Recognizing an historic crash vs. correction or bear market.

[Snidely Whiplash]

Were there any indicators that anyone here recognized just prior to or during the 2008-2009 market crash that led them to believe that it would be as historic as it was? I'm curious as to how others may have recognized the severity of the crash vs. the "routine" 10-30% market declines.

[brewer12345]

The insolvency of several major financial institutions was a good hint.

[Animorph]

Yeah, the personal savings rate was negative. There clearly had to be a reduction in spending. I was expecting something bad from that. And it was in addition to the housing crisis, which I really had no great feel for, but wasn't going to help. I went about 30% cash, most of it about 10% too early. And I had an additional 10% in gold and a bear market fund. After the market was 20% down I started buying every 5% down, with a plan to run out at about -40%. I managed to stretch it to buy some at -50% and that was it.

But you never know for sure.

[clifp]

IMO the guy that called correctly on the board is Running_Man as far back as early 2007, was warning about subprimes and the domino effect they would had.

It is worth reading much of this thread on banking stocks from 2007.

The strange font changes make this post from Running_Man on Nov 2007, a bit hard to read, but I think you get the idea.

Quote:

I don't disagree that the govt will do something stupid with SIVs. That being said, I'm looking at the disclosures now that Citigroup made. They're pretty darn clear about what they were doing. If they were trying to hide it, they weren't trying very hard. This is referring to October 18th when Citicorp announced they would have slightly over 1 billion in writeoffs and they expected market conditions to return to normal by the 4th quarter. In lieu of activity in the last 18 days, I don't think it was ever very clear to anyone what they had in terms of risks NOT on their books. MY QUOTE I disagree that people are hating the bank stocks they are down some but most unless they are specifically in the subprime area are down less than 20% from their peaks and are not much below 2006 levels when the excess was in full throttle. Having seen the devestation that can hit banks in times of financial difficulty they are the first stocks to be avoided. Losses of 50 percent are all too frequent in their history. There will be plenty of time to wait to see how the air will clear without stepping into an industry where even the CEO's such as Citicorp say they really are surprised with how much the market is changing on them. Since this point only 18 days ago Citicorp has announced the writeoffs need to be 6.5 +8-11 billion and perhaps more. The banking stocks have continued to be the worst performing industry in the stock market. Now the realization phase is fully hitting that this may not be the golden era for banks as further rate cuts are probably on hold with the collapse of the US dollar. I will stick by my prediction of March 3, 2007, predictions for which I have earned animal abuse analogies and metallic headgear claims: The subprime market collapse is a BIG deal in my opinion. 17.86% of all subprime loans are in default. In the New York Times today it was disclosed that forclosures have hit their highest level ever since the forclosure rate has been measured. General Motors is injecting 1 billion dollars into GMAC for bad subprime loans. General Motors is really not in a good position to bail out their credit arm. The decline in this segment is due IMO to the decline in housing values of 8 percent over the last year. When you borrow 100% there are no gains to bail you out and no reason to not default. As these mortgages fail the homes will be put for sale and credit terms will be tightened. This will insure fewer buyers, more houses so lower prices and sales for '07. This unfolding process will first hurt: Homebuilders (already obviously affected) Financial Institutions lending to home buyers (bearing the brunt now) Home supply centers - Home Depot, Lowe's thumped, shares downgraded - Nov. 5, 2007 Paint manufacturers (fewer houses painted for sale) realization:soon Chemical companies - supply raw materials for the paint industryEarnings Preview: Dow Chemical: Financial News - Yahoo! Finance Auto Manufacturers/Suppliers - car sales will slow drastically as basic industry slows I would hate to have investments in the above group but from there later it will spread to non-cyclicals.

Anyway he pretty much called it exactly as it happened a year latter. I am pretty good at spotting tin foil hats guys on the internet, so I was smart enough not call him out as being tin foil guy. I was even smart enough to become more cautious on implementing my strategy of Jan 2007. I had taken out a home equity loan from PenFed at 4% in order to buy bank stock who's dividends were often paying 6% at time . I was not nearly smart enough to sell my significant stake in bank stocks until a full year later. A multi hundred thousand mistake on my part.

Now there were plenty of smart guys who are professionally involved with finance on the forum who disagreed with Running_Man and when they do it is hard to figure out who to listen to.

[ziggy29]

I distinctly remember having a really bad feeling on Halloween 2007, and contemplated liquidating most of my equities -- but I didn't do it. This was very close to the peak of that market cycle. I guess it's easy to kick myself for not doing it, but if I did, would I have known when to get back in?

