CNBC's Pisani: The Bears Are Wrong. Here's Why.
CNBC "On-Air Stocks" Editor
Once again, the markets have rallied today after several days of trying. This is typical of the market in the most recent leg of this rally, which began in July. Here are it's characteristics:
1) A "floor to the market." Every time the market drops for a few days, buyers have come into the market.
2) No weak sectors: small, midcap, and large cap all near new highs.
3) A global synchronous expansion. This is rare if not unprecedented. Japan's Nikkei is hitting a 6 1/2 year high, markets in France, England and Germany are also just shy of 7 year highs, and emerging markets like Brazil are at historic highs.
Global economies are converging--this is historic.
There is considerable anxiety about this brave new world. Traders, unused to such expansions, have been playing out "left-field disturbances" that might upset this apple cart. They include:
1) Some meltdown in an emerging markets that will create panic. The recent political debacle in Thailand was thought to be the perfect scenario by the bears; but something funny happened: it was contained, and no one panicked. A recent drop in commodities also caused a brief, 10% drop in the Russian stocks market, but again: no one panicked. Traders are exhibiting discipline and patience they never exhibited in international trading.
Why is this panic not happening? a) a tidal wave of liquidity means more money is invested in global markets than ever before; b) more sophisticated investors who see the global expansion as a long-term event and feel it would be foolish to quickly leave markets like Russia, Brazil, India and China.
The two other major bogeymen:
2) Anxiety about derivatives--the trillions of dollars in derivatives globally is a favorite bogeyman, but risk is spread out so widely that nothing close to a meltdown from has occured.
3) The complete collapse of the "real estate bubble". Another favorite of the bears. Here's the problem: none of the "classic" elements of a real estate collapse are present. Historically, the real estate market falls apart when three things happen:
a) the economy weakens notably, b) liquidity is withdrawn, c) supply overwhelms the market.
None of this is happening. The economy has made a soft landing, there is no withdrawal of money to buy and sell commercial real estate ($40 billion from Blackstone to buy Equity Office? Please!), and supply of offices, malls and apartments are certainly not overwhelming the market.
As for the fluttering over the collapse of some subprime residential mortgage lenders - this is a natural result of too much liquidity, when brokers competing for business make loans to people they should not under terms they normally would never offer.
Welcome to the murky world of subprime lending. It is neither surprising nor unprecedented, and it has so far been completely contained. It has not spread to the prime mortgage business.
The bears claim that this is the "canary in the coalmine" that will bring down everything. They don't understand the conditions under which real estate markets collapse, and these conditions are not present.
Keep an eye on the big picture. If this continues, we are in an historic time. There will be books written about this period in the next decade.