It's Not 1929, but It's the Biggest Mess Since

[FinallyRetired]

This is the title of today's column by Steven Pearlstein, Wash Post business columnist. Some excerpts:

"We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon. But let me assure you, you ain't seen nothing, yet. "
....
"This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001."
.....

washingtonpost.com

Mr Bernstein will be online to answer questions at 1100 this morning. I submitted the following, will let everyone know if and how he answers it.

- Assuming the situation will get as bad as you indicate, what does that mean to those of us who are not directly involved in subprime or credit markets? In particular, for those of us near or in retirement, with a balanced portfolio, but needing the markets to work somewhat normally for our financial plan, does this situation call for action?

 

[FinallyRetired]

Here's his reply.

"It calls on you to look at your portfolio and make sure that any money you need to take out over the next five years is in the form of cash or some security that won't be subject to big swings in market price."

Guess this is why he makes the big bucks.

Here's a few more Q&A that may be of interest.

How much more depreciation must we go thru for the real estate market to hit bottom and start stabilizing again?


Steven Pearlstein: Obviously, it depends a lot on the geographic market. On a national basis, the latest estimates among realistic analysts is that the decline, over three years, will be 10 percent, maybe as much as 15. That's a reversal of a couple of years of recent house price inflation, which seems reasonable.

Do you believe a major stock market correction (DJ index below 8,000)could happen within the next few months because of the US credit problems, the devaluation of the dollar, the high prices of commodities (oil, gold, copper,etc.)and the problems with the sub primary mortgage market?
What would happen if the holders of US Bonds/Notes decided to sell most of these US debt because of the dollar's continuing devaluation?


Steven Pearlstein: I wouldn't bet too much money on the fact that the Dow would go down to 8,000 -- that's a pretty dire prediction. And the recent evidence is that, in times of market murmoil, people still flock to Treasuries. I don't see massive foreign dumping, although there may be a slow diversification that will put upward pressure on US rates and therefore downward pressure on the value of US bonds.

 

[TickTock]

"It calls on you to look at your portfolio and make sure that any money you need to take out over the next five years is in the form of cash or some security that won't be subject to big swings in market price."

And this is different than every other realistic looking-into-the-future scenario how?

Guess this is why he makes the big bucks.

Yep.

 

[retire@40]

There have always been reasons for people not to invest in the stock market.

In 1991 people were afraid of investing because we were about to enter into a war with Iraq.

In 1989 people were afraid to invest because of the fear that the government had to bail out the S&Ls.

In 1988 people were afraid after Black Monday.

In 1987 people thought they missed the boat when the Dow hit 2000.

In 1983 people were afraid because unemployment was at 10% and banks were failing.

In 1981 people were skeptical of the future of US businesses when Chrysler needed a $400 million loan to stay in business.

In 1980 people were afraid of a war when Iran was holding US hostages.

In 1977 people were afraid of inflation killing the economy when coffee was at $5 a pound.

In 1976 people were afraid of the stock market when New York City almost went bankrupt.

In 1963 the Dow dropped 4% the day Kennedy was assassinated but recovered all losses on the very next business day.

In 1941 the market dropped 1.72% the first week following Pearl Harbor but recovered in just 5 months.

In every one of those years or any year in between, if you had invested in the stock market, you would be worth a considerable amount more today. Invest for the long-term in the stock market and you will be rewarded.

 

[FinanceDude]

Here's his reply.

"It calls on you to look at your portfolio and make sure that any money you need to take out over the next five years is in the form of cash or some security that won't be subject to big swings in market price."

Guess this is why he makes the big bucks.

Here's a few more Q&A that may be of interest.

How much more depreciation must we go thru for the real estate market to hit bottom and start stabilizing again?


Steven Pearlstein: Obviously, it depends a lot on the geographic market. On a national basis, the latest estimates among realistic analysts is that the decline, over three years, will be 10 percent, maybe as much as 15. That's a reversal of a couple of years of recent house price inflation, which seems reasonable.

Do you believe a major stock market correction (DJ index below 8,000)could happen within the next few months because of the US credit problems, the devaluation of the dollar, the high prices of commodities (oil, gold, copper,etc.)and the problems with the sub primary mortgage market?
What would happen if the holders of US Bonds/Notes decided to sell most of these US debt because of the dollar's continuing devaluation?


Steven Pearlstein: I wouldn't bet too much money on the fact that the Dow would go down to 8,000 -- that's a pretty dire prediction. And the recent evidence is that, in times of market murmoil, people still flock to Treasuries. I don't see massive foreign dumping, although there may be a slow diversification that will put upward pressure on US rates and therefore downward pressure on the value of US bonds.

yawn..........nothing new was learned here......how about telling us WHERE to invest?

