Wow -- there are some bearish people out there!

Can't help but think that sentiment is getting a little bearish right now -- anecdotes only so I could obviously be guilty of sampling error but here are some thoughts:

Have you read any of cramers thoughts lately? talking a lot about bankruptcies and not much else. only positive on a handful of stocks. Went to a dinner tonight with a few hundred colleagues that had a panel discussion including David Tice -- he runs the prudent bear funds (mostly short selling but also buying precious metals) and boy was he bearish. But I expected that -- the surprise was the rest of the panel was bearish and so were several audience members who I spoke with afterward.

One guy starts talking about how similar we are to Japan and that unlike them we don't have the manufacturing base because we outsourced it and then someone else pipes in that Japan also had savings so their debt was all owed to themselves whereas we owe foreigners. I compared this situation to 1990 (S & L crisis) where Citibank almost failed while Bank of New England and many others did fail and asked where are all the failures now -- have they just not happened yet or will this situation turn out better? Most said this was much worse and that we will see more losses and failures, etc.

Tice talked about the Austrian Credit Cycle -- every credit induced boom is followed by an equal sized bust -- since we have been booming from the early 90's (first tech stocks then housing) the bust could be pretty huge. he showed many pretty charts about the growth in debt and how unsustainable debt has become. As a percentage of GDP, debt is a huge number -- bigger than ever before including in 1929. His key point was that our economy has become addicted to debt to the point where there would be no economic growth without growth in debt. If we have a credit crunch where credit shrinks, we will have to have a recession.

Other issues mentioned include asset inflation meaning that the Fed has kept rates over the last decade or two lower than they should have been. They were able to do this because the CPI was tame and because the Fed didn't notice that their loose money was causing asset prices to soar. The problem comes when everyone borrows against those higher asset prices -- at some point the system reaches a peak in asset values and just won't support anymore debt. At that point the asset values drop and all of a sudden assets are worth less than the debt owed (housing/mortgages). That leads to massive losses as the asset holders are wiped out, while the lenders are left with huge loan losses because the collateral isn't able to cover the debt owed.

This leads to a deflationary spiral where homeowners/businesses are wiped out because their assets have declined and can no longer support their debt which causes their lender to foreclose and sell which pressures other home values which forces other homeowners to be under water which leads to more foreclosures and further pressure on home prices, etc.

The Austrians definitely are the best economists because they don't just look at GDP -- they care about balance sheet items -- quick question: which matters more the $12+ trillion in GDP or the $140+ trillion in assets in the US? obviously the assets matter more.

That said, I don't agree with all the bearishness. Cramer highlighted EAT today -- great company with a solid plan to raise returns on capital and free cash flow -- stock is down almost 50% in the last few months. Yet he won't tell you to buy it because he can't predict how much further it will drop (they were down 10% today on falling estimates). If you have confidence in the future cash flow and growth for EAT then now is the time to step up. I don't think I have any particular edge in this one. Also, YUM has been a much better stock -- it hasn't declined sharply though so its probably not as good going forward.

The analogy with Japan stops with we both have had asset inflation with strong growth in debt that has ended. Our economy is more flexible, more balanced and has more inherent strength than Japan.

I find Tice's use of debt as a percentage of GDP a little self serving -- I just said that assets matter more than GDP -- exactly what Austrians think and yet Tice uses this GDP based stat to help his case.

He argues that structured products are done -- no one trusts them and too many have lost too much to want to buy more of them. I think structured products will make a come back because the product makes too much sense -- there needs to be some adjustments but not an elimination.

I also wonder about this growth in debt issue in that it all started in the early 80's -- right about the time when Reagan was lowering taxes and deregulating (especially financial services). Lots of financial innovation since the early 80's so obviously not all the growth in debt has been bad.

Anyway. sold the last of my GGG today and bought some more MCO. Still a small position but it had dropped about 10% from my first buy so it was time to put some more money to work.