The great crash of 2008 was mainly based on failed financial markets where banks owned bad mortgages that had been falsely rated as investment grade. The non-financial part of the economy was not that badly hurt by the crash.

    Some bullish advisors have leapt to the conclusion that financial assets, which can be difficult to fairly value, somehow incorrectly dropped in value in 2008 because of some irrational, unfounded panic for no reason. The claim is that because no one knows the future in terms of whether or not a mortgage borrower will be able to pay his loan each year for 30 years then perhaps it is impossible to fairly value a loan so why not simply ignore that market price and instead use mark to model acquisition cost.

    Thus these bullish advisors can claim that the banks weren’t really sick after all and the whole problem was some kind of mysterious irrational panic. This is an evasive bogus line of reasoning. The facts are that a huge number of homes went into foreclosure in 2008 and thus mark to market method was correct.

      The central banks and Congress successfully reflated banks and real estate after the crash thus enabling bullish investors to assume that the government can magically rescue the economy during the next crash. This is an incorrect assumption. If the next crash is a slowdown for manufacturing or a highly likely collapse in the ability of BBB rated non-financial corporate borrowers to pay their loans it will not be possible for the Federal Reserve to simply buy assets to reinflate the economy back to normal. The only way they could do so would be to actually buy unneeded inventory of manufactured goods and simply store them in a warehouse for many years, incurring more costs. It is too much of a change to expect the Federal Reserve to buy physical goods to prop up the economy.

     Investors made a serious error of assuming that the Federal Reserve was in control of the situation in the 2008 crash and was making rates low so that investors could buy stocks. However, a significant component of why rates were low was because of weak global macroeconomic reasons (including the EM sourced global Savings Glut) and not because of the Fed. Rates were low because the marketplace anticipated the economy would get stuck in a Japan style Soft Depression. Thus investors were wrong to make stocks go up.
The incorrect faith in the Fed’s ability to reflate the economy and the huge drop in rates has been analogous to a giant “Value Trap” stock that fools investors into being bullish. Once investors realize the central bank “put” option for stocks and potential rescue from recession are weak and unreliable they will have to assign a higher risk premium to stocks which means they won’t cross a hurdle rate and buy stocks unless prices are much lower, such as a PE10 ratio of 15, about half of today’s SP price of 2900. In 2012 when the SP was about 1300, before-tax corporate earnings hit a plateau and haven’t increased since then, thus stock price increases since then have been unjustified. Of course after-tax earnings increased because of a 2017 tax cut but that will go away either during the 10 year Byrd amendment sunset period or possibly sooner if a new Congress changes the rules.
Basically the recovery since 2008 has been a “show” where a paper tiger of a housing bubble crash was “cured” by massive QE and ridiculous rules allowing banks to mark assets to their purchase price instead of to true and correct depressed market values. For the housing crash to have been properly cured it would be necessary for workers to suddenly acquire much better paying jobs so that they could qualify to buy homes at bubble top prices thus avoiding the necessity of a deep crash. Instead workers experienced in recent years more growth of minimum wage or fake jobs like a waiter who gets a $2.50 an hour wage because he gets tips, or an Uber or Lyft driver who foolishly forgets to calculate his car’s depreciation when calculating income. These workers can’t be relied on to prevent or to cure the next crash and they certainly won’t increase consumption if their mortgage rates go to zero in a crash since at zero% the amortization of principal is like paying 4% interest-only, plus 1% for tax and more for HOA dues, etc.

   Investors need independent financial advice about the risks of being fooled by the showmanship and fake “cures” of the government’s rescue in the 2008 crash.