I always find Mr. Caravaggio's writings very thoughtful and insightful. However, I don't agree that it was a bubble. Prices were and will be completely justified. What was wrong was that the financial companies were leveraged to debt of 30 times their net worth. When the value of their assets which to a first approximation equaled their debt declined by 3%, their net worth was wiped out. The problem was that they made their money by making 1% more than their debt for a long time, and when the negative news had its day on home prices, it was enough to temporarily mark their assets down by 10 to 20 percent or so, without regard to subsequent return. What a former colleague insightfully would call "selling premium." Ouch. Okay, the banks erred. That doesn't mean that they will err again or that cycles will repeat or that the economy will not be resilient. Regions come back much stronger after natural disasters. Things have been worse. The banks were given say 100 billion of money from the rest of us to recoup their bad debt. They're happy. The process of recovery will occur. Proper money management and adherence to economic principles is called for now. The difference between the returns on equities and debt and the required rate of return a priori which is equal to the actual realized return on average, and the average non-understatement of earnings estimates is paramount. Let the bygones be bygones.

Vince Fulco adds:

Institutional investors now have a decade of no return. With some detailed credit work they can get 15-20%+ annualized from more senior securities and meet long term liabilities. Why subject oneself to the vol of equities when all your peers are moving to liability management policies and many are way behind the curve? The word on the street is hedgefund managers (those still in existence) are blowing out their equity teams under the banner, "debt is the place to be for the next decade." Granted equities are undervalued by many historical measure but can stay so for a lengthy amount of time and the recent moves can be lethal if not careful.

Riz Din replies:

Lack of returns is a problem for this generation but when I hear of the 'death of equities' I can't help but to think of past messages such as 'death of inflation' and 'death of cheap oil' and how they turned out.

Rocky Humbert remarks:

I'm watching for an inflection point on the number of Google hits for "Nouriel Roubini" as an important signal for a persistent rally in all risk assets.


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