Walking through a packed mall, it's hard to believe that ATMs came within 24 hours of shutting down when the banking industry froze up. Or, that the fired manager of bond-trading who destroyed Merrill Lynch had $10,000 in cash taped to the inside of his desk. He obviously was prepared for a scene out of Cormac McCarthy's "The Road."
Critics of the federal bailout program TARP can't appreciate how ugly things might have been if we taxpayers hadn't stepped up to the plate.
Well, happy days may be here again. People are out spending money on cars, clothes, you name it. And companies like Honeywell are pre-funding their defined benefit retirement plan with more money than they are required to contribute -- $500 million more in Honeywell's case. Companies, shaken by the banks' near failure and vowing to not be left vulnerable, have more cash right now than they know what to do with.
Is the glass half empty or half full? While the jobs picture may continue to look bleak, it's worth noting that those with college educations are experiencing only 5 percent unemployment. Those still employed have typically received wage increases -- traditionally the norm during recessions. After all, how can corporate America be sitting on record amounts of cash and not consider some raises for what companies all claim are "our most important asset?"
Then, there's the stock market. We're getting back on track with Warren Buffett's 2005 prediction in Fortune that the market would "only" double over a 10-year period. This simply meant a 7.2 percent annual compound increase instead of the historic 10 percent average.
We're five years into that prediction, and the overall market has remained flat up to now. For his original projection to reach fruition, we would have to experience about a 13 percent rise in values over the next five years. That may be happening as we read this. The average rate of return in the years following a major crash has been higher than the 10 percent historic average -- 13 percent as a matter of fact.
What would contribute to a "super boom?" I'm reminded of the book that predicted with giddy excitement "Dow 36,000" written back in 1999. The Dow did make it to 14,000 in 2007, but nestles in at 11,000 today. Those who believe that we're in for strong stock market gains over the coming years cite, among other things, the possibility of higher inflation that would help to boost stock values.
Of that historic 10 percent gain, 3 percent is simply inflation increasing the value of real assets in dollars as the dollars get cheaper. Since the market tends to beat inflation by 7 percent. Warren Buffett may have been thinking back in 2005 that inflation would be zero and that the market would do just 7 percent better.
According to "The Stock Traders' Almanac," the third year of a presidency tends to generate the best market results, so we have that possible tail wind working for us in the short term.
Add that to the $9 trillion sitting in cash that is increasingly impatient earning zero interest and we have reason to hope for a rising stock market.
Longer term, there's inflation around the corner, of course, because our government tends to pay debts with cheaper, inflated dollars when we think we can get away with it.
It's the political path of least resistance when compared with borrowing more, raising taxes or cutting spending.
The market rises on a wall of worry. There are always reasons for why rosy predictions might not come true.
Not to worry.
There are investments like dividend paying stocks that offer some protection on the downside as well as some great balanced mutual funds with combinations of stocks and bonds that can insulate long-term investors from the vagaries of market forces.
It gets back to the question of what appear to be "Happy Days" and whether or not they are real. If we can hedge our bets with some diversification, we can sleep at night even if our optimism is partially false.