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Why We Need the Recession to Continue


The return to old ways proves people weren't scared straight.

Boiling the Frog?

Whew. I'm so glad I was wrong in doubting the economic recovery in early July. The major indices went on to have one of the best July performances in over a decade. And this concerns me. I realize that things are getting worse at a slower rate, but does it really justify the ubiquitous optimism and recent rally in stocks? Investor sentiment polls, such as Investors Intelligence, and option gauges such as the put/call ratio and VIX, are at their most bullish levels in months.

A New Generation?

The popping of the credit bubble and ensuing breakdown of the financial system -- I think that's the order it went, or maybe the chicken and egg held hands and crossed the street together -- was supposed to mark a new era in the investment landscape. Even as some predicted, possibly correctly, the March bottom would prove to be a generational low in stock prices. But they simultaneously warned that the behavior of consumption would be suppressed for the foreseeable future.

The theory here is that people had been so badly burned by the meltdown and evaporation of wealth that across the board, spending patterns up and down the ladder -- from food and clothes to houses and stocks -- had been permanently altered into a new posterity.

But while people may be trading down or looking for better value, they're still, in fact, trading in every sense of the word. Having adopted the view that the worst is over and things will soon get back to normal (with "normal" being the general increase in asset values), there seems to be resumption in spending.

The fear that this country would have lost a full generation of investors seems to have been overblown. In fact, a recent survey by Fidelity of college-educated 20- to 30-year-olds showed that 65% believed now was a good time to be buying. And a full 80% said they planned on using traditional mutual funds and IRAs as means to save for retirement.
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No positions in stocks mentioned.

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