The stock market has crashed back down to 1998 levels (S&P 500 off 6.6 percent today). The velocity of the collapse has people talking about whether this will be like 2008 all over again. I don’t think that it can be. The Collapse of 2008 was a huge psychological blow to a lot of Americans who’d come to think of themselves as smarter than average, as “winners”, and as savvy and sophisticated. A friend of mine who had made some decent money between the mid-1990s and 2008 said that he had lost his confidence and, though he had not lost his fortune, “did not feel that he could lead a family.” He’s back on his feet now and concentrating 100 percent of his work energy on a startup in China (“our sales in Europe and the U.S. have been disappointing, but strong demand from Chinese consumers has more than made up for it; the dollar and the euro are high, but there just aren’t that many of them left in the U.S. or Europe”).
Americans have made whatever psychological and financial adjustments they needed to make for a world in which U.S. stocks might be volatile and trending down, at least in real terms. Even if the market continues its downward trajectory, I am not expecting the same scale of problems with the real economy that we had in 2008-2009.
“Even if the market continues its downward trajectory, I am not expecting the same scale of problems with the real economy that we had in 2008-2009.” — I hope you’re right.
I’ve come to the conclusion that “investing” is not compatible with high frequency day trading in the same market.
I wonder how much money Ray Dalio made from gold today….
I fear your friend is in for another shock when China’s bubble bursts.
I couldn’t agree more. This time, I think most Americans are just watching from the sidelines with amusement while Wall Street loses its shirt, this time.
This time IS different Phil. The western world’s economy has yet to deleverage. What was a housing / credit crisis is now a global sovereign debt crisis. Massive stimulus spending, 0% interest rates & QE 1 & 2 have simply delayed the inevitable. The staggering bills must now be paid. There are only 4 ways the US & Europe can deal with them: austerity, higher taxes, default or inflation. Get ready for some long-term stagflation…. Buy gold. Or farmland. Or guns.
The ‘real’ economy – even since ’08 – has survived on easy credit. This is coming to an end. Psychological adjustments? You haven’t seen anything yet…
So you want divergent perspectives, eh? My divergent perspective is that we are increasingly driven by information-based dysfunctions.
Ergo, my high-level view of this particular situation is that the financial markets are finally reacting to the increasingly obvious dysfunction of the American government, but what is underlying that dysfunction is a kind of super-ignorance. To have democratic or republican debate on the real problems and their possible rational solutions requires some linkage to reality, but many of the participants have retreated into their own isolated universes. The Internet now makes it possible for people to fully saturate their so-called research time with so-called evidence of exactly WHATEVER they want to believe. A few years ago I anticipated this problem as ‘pandering’ by the search engines, though it is now described as ‘personalization’.
A different kind of information problem involves impoverished people gaining accurate information about the rest of the world. I suspect the driving force for much or most of what we label as ‘terrorism’ is the Internet-informed realization that the Americans are living like kings by grinding poor people, their friends, and their entire countries into the dirt.
Interesting conclusion, and you might be right. And yet my gut leads me to a different direction. The recovery and huge gains of 2009 allowed many folks to gain back most of what they had lost. We could go back to thinking about investing money and what something like even 5% growth looked like over the long term. With these two crashes so close to one another the adjustment Americans might make is that the hope of growing our investments over the long-term in the stock market is over. Every time the market inches toward 13,0000 or 14,0000, everybody will run because the debt problem always gets worse.
The only people anyone will see making 8% return over the long term are defined benefit pensionseers because their 8% return is guaranteed regardless of the market returns. The money to pay for those returns will come from our earnings and (eventually) our savings. That’s a separate issue, but I’m more inclined to envision civil unrest more than I am an easier ride this time around.
What’s different this time around:
http://online.wsj.com/article/SB10001424053111904140604576496241939456906.html?mod=WSJ_hp_LEFTTopStories
Phil, I think the only difference between now and ’08 is that govt guarantees to bailout financial firms are explicit and precedented.
So now the question is exactly how much credit guarantees they have already extended (NY Times estimated north of $12T on 6/24/11, link below). These loan guarantees would roughly double national debt, to some 200% of GDP. This brings up the question of how much more they can do before going Weimar.
So, yes, the probability of bailout is higher. However, the capacity for bailout is lower.
Net-net it’s hard to say if today is better or worse than ’08, as far as the markets go. Clearly, for future generations, we’re in a much worse place. $12T worse.
