I posted yesterday that our likeliest economic scenario is the "L-shaped" bottom which has all sots of implications because it is not what we have come to view as "recovery." Since that post may have seemed contentious (Moi contentious? Never!) I am revisiting it to flesh out practical recovery versus popular expectations of recovery.
When a bubble bursts you go from fantasy valuation levels to panic levels, usually overshoot the bottom a little then bob up to oscillate around a much lower new-normal of more realistic valuations for a long time. Since the new valuations are more realistic there is no obvious reason why they should change.
Thus "recovery" in the way we think of it, is not an option. Assets can not regain their previous levels because those levels were fantasies attainable only in the context of an asset bubble.
Say you have a job paying $40K. There is a terrible recession and you get laid off. For a while there are no jobs to be had at any wage. Then the economy turns around some and you get a job paying $20K. You are relieved for a short while. But then for the next decade you are stuck at $20K. You become angry and unhappy, and more so with each passing year. We expect a recovery to
re-cover ground we have lost, not merely arrest a terrifying slide.
Fortunately wages will not be cut in half, but so many ordinary people own assets now (like retirement funds) that the situation isn't dissimilar. Houses and stocks will bounce up and down within a much lower range so there will not be a household wealth recovery.
(Always adjusted for inflation. This is important... people talk about how their home or job or stock portfolio will "eventually" reach its former value. No! It will eventually reach its former nominal PRICE. Pre-crash 1929 was a jaw-dropping stock bubble with insanely rich valuations. The DOW peaked at about 400. If you don't adjust for inflation then the DOW eventually "recovered" by reaching 400 again, but the buying power represented by one DOW unit did not recover.)
Terms like "L-shaped bottom" can use some illustration. The red line on this chart is the Japanese stock market during the "lost decade." The market crashed, losing 60% of it value. Then it oscillated around that -50% to -60% range for a l-o-n-g time. That reduced level was the new normal, not an aberrational low from which to bounce higher. (Japanese real estate followed a similar path of crash-then-stagnate.
It is a complicated political question how we manage popular assumptions that when the economy "turns around" it will recover lost ground any time soon. (Which it may well not.)