Anyway, one thing I do remember in 2007 was hearing a lot about "systemic risk" even before financial institutions started showing clear signs of collapse. You're not hearing anything remotely resembling systemic risk today. (It was, in part, all that talk among respected economists about "systemic risk" that was spooking me.)

[Fermion]

The only thing we are hearing about today is submerging emerging markets. They seem reasonably priced relative to the first world markets (earnings ratios 30% to 40% cheaper) but keep going down. I bought some last week but don't feel really great about it. Maybe next year I will look back and wonder how I didn't see the worldwide crash.

[tuixiu]

During the 2008 crash I arbitrarily (and stupidly) set a threshold of DIJA 9000 where it had to be a great buying opportunity. When it went down past 9000 I dutifully moved money from bond funds into equity funds, then of course watched it continue to fall.

[jebmke]

The debt markets were nearly frozen. This was more scary than the equity slide in 2008.

[ducky911]

When people making 15 dollars an hour were flipping houses. Should have been a pretty good hint.

[karluk]

Of all the awful news from back then, the item that most struck home to me was the failure of Washington Mutual, which Wikipedia says happened on September 25, 2008. I would have guessed it happened a little earlier, but most likely that's because rumors of its imminent failure were already circling.

There were two reasons this news made an impression on me. It was the first time in my life that a financial institution failed in which I personally had an account. I had a credit card with them, which at the time was maxed out in a 0% loan.

That by itself would have been good reason for me to sit up and take notice, but even more striking was the peculiar incentive WaMu gave me to take the 0% loan in the first place. As I recall, they gave me the entire 1% credit card cash back on the loan. So here we have an example, absolutely unique in my experience, of a financial institution paying ME to borrow money from THEM. Even with my limited knowledge of how banks make money, this struck me as a rather counter-productive way for WaMu to turn a profit.

So my personal awareness of the huge magnitude of the crisis didn't happen until right around the time it became obvious to everybody else as well. I think this is a fairly inevitable byproduct of me being a buy-and-hold, ignore the financial noise type of investor. On rare occasions "noise" escalates to "news that you really should pay attention to". 2008 was one of those times.

If I had correctly identified the scope of the crisis in a more timely fashion, I would have done only minor things differently. Mostly I would have held off doing any rebalancing in the summer of 2008 and waited until the height of the crisis in October. In perfect 20/20 hindsight, I should have sold all my stocks in late 2007, but there is no chance at all I would have done that. I was in the process of building up my stock holdings from a floor of 15% and would have looked forward to the crash as a great buying opportunity.

[haha]

Many of the older members here are here because they rode that crazy market of 1995-2000 long past its clear extreme valuations. Valuation (and IMO only valuation) will keep you out of deep trouble, but it can also make you miss giant blow-offs. In 2007 valuations were again stretched, but as many people accurately pointed out, not nearly so stretched as back in 2000. Taking comfort from this is like taking comfort from thinking, as you climb into the driver's seat after night of partying, "Sure, I am bombed, but not nearly so bombed as I was 3 months ago!"

IMO, a "correction" cannot be distinguished from a mega crash as I gets underway. Only after it is over, if in fact it is actually over. If the market is high judged by a number of reliable measures, any down move may be nothing, or the beginning of a giant smash-up. No way to tell. However, if the PE10 to take one example is 6 or 7, it is very unlikely that a diversified equity portfolio will lose 50 or more percent. If PE10 is >=20, different story. It got down to ~9 in March 2009, and it has been lower than this at other times.

Ha

[MooreBonds]

Quote:

Originally Posted by tuixiu During the 2008 crash I arbitrarily (and stupidly) set a threshold of DIJA 9000 where it had to be a great buying opportunity. When it went down past 9000 I dutifully moved money from bond funds into equity funds, then of course watched it continue to fall.

Hey - at least you didn't put it all in at DJIA 10000 or 11000 (and 11,000 itself was, what, like a 25% drop from the previous top?).

I also had misgivings about letting it all ride, but I kept repeating to myself Peter Lynch's famous words: "More money has been lost waiting for crashes and trying to time crashes than has been lost in the actual crash!".

Unfortunately, a once-in-a-lifetime "Great Recession/Depression" would not apply to a mere crash.

However, I did luck out, in that I had 67% of my Vanguard Charitable account in cash, and managed to move half of my cash into equities in March 2009 - almost the very bottom of the freefall! At least my charities are benefiting from the timing.

