For the benefit of new visitors, let me recap why I am optimistic.
To begin with, it's not hard to be optimistic when everyone is pessimistic and there is no shortage of bad news to worry about (e.g., Obama is likely to win, he wants to raise taxes and expand government; housing prices are plunging; financial markets are frozen; banks aren't lending; stock prices have collapsed; the great majority of economists are now saying we're in a recession, and the only areas of disagreement are over how deep and how long the recession will be). I think that the market has priced in all the bad news by now, and is fully expecting the news to get worse, which is why corporate bonds and stocks are so incredibly cheap.
All this would be reason alone to be optimistic, but here's the good news the pessimists are overlooking: 1) the Fed, along with other major central banks, has launched a massive effort to pump money into the banking system and backstop the credit worthiness and credibility of major financial institutions and money funds, and there are plenty of signs that these efforts are gaining traction—swap spreads and the TED spread have plunged, and implied option volatility is down; 2) there is plenty of money in the system, with all measures of money supply currently at all-time highs; 3) the credit squeeze is a myth—bank lending is at all-time highs and nonfinancial commercial paper is expanding—the problem is not a shortage of money but a shortage of buyers; 4) the credit default swap market has so far managed to settle and liquidate many hundreds of billions of contracts without so much as a hiccup, and without a shred of assistance or oversight from the federal government; 5) housing prices have plunged and this has resulted in a surge of home sales, to the point where buyers are competing with each other to grab foreclosed properties; 6) capital spending by corporations has been rising for the past year, laying the foundation for future productivity gains, 7) the labor market is weak but not collapsing—corporate layoffs according to Challenger Gray & Christmas have risen only modestly, the Monster Index appears to have leveled off, and weekly unemployment claims are flat for the past four weeks; and 8) speculative excesses have been wrung out of the commodity markets, leaving most prices (especially energy prices) at levels that pose little or no threat to future growth.
In short, we're seeing evidence that unprecedented action by central banks is restoring confidence, and there are lots of signs that the market is busy fixing itself. Rather than pulling the rug out from under the economy, the financial market has functioned as an ideal shock absorber for the real economy. This means that the recovery from this crisis could come much quicker than most would expect.
I've talked about all of this in previous posts. I called for a bottom in the equity market a few days too early, it seems, but the action of the past week or so, especially the improvement in key financial indicators such as swap spreads and the TED spread, has significantly increased my confidence that we've seen the worst of this financial crisis.