted for food and energy inflation -- and poor durable-goods reports. 

Moreover, other leading indicators -- such as the Baltic Dry Index dropping by 10% from its high, housing permits and rising job claims -- all point to a rapidly eroding economy.The panelists seemed keen on partial and conformational economic analysis and also chose to ignore the negative impact of Thursday's release of the PPI, which recorded its largest gain in nearly 35 years. (My "blahflation" scenario seems to be playing out.) As well, they chose to ignore the forward-looking equity market and its current weakness, although Larry routinely cites market strength as support to his uplifting economic forecasts. 

In the final analysis, what Don and Larry don't appreciate (perhaps because they don't manage money) is that by the time it is clear that the economy has weakened toward recession, stocks will be much lower. It will be too late.

Doug Kass is president of Seabreeze Partners Management Inc. This essay originally appeared at  

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