The Short-term Outlook is Dark.

The unfortunate reality is that we are going to face tough economic times in the short term.

Furthermore, certain “structural” factors in the credit markets have led me to believe that the market prices of assets (including most stocks) have more downside risk than upside potential in the short term.

The key data point here is one of supply and demand. Anywhere from 65-80% of demand in the corporate bond and bank debt markets came from highly-levered entities including CLOs, CDO’s and SIV’s over the last few years. These entities no longer have leverage available, and thus are not buying assets. Until this problem is mitigated, prices will continue to fall in the credit market even if we ignore the weakening underlying fundamentals.

Add to this the facts that: a) the economy has only just started slowing down, b) job losses have been relatively muted to date, and c) the key to this whole puzzle – the underlying housing market – is still facing massive challenges the foremost of which are homeowners underwater in their mortgages, and it is easy to see why things don’t look good in the short term.

However, *if* you are willing to keep a long term focus there is light emerging on the horizon.

Reasons For Hope.

1) Barack Obama is the President-elect.

I want to point out that I am not a Democrat. I am not a Republican. I am an American who finds it equally deplorable to see the disrespect that people show our current President (discussed by the WSJ here: The Treatment of Bush Has Been a Disgrace) as I am optimistic with the election of our new President in Barack Obama.

He stands for something: the kind of optimism and hope in our country that is very important in times like these.

But don’t forget, President-elect Obama called for a sense of service and sacrifice. And he meant it.

2) We have a sense of solidarity again.

This is delicate. We can’t let the short term bad news over the coming months distract us from the momentum this election has achieved.

Voter turnout was the highest it has been in a century. You cared, and your voices were heard.

Last night people were literally dancing in the streets across the country singing God Bless America.

This patriotic spirit is essential for us to collectively overcome the challenges we face.

3) Our long-term economic prospects are strong.

We are the most innovative country in the world.

Trends such as in the success of web services like Twitter; the current adoption of the mobile internet on devices like the I-Phone, the Blackberry Bold and the G1; innovations in clean nanotechnology; and countless other great opportunities show that there are tons of great things happening in our country today.

Our economy is $13T and even if it declines by the greatest amount in history it will still be the largest and strongest economy in the world by a long shot.

Keep A Long-Term Focus.

Emulating great investors like Warren Buffett, we should disentangle the long-term value from the short-term “signal” and technically-driven prices.

The short term is murky, but the long-term truly is hopeful.

The sun has set and we are in the midst of a cool and dark night. The silence is almost deafening, but on the horizon rays show the Hope of a new day. And now we have a leader to take us there.