Redefining Bad

A few postings ago I predicted that analysts and other market participants that gauge corporate results would switch from "better than expected" to "not as bad as expected", in their efforts to sugarcoat dismal performance. That's exactly what an article in the NY Times now makes clear:

For now, at least, some investors seem to have become so inured to the bad news that results that would have once been viewed as disastrous are now seen as good, or even great. The sober phrase often used on Wall Street to describe solid corporate results — “better than expected” — has been replaced by “not as bad as feared.”

Hiding behind this development is the expectation that "surely, things can't get any worse", which goes a long way to explain the various relief rallies going on in the financial sector. Unfortunately, this expression of hope is not founded on solid fundamental evidence but on irrationality (at worst), or uninformed mechanistic cyclical analysis (at best).

Two observations:

1. I'll pay more attention when the attitude shifts to "it's bad and it's going to get much worse", i.e. when even the professionals reach the capitulation phase and abandon all hope. That won't be the point to jump in, mind you, but it will be a sign to stop fishing and get back to work(*).
   
2. This is not a garden variety recession. It is not caused by cyclical excess inventory accumulation that can be reversed within a couple of quarters, but a most pernicious credit contraction. It's not only that banks are less willing to lend; it is borrowers that are retreating from debt because their incomes can no longer support the heavy burden accumulated over the past decade. Household debt as a percentage of personal income now stands at 115% versus 79% in 1998. This ultimately acts as a drag on consumption and won't go away quickly or painlessly.
   

(*) A famous market speculator once said: "There are times to be long, times to be short and times to go fishing".