Ohh....speaking of which, I've been meaning to move a bit of my equities in my VC account to cash, since that account is about 98% invested.

[Lsbcal]

Quote:

Originally Posted by Snidely Whiplash Were there any indicators that anyone here recognized just prior to or during the 2008-2009 market crash that led them to believe that it would be as historic as it was? I'm curious as to how others may have recognized the severity of the crash vs. the "routine" 10-30% market declines.

I don't believe it is possible to quantify the severity of a decline. That is because the severity depends on human panic emotions and also future news that comes out randomly, both positive and negative. So one might guess right at a decline but not the severity, in my opinion.

The Fed thought things were OK back in early 2008. The recession that apparently started in December 2007 was not announced officially until late in 2008. Great call guys. Lsbcal didn't get it either until the waterfall event was under way.

In my opinion the clincher was the flattening of the yield curve from 2006 to mid 2007 which can have a delayed effect. So a soft landing became a hard landing. I recognize this now after a lot of personal data crunching starting in 2009. I won't have a problem acting on this sort of thing in the future.

Note today the yield curve is very steep. We could still have a 1987 type event. Never out of the woods. Risk is always there along with rewards.

[timwalsh300]

Quote:

Originally Posted by clifp It is worth reading much of this thread on banking stocks from 2007.

Nice. I enjoy re-reading threads like that every few months to remind myself how those extraordinary times felt. The posts from "VaCollector" are gut-wrenching, especially Adios.... That, and the epic thread over at Bogleheads following "market timer," should be required reading for investors.

For what it's worth, here's some stuff that I remember:
1. In 2004, as a high school student, I wondered how anyone from my generation would ever be able to afford a house. I also remember telling an adult that I wanted to get into real-estate somehow to make money. I guess I was almost like the "shoe-shine boy" giving stock tips.
2. In 2006-2007, I read several scary articles about how the economy was artificially propped up by the "finance, insurance, and real-estate" (FIRE) industry.
3. I took a college personal finance class in early 2008, and there was a lot of heated discussion over whether or not we were entering a recession. Our instructor was still telling us about how he flipped houses.
4. A college classmate lined up a job with Bear Stearns for after graduation, and then they collapsed two weeks later.
5. This American Life and Planet Money did their now-famous episode called "Giant Pool of Money" in May 2008. I didn't catch it until early 2009.
6. Few people mention it anymore, but don't forget the bubble in oil prices that appeared at the same time. I remember, in the summer of 2008, doing the math and seeing that a gallon of gas would be $100 pretty soon if the trend continued. The stock market seemed to have a perfect inverse correlation with oil prices. I thought the market would recover once the oil bubble finally popped. Then the oil bubble popped and stocks kept falling.
7. As things happened quickly in September, what stands out in my memory is news of the "TED spread" reaching some historically astronomical figure, although I didn't really understand.
8. In October, after the sharp 30% drop in the S&P 500, I called bottom and maxed out the remaining space in my IRA for 2008. As soon as markets opened in January 2009, I did it again. Then the indices continued to fall. I felt like I knew nothing, and it all started to seem comical.

EDIT: To be clear, I didn't predict anything. None of this stuff led me to believe there would be a big crash. For everyone predicting something bad, there were plenty of optimists and nay-sayers, myself included oftentimes.

Tim

[enjoyinglife102]

After the fact, there is always somebody who was spot on with their forecast/concerns and they become the sage of the day - just like that broken clock twice a day. The list of former Wall Street "gurus" who have faded into oblivion is endless.

[audreyh1]

Quote:

Originally Posted by Lsbcal The Fed thought things were OK back in early 2008. The recession that apparently started in December 2007 was not announced officially until late in 2008. Great call guys. Lsbcal didn't get it either until the waterfall event was under way.

Starts of recessions are always announced about 1 year later as is the end of one - that's the way that bureau works (NBER - National Bureau of Economic Research). And it's not the Fed.

The start of a recession just means the economy has stopped expanding (i.e. reached a peak). The economy sometimes doesn't seem like it's having serious problems at the beginning of recessions anyway and it takes a long time for the economic data to be reported and revised. It was later in 2008 before many folks started to really feel it, I suspect, and the severe credit crisis late that caused huge business dislocations and layoffs occurred later in 2008.

The failures of the big financial institutions was a good clue that that there was a "systemic problem" - and particularly the failure of Lehman on Sept 15, 2008, the repercussions of which seemed to take most official folks by surprise.

Cramer was screaming bloody murder that the Fed wasn't seeing the imminent disaster (systemic risk) in 2nd