Is This The Worst Crisis Ever?

I'm not going to pretend to know how to pick a bottom for stocks, but if we dissect the anatomy of a bear market we might understand why stocks markets eventually recover.

Anatole Kaletsky, a columnist at the Times, recently wrote a brilliant piece on bear markets:

When we look back through history - or think about the underlying economics of business cycles - we realize that every financial crisis and bear market in the past has been a buying opportunity because we can see, with hindsight, that the world never did come to an end.

Kaletsky makes an important observation:

If everyone in the market knew that previous financial crises and bear markets always created buying opportunities, then a new bear market could never occur.

Overly simplistic? Logically correct?

But why do we still go through bear markets when everyone knows that past bear markets offered buying opportunities? Another important observation: We can only go into a bear market if potential buyers believe that the latest financial crisis was somehow different -- and worse -- than any that had gone before. Kaletsky adds:

If people believed that this was just an average sort of crisis, they would now be buying instead of selling, and there would be no crisis.

In other words, a bear market is only possible if there is a consensus that a financial crisis is significantly worse than ever before. And that is why we are currently in a bear market. A few examples of this psychology:

- George Soros said that this is "the worst market crisis in 60 years." George Soros also reacted to Black Monday in 1987 with a single chilling sentence: "This is 1929."
- David Rosenberg at Merrill Lynch said, "we confess that we have been in the business for 25 years and have never - and repeat never - seen a cycle like this one."
- Alan Greenspan described LTCM in 1998 as the worst crisis in his 60-year working lifetime.
- Nouriel Roubini of New York University's Stern School of Business said that this is "the worst housing recession in U.S. history."
- Legg Mason's CEO, Chip Mason, said that credit markets are in the "worst state he has seen in his 47 yrs in the business."

This psychological trap will probably always be with us. The most experienced investors and bankers have careers that last about 30 years, a blink in economic history. "It is hardly surprising, therefore, that people are constantly amazed by each new cycle that comes along -- and find it difficult to see it in historic proportion," says Kaletsky.

The near-term question: If bond insurers are bailed out, will credit markets recover? If credit markets recover, will investors then come to the realization that this is just an average crisis? If that is the case, a bottom for stocks might be around the corner.

The long-term question: If each successive crisis really is worse than the one before, a necessary condition for bear markets to occur, are we involved in a cumulative process that may one day approach an apocalyptic climax? That idea seems a bit far-fetched...

Comments

[Herrington]

For better than two decades now, profit growth has been driven by cost cutting rather than productivity growth. And while the appearance of productivity growth is increased by cost cutting, the foundation of productivity growth is not reinforced by cost cutting and manpower reductions. The foundation of productivity growth is, as it ever was, innovation.

Innovation is tricky stuff. It is the one claim that capitalism has for economic superiority to socialism. Capitalism provides the wherewithal and motive to fund innovative change, whereas socialism relies on individual initiative, exclusively, to foster innovation. That’s right, socialism is innovative too and in the same ways as capitalism except for ease of obtaining the funding. The U.S.S.R. kept up well enough with U.S. innovation to seriously challenge us for half a century. Now as funding for innovation dries up due to cost cutting, meaning every dime goes to show growth of profits rather than re-investment in the companies, innovation is left without a sponsor.

Without innovation, companies can only grow through mergers and acquisitions or monopolistic designs. This is a zero sum game. Mergers and acquisitions rob the liquidity and market position of successfully innovative companies to enhance the appearance of profit growth of the surviving companies. Sooner or later, raiding for profits will have exhausted the resource of actually profitable companies, like too many wolves will exhaust their own food supply.

Our stock market has become, literally, a betting pool on the most successful at robbing people of the product of their work. This is not the world for which my father went to war in 1940. In fact, we are still at war with the same enemy, the face and conquests of which have just become less observable to the public.