 

[FinallyRetired]

yawn..........nothing new was learned here......how about telling us WHERE to invest?

I agree, but I did learn one thing. Here's a respected financial columnist who is forecasting this to be the biggest mess since 1929. And the best advice he can give is to have 5 years of cash equivalent? So either (1) things aren't as bad and he thinks, or (2) he wants to get his gold and guns before telling others to do the same, or (3) he needs a scary headline to keep his readership. I vote for (3).

I would really worry if everyone was saying there's nothing to worry about.

 

[jazz4cash]

The excerpt is not representative of the point of the article. The larger point is the significance of the current subprime problem. See SoonToRetire's followup, or better yet, follow the link which I also posted on the Subprime Freeze thread.

 

[Robert the Red]

Let's see:

(a) people are upset because Steve Pearlstein can't predict the future in enough detail to help them beat the market
(b) people believe that such prediction is essentially impossible

Conclusion: people posting here are upset that SP isn't superhuman

 

[Nords]

I agree, but I did learn one thing. Here's a respected financial columnist who is forecasting this to be the biggest mess since 1929. And the best advice he can give is to have 5 years of cash equivalent? So either (1) things aren't as bad and he thinks, or (2) he wants to get his gold and guns before telling others to do the same, or (3) he needs a scary headline to keep his readership. I vote for (3).

Respected for what?!? You're right, he's good at penning scary headlines.

I'm still waiting for Bill Gross to get to Dow 5000, and Harry Dent to get to 36000. Hopefully neither of them is right in the next five years.

 

[twaddle]

Like I said over a year ago, one can make a fairly conservative estimate on the size of this thing by just looking at a "gentle" RTM for housing. $6 trillion in lost wealth. That's bigger than the naz crash, and that doesn't consider any of the repercussions on the stock market, the economy, credit crunch, etc.

I think one can conservatively say that this will be the biggest bust we've seen in a while.

 

[FinallyRetired]

Respected for what?!? You're right, he's good at penning scary headlines.

He's respected for being a respected journalist. What are you, a troublemaker?

FWIW, I moved about 4% of my funds from US equities to half global and half i-bonds. I figure this will jump start the santa claus rally.

 

[haha]

This is the title of today's column by Steven Pearlstein, Wash Post business columnist. Some excerpts:

Thanks for posting this, SoonTo. In spite of the generally negative reaction of our experts here on ER.org, I found it quite interesting. Mr. Pearlstein is obviously no dummy and he clearly did his research and supplies some links and back-up for his story.

Who knows how this will shake out? But this outsider feels more comfortable on the side of wary than with the "Oh, just more BS to sell newspapers, etc." side.

Ha

 

[unclemick]

1966 - 2006 We've had a few events of interest priced into the market and the dollar over my first forty years of investing - I expect a few more.

Unclemick's unified chickenheartedness theory states that true hands on the throttle type personalities who 'must' act (it's da hormones don't you know) could do worst than benchmarking:

Pssst - Wellesley and tap dancing around the edges as conditions warrant.

Those of us whose hindsight reveal reveals a less than brilliant record in controling emotion:

Age dated Target Retirement - with a few dividend stocks to keep my greed is good hormone happy.

Your mileage may vary. I plan on letting those impersonal Vanguard computers do their thing - and skip the guns, gold and freeze dryed food this time around - I may crack on rental RE but I doubt it - been there done that.

heh heh heh - so was the best stuff for my crystal ball - plain windex or do you have your own cleaner formula?

 

[FinallyRetired]

Thanks for posting this, SoonTo. In spite of the generally negative reaction of our experts here on ER.org, I found it quite interesting.

Well, I'm just as bad at denigrating most of these journalists who pass themselves off as expert prognosticators. But what made this column a bit different, as you noted, are his references and the sheer numerical magnitude of the problem -- $2T (with a "T") in Collateralized Debt obigations, CDOs, something I hadn't even heard of before.

Here's another good question:

Washington, D.C.: OK, so it's not 1929... what does that mean for individuals? We don't need to be stockpiling food and ammo, but should we brace for a recession, even if that means doing things that help bring on on elongate one, like reducing discretionary spending?

Steven Pearlstein: Taking a more conservative stance, whether it relates to your investments or your spending, is the right thing to do in the fact of this kind of uncertainty. You don't have to overdo it. But if you didn't respond at all, that would be irrational. Will that help accelerate the downturn if everyone does that? Obviously -- that's how downturns occur. But this is the way market economies correct for their excesses.

