A couple of great questions came in on the Seeking Alpha version of this morning's post about run-of-the-mill bear markets and I thought it would be useful to post the questions here and how I answered them.
Why do you think we won't have a decline similar to what we had in '00-'03, which was a lot more than 30%?
Markets cut in half every so often; the great depression, the mid 1970's; the start of this decade and I also know there was a depression in the 1870's but do not know what the market did then, there was also a bank panic in 1907 that lead to a 37% decline that year. If you notice you see the gaps in time ranging from 22 years on up.
I believe the reason for this is that the market "can't" cut in half so soon after doing so as a matter of perception/sentiment. You get a reasonable bit of generational turnover after 20 years or so. I put can't in quotation marks because certainly anything is theoretically possible.
The one thing that does make this bear different from previous is the derivatives situation...gives the current situation the potential to be worse than the average bear.
I debated Michael Panzner in a point counter point type of thing on derivatives two or three years ago in the WSJ Online. The thing for me that makes a derivatives-led meltdown unlikely is that they are not all derivatives of the same instrument. They are derivatives of hundreds or maybe thousands of different underlying instruments.
An ABX derivative probably has very little to do with some sort of currency swap to hedge an Uridashi bond.
Wikinvest Wire
2 comments:
Roger,
While I salute and commend your consistent efforts to shine a light of sanity on the tin hat brigades (who have seemingly cornered the market on fear), I am experienced enough, and I guess (I admit, somewhat regretfully) old enough to have been around 'way back when (i.e., '87 crash) and to have at least a spotty memory of what happened.
I don't think it is enough to find 'common threads' and conclude "therefore, this probably will/should conform to historical standards of 'normal'". (You appropriately disclaim any conclusive predictions, but the takeaway is reassuring in that direction.)
In fact, every meltdown is unique, even if the underlying mechanic is the same (e.g., "the patient died because their heart stopped beating"). Markets fall because shares/asset prices for sale outnumber/exceed the bid from buyers.
But I do agree that there is a commonality worth focusing on: the time to buy again depends on the individual. Lambert thinks that time is now, Taleb thinks that light at the end of the tunnel is an an oncoming freight train. Neither could possibly convince the other they are wrong - and yet each would conclude that very thing.
You have consistently warned people that no one can decide for them, and each individual's considerations are unique, and to my mind, that's the end of the debate. Somehow, it doesn't satisfy those who are looking for someone to tell them what to do. (That in itself is probably a signal - when conviction - like confidence - drifts away, overreactions and directionless trading result.)
To me, derivatives do distinguish this bear from all prior bears - if there is anything like a counterparty domino effect, it won't matter that different risks are/were being hedged. If Bear had fallen without a net, the mess from just their work as a clearing agent would have taken months and months to sort out, and if people had REALLY started panicking and demanding collateral from their same or riskier counterparties for positions previously left uncollateralized, it could have been a "worst nightmare" scenario. (Some of that still seizes the credit markets...)
In any case, I think it is safe to say that (just like for every prior bear market) "the world IS different now then it was in the past," but that is not what determines what "must" happen. Until sufficient confidence is held by holders of sufficient investment capital, prices will not go up.
Confidence and reason are not always aligned.
Rick
Ha! Peak oil nuts are the new 'I was captured by aliens and anally probed' nut cases, convinced that a once in a global lifetime event is happening and their job in life is to educate everyone else of the dangers. It's unfortunate that the internet allows their strained voices to be heard, but I suppose you have to accept the bad with the good.
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