[FreedomCorpse]

Maybe a $700 billion plus trade deficit has something to do with it too, where's the historic precedence of that? We used to buy stuff we made

[robinhood1]

Things looked pretty grim in late 1973-1974. The stock market was down some 30% from its 1973 high, gas prices doubled from their early 1973 levels, real estate investment trusts lost most of their value, interest rates spiked to levels much higher than today and it was a bad time to be working for a car company (which I was). Of course, if you had guts and some spare cash, an investment in the US stock market in December 1974 was a smart thing to do.

It's probably not the end of the world, even for US investors. In a couple of years, we may look back and say "If only I had bought Citigroup at 24". Of course, in a couple of years, Citigroup may be kaput. You place your bets and you take your chances.

[dadw5boys]

Why would you buy any stock when the companys are afraid of building any cash reserves to aviod becoming a take over target.
Nearly all extra cash is dealt out in stock options for those who do little if any work but receive the major part of all benifits. How would your investment be repersented by a CEO who sends his kids to school on the company jet and send entire groups of their friends on fully paid for island vactions?

I will buy property or other types of things instead of stocks. Enron should have shown you that no laws that protect your investments from theives. Just because Ken LAY bit the dust before sentencing does not mean all those millions of investors dollars he stole should not be returned. Crooked judges and courts rule the day and those who vring the gravey walk away scott free.

Count me out of the trading game it is rigged against me.

[robinhood1]

I think a lot of property investors in Miami, Las Vegas, Stockton, Phoenix etc are now having buyers' remorse about their real estate investments in those cities. The real estate market isn't any more pristine than the stock market, only much less liquid. What do you do if you put 10% down on a million $ Miami condo but can't afford the property taxes, the condo fees (including high insurance expenses) or the mortgage for that matter, and you can't find a buyer to take it off your hands? You walk away from your "investment" and hope the bank does not come after you for your other assets.

[msmaggie]

What a crock. Here's a thought--people don't buy stocks in a bear market because their liquidity is down (duh) or because they prefer to sit out downturns by placing their money in steadier equity--CDs, guaranteed bonds, precious metals etc.

[sculptor]

Does it matter how much wind is in your sails if your anchor is wedged fast in a reef? The subprime crisis is real and those that could make the hard choices needed to stop it dead in its tracks are playing the economic equivalent of tiddlywinks with our tax dollars.

[Rockyman]

This may not be "just an average crisis". Oil is monopolized and in shorter-supply then ever before and the price reflects that. We are rapidly losing manufacturing jobs to overseas cheaper labor. The housing bubble enriched many and will now deflate and take years to recover the depreciation yet to finalize in many markets. Our National Debt is costing us hundreds of billions in interest annually. The baby-boomers are now retiring and putting stress on Social Security. I see some very concerning fundamentals. This may well turn into a "cycle" unlike many we have seen--trending ever downward!

[Dendroica]

There is a very significant error in this sentence: "We can only go into a bear market if potential buyers believe that the latest financial crisis was somehow different -- and worse -- than any that had gone before."

No.

It doesn't have to be worse than any that had gone before, just worse than the present conditions of the last few years.

You don't have to have all hell breaking lose, you just need a period of relative weakness. So you should definitely replace that last clause in the sentence.

[Hoelder]

So now we are the culprits? We are not buying enough? What money should we use? Is this the worst crisis ever. Hard to tell, there are no records on the big mammoth crisis of 10,050 BC. I say avoid superlatives and grim predictions. At least from my point of view it is pretty bad. I lost more than 40% value of my salary due to the steep decline of the Dollar (Crash?). Of course the money I was entitled to went to some outsourcing company in the Philippines or India and their sickeningly owners or to the CEO of some company getting super bonuses for poor performance because they can. How about giving each shareholder a vote? At least then you can blame the common man to vote for incompetent assholes.

[naugiedoggie]

I remember some years back reading in an article the statement of a Wall Street broker, "The market is irrational­."

The reason it struck me was because it directly contradicted the claim of many theoreticians on the right, that the market is the ultimate rationality.

My own belief is that a big problem for American and probably global economies is that the stock markets have ceased to be primarily a source of capitalization for businesses and become primarily a financial tool for investors.