Here's the entire Q&A

Pearlstein: Credit Crisis - washingtonpost.com

 

[FinanceDude]

Thanks for posting this, SoonTo. In spite of the generally negative reaction of our experts here on ER.org, I found it quite interesting. Mr. Pearlstein is obviously no dummy and he clearly did his research and supplies some links and back-up for his story.

Who knows how this will shake out? But this outsider feels more comfortable on the side of wary than with the "Oh, just more BS to sell newspapers, etc." side.

Ha

Fear not, the Democrats in Congress are going to "freeze" interest rates so less people will foreclose...........that should work nicely...........

Whatever happened to the law of supply and demand, and letting the market dictate who gets clocked??

 

[haha]

Fear not, the Democrats in Congress are going to "freeze" interest rates so less people will foreclose...........that should work nicely...........

One of the things Pearlstein seems to be saying is that while residential mortgages may be the biggest problem, and certainly the best known problem, they are not the only problem.

So unless the government plans to nationalize the entire financial economy, some a$$ is going to get kicked.

Ha

 

[twaddle]

... the sheer numerical magnitude of the problem -- $2T (with a "T") in Collateralized Debt obigations, CDOs, something I hadn't even heard of before.

I have trouble with trillions, so I try to put large numbers in relative terms.

The total market cap of stocks world-wide is about $51 trillion. In the US, it's about $28 trillion.

So if all the CDO's went to zero (which they won't), that'd be like our market dropping less than 10%. Something that happened quite recently.

But housing is bigger. $21 trillion. So start imagining what a big housing drop would do. Coupled with a stock market drop. Coupled with a CDO, ABCP, etc drop. Coupled with a credit crunch. Coupled with a large drop in residential investment. Well, you get the idea.

 

[haha]

I have trouble with trillions, so I try to put large numbers in relative terms.

The total market cap of stocks world-wide is about $51 trillion. In the US, it's about $28 trillion.

So if all the CDO's went to zero (which they won't), that'd be like our market dropping less than 10%. Something that happened quite recently.

But housing is bigger. $21 trillion. So start imagining what a big housing drop would do. Coupled with a stock market drop. Coupled with a CDO, ABCP, etc drop. Coupled with a credit crunch. Coupled with a large drop in residential investment. Well, you get the idea.

This gets very complicated, but I believe that these instruments are very highly leveraged, so that the disruptive effect of their insolvency or extreme illiquidity could be magnified.

Ha

 

[twaddle]

This gets very complicated, but I believe that these instruments are very highly leveraged, so that the disruptive effect of their insolvency or extreme illiquidity could be magnified.

Yes, but I think the consumer is still the main driver for the economy. So, the leverage that matters most is consumer mortgage debt. Which happens to be at a historic high right now....

 

[unclemick]

We try to keep each generation entertained - who said history does not repeat itself but sometimes it rhymes?

Vietnam, Breton Woods, Hunt bros silver,gold standard, whip inflation now buttons, savings and loan crisis, Graham Rudman, Mr Market 1973/4, 1987, 1990 and post 2000 dip and I haven't even mentioned the Japanese or Asian currency crisis.

Buckle up - we've remodeled repainted and renamed the roller coaster going forward.

Plus - there will be a test - isn't there always.

heh heh heh - the savings and loan crisis - I had to hire a lawyer to chase thru 6 or 7 companies before I could pay off my duplex and get a clear title(?maybe a year) - seems they were busy selling loan packages and going thru bankrupcy. We all knew the bill would arrive eventually - right

 

[Martha]

We are unlikely to ever see it coming. Whatever "it" is.

 

[twaddle]

We always see it coming. The Great Depression. The dot-com bust. The housing crash. But we always hope it'll go away and that the party will continue.

 

[Running_Man]

In every one of those years or any year in between, if you had invested in the stock market, you would be worth a considerable amount more today. Invest for the long-term in the stock market and you will be rewarded.

Unless of course you invested in Japan in 1989

 

[Texas Proud]

This gets very complicated, but I believe that these instruments are very highly leveraged, so that the disruptive effect of their insolvency or extreme illiquidity could be magnified.

Ha

The instrument is not highly leveraged, in fact all the ones I was trustee on had excess assets in the portfolio....

Now, the person buying them might be leveraged to the hilt... but that is another matter.

 

[jazz4cash]

Pearlstein: On Wall Street, Morgaged Principles

Pearlstein's response to the "[-]No[/-] New Hope Plan"
washingtonpost.com