Dawn After Darkness

Thursday marks the third anniversary of Lehman Brothers’ collapse—the biggest bankruptcy in US history and the event touching off a global financial panic the likes of which haven’t been seen in decades and won’t likely be forgotten soon. What followed Lehman’s failure was an intensely trying period—economically and for capital markets. But at the same time, it’s important to remember the world didn’t end there.

Following the bear market’s end in March 2009, stocks began a sharp charge higher, kicking off a global bull market—the normal action occurring at the onset of most bull markets historically. Economically, US GDP has risen to within a hair of its pre-recession peak. While some might criticize the growth rate along the way (and we’d prefer faster, too), the reality is recovery’s continued for eight quarters since the recession’s end—and likely continues now.

Given recent volatility, some feel as though today resembles 2008—and are on the hunt for the next Lehman. But the fact is, a key driver and exacerbating factor—the powerful surprise eating away at bank capital that was FAS 157—is no longer in play. Banks are far better capitalized today than in 2008—and with better quality capital, on balance. Credit markets are, on the whole, functioning much more smoothly than they were this time three years ago. This is true even in Europe’s periphery, where credit markets are pricing in what they think the true risk level is (and doing a better job at it than the credit ratings agencies). And ultimately, while governments might still be doing some bizarre things (their norm), it’s a far cry from the schizophrenic and misguided steps taken in dealing with the sequence of Bear Stearns, Fannie and Freddie, Lehman, Merrill, AIG, et al.

There are those who argue even today 2008’s problems weren’t dealt with but rather deferred or transferred to governments. While we can see where the latter comes from—after all, nations like Ireland took on a large deficit load tied to their banks—this mostly misses the point. Folks commonly think a big bear market and recession had to have extremely serious problems that would hamper or prevent any kind of normalcy from returning after they ended. But the reality is, most of our problems weren’t insurmountable and didn’t require massive and sweeping reform (though we’re always for smart regulatory rejiggering if it leads to smoother-functioning markets). And while unfortunate after-effects like high unemployment may linger for some time to come, global economic health—growth, credit markets, the banking system, trade and many more—are dramatically improved relative to 2008. Even recently, as volatility has spiked, economic data globally have been far more expansionary than contractionary.

The world isn’t devoid of problems, and it never will be. The eurozone’s periphery continues to be a thorn in core Europe’s side—and no small thorn, either. But the critical question isn’t whether problems exist, but rather, how big and surprising are they? Europe’s issues are well-known—and we contend no one involved wants a disorderly break-up of the monetary union (nor the frozen credit markets that could ensue should such a thing happen). The fact so many are staring at banks seeking signs of a new banking crisis probably makes it somewhat unlikely that comes to pass—after all, this takes away a large portion of the surprise bear markets typically need.

Ultimately, the overall state of the economy has changed significantly for the better since the recession ended. In our view, it’s not repeated often enough: After darkness comes the dawn.