Peter
http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html
Of course it’s not different because this is a continuation of the crisis that started in 2007. Those who understand that the incredible amounts of money thrown at it by the US and European governments have merely put things on hold, because nothing was done to address the fundamental problems (writing off the bad debts, basically), will be the ones who survive. The ones who believe the stories about how the economy has grown for the past two years (remember the green shoots?), about how the housing market’s at the bottom, about buy-and-hold stock investment strategies (including for their 401k funds) will be completely wiped out.
Having said this, no one knows how things will play out this time. The pessimistic version is that we’ll see the world stock markets collapse again, to very low levels. The optimistic version is that things could easily drag for a few more years, while the US and European governments spend every last penny they (don’t) have trying to stave off the crisis.
“Americans have made whatever psychological and financial adjustments they needed to make for a world in which U.S. stocks might be volatile and trending down, at least in real terms.”
I find this statement, especially the part about the financial adjustments, highly suspect so I would be very interested to know if there’s any research data to support this. Have people moved their 401k investments into conservative funds when the stock market recovered to almost the pre-crisis levels? I very much doubt this, especially given the incredibly stupid and dangerous “buy and hold” and “expect 8% returns on average” advice the public is constantly bombarded with. How many Americans do you think are aware of the fact the Japanese stock market is now below where it was in 1984, for example?!
Peter: What financial adjustments could Americans have made? Obviously, except for public employee pension fund managers, they can’t live in a fantasy world of 8 percent returns on investment. But they can spend less and defer retirement (unless they are public employees, of course, in which case they need not).
Financial adjustments Americans could have made:
1) Profit from the stock market recovery and move the investments into conservative funds or stocks.
Here’s a link to an article I just read:
http://money.cnn.com/2011/08/08/pf/expert/investing_cash.moneymag/index.htm?iid=HP_LN
Reader: “I can’t afford to lose my money again, so I’m considering moving it all to cash. Do you think that’s a good move? I’m scared to death.”
Personal finance expert: “If you look at the 56 rolling 30-year periods from 1926 through 2010 (1926-1955, 1927-1956, etc. through 1981-2010) the lowest annualized return stocks have delivered over a 30-year span is 8.5%, and the average 30-year annualized return for all those periods is 11.3%. For bonds, the numbers are 1.5% and 5.1%, respectively. This doesn’t mean stocks will generate the same gains over the next 30 years. I wouldn’t be surprised to see them come in considerably lower. But I don’t see any reason why, over the long term, one would expect stocks to underperform bonds or cash, especially considering the current low yields on bonds and cash equivalents. […] Remember, though, if you go with too conservative a strategy to guard against market downturns, you limit your upside.”
So let me repeat what I said in my previous post: the Japan Nikkei 225 stock market index is lower today than it was 27 years ago. Evidently, this personal finance expert doesn’t think this is even remotely possible in the US, assuming he’s even aware of what happened in the Japanese market.
2) Reduce the discretionary spending.
Apple briefly became today the largest US company (highest market capitalization), surpassing Exxon Mobil.
3) Rethink certain durable goods purchases.
It appears that the public continues to purchase heavier vehicles (SUVs and cross-overs) rather than cars. These vehicles are more expensive to operate than comparable cars. Also note that the sales have picked up quite a bit from 2009.
http://online.wsj.com/mdc/public/page/2_3022-autosales.html
4) Delay purchasing real-estate.
Many people have decided to purchase real estate, either due to the government’s 8000 US dollar incentive or to the attractive credit rates or due to being tired of waiting (for the first time buyers) or due to hoping to make a good investment now, when the prices are lower than have been. Based on anecdotal evidence (I don’t have any research data) my guess is that many of them did have the option to wait even longer but didn’t. Purchasing real-estate involves considerable costs, in general, both immediate and long term.
“…. Buy gold. Or farmland. Or guns.”
I am going with the guns. Later, take the gold and farmland. 🙂
“Americans have made whatever psychological and financial adjustments they needed to make for a world in which U.S. stocks might be volatile and trending down, at least in real terms.”
Regarding those psychological adjustments, here’s an interesting quote, if a bit melodramatic:
“A Depression doesn’t run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality.”
Read the rest here:
http://www.marketwatch.com/story/the-second-side-of-the-financial-storm-2011-08-10?pagenumber=1