If you take a serious look at how the leading economists, government officials, analysts and other experts attempted to predict where the economy was going to go a few months ago and how they miserably failed, you will think twice before making your own predictions. I have always refused to make my own predictions, because I don’t possess supernatural abilities and, as history has shown us, most predictions turn out to be wrong, even those made by highly respected experts. Therefore, please look at this article as just my thoughts, rather than predictions.

The popular opinion is that we are seeing just another recession and our economy will recover in a couple of years. Most people probably believe that we have reached the bottom. This opinion is easy to explain – everything has fallen so much from where it was a year ago, so it must be the bottom. I don’t think we have come even close to it.

This global recession started with the so-called credit crisis. But the underlying reason why credit dried up was not that the money just disappeared. The problem was that the amount of credit was based on grossly overvalued assets used as collateral.

The first sign of trouble manifested itself in the residential real estate market. Homes were used for speculative investments and their values were based on the assumption that next year somebody will pay even more, rather than on the real value of a home as a place to live. A historically sustainable house value determined as a median income multiple is around three. In many areas in US, Canada, Europe and Australia that multiple reached twelve and even higher. Even with the recent drop, house values are still well above the sustainable level.

The next one to fall was the stock market. And the underlying reason was the fact that the stocks were also grossly overvalued. The intrinsic or true value of a stock is determined by the Price to Earnings (P/E) Ratio. The current average P/E ratio for S&P 500 is reported to be at 15.44 (after the drop), which is more or less consistent with its historic level. But if you study this subject deeper, you will find that there are various methods to report corporate earnings, and in the recent years more and more aggressive methods have been used. Some less aggressive methods suggest that this ratio is actually at 181. Hard to believe, but if you look at the negative earnings most S&P 500 companies have been reporting, you may even wonder how their stocks can have any value at all. All serious analysis I have read indicates that as far as the stock market is concerned we are still far from reaching the bottom.

I am a big believer in fundamentals, and until we return to the sustainable values supported by those fundamentals, expecting recovery is unrealistic. And only God knows how long that may take.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.