This change has divorced stock market activity from the actual functioning of the economy at the business level. I am a consultant for a software company and I pretty much love all things computer, but it is difficult for me to see how the capitalization of Google bears any relation whatever to its actual contribution to the American economy.

Koyaanisqatsi, "life out of balance." This account has to be settled, soon or later. Whether that settling comes with a bang, or a whimper, is an open question.

Thanks.

mp

[Halsey]

simply put..if anyone thinks the market should always go UP...was just born..of course we have correction­s..and the credit "cruch"..b­rought to us by the billionnaire thugs of Merrill, Lehman, Bear Stearns, Goldman Sachs..etc etc etc... hell.maybe in the Long long run..it's a good thing..(it would be better if THEY went to prison instead of getting $114 million severance package (former Merrill CEO)..

but if this cleans up the crap..even a little, maybe some good will come..

yes..it probably IS a good time to buy good blue chips that have been hurt.. just remember..­if it seems too good to be true..it is..

[PacificGatePost]

Headlines FOLLOW the MARKETS, they never lead - Why?

The media attempts desperately to explain movements of indexes, yet neither media, pundits or analysts manage to predict tomorrow or even later today, based on NOW occurring events. And all subsequent endeavors to explain are simply rationalizations. There is a great disconnect between day to day realities that affect all our lives, and the energy behind the major markets...­. >
http://pacificgatepost.blogspot.com/2008/02/there-is-some-good-news.html

All but a very, very few are but observers or at best minor participants. This is a game unlike any ever created by man.

• We are currently, it appears, in a Long Term Up-Trend that began in July of 2003. Hang-on to your stocks and let the mid-term or even short-term volatility subside. The big money isn't cashing out yet.

[January]

HuffPost's Pick

Thank you for the insight into where the big investments are coming from. I shall look forward to reading your blog. When I asked my middle-aged son if he believed the US had unlimited credit in world markets, his answer was, yes. That's beyond me. The EU clearly wants a piece of that action and if the euro is any measure, they are getting it; eh? picky.

I don't know yet what to do with the consequence that foreign investment in the US will continue so long as it is good for foreigners. That allows us to continue our role as the world's policeman. But only so long as our tax on the rest of the world continues.

The disconnect is believing that we control our destiny when in fact we are more entangled in foreign relations than any previous time in our history. It seems that One World works so long as it is a stealth process. No one even just 50 or even less years ago would believe our economic interdependence with China and Russia. I prefer competing economically than in war. So that also is some good news.

[PacificGatePost]

JANUARY,

All positive nods are welcome. The latest article on my blog speaks to turning this great ship around. It's doable. The next article will deal with this global trade quandry you mention.

You are quite right (as is your son), IMHO, the U.S. remains the favored safe haven for most off shore funds. Everyone else gets the crumbs.

James Raider

[mmckinl]

Maybe everything is fine in the long run.

But as someone once said : "We are all dead in the long run."

I'm sure Spain was doing fine when it was looting the New World for Gold and Silver. It was the world's largest economy and had the world's largest Navy.

Britain was the most powerful nation on earth, the largest economy, with the riches of colonies such that " the sun never set on the British Empire". They watched over their holdings with, the largest Navy in the world.

The United States is the most powerful nation on earth with the largest economy, 800 military bases around the world and the world's largest Navy.

Sh::T Happens !

[MSB]

I like your take.

My issue with the author's position (I think) is that it appears to ignore the monumental suffering that occurs during these times. It may be true that the market will eventually correct under far more enlightened stewardship (that will likely be demonized for making actual, adult, decisions), but it is also true that many lives will be ruined by the insane economic policies of the past 30 years or so.

If we all look relatively, the sun will go nova in 5 billion years and Earth will be burnt to a cinder. Still, that doesn't help the folks that will be eating cat food next year.

[weaselbasher]

Unless something is done about it or nature corrects itself the disappearing honey bee will be the greatest crisis ever. Enjoy eating your stocks.

[lynnn]

Everything is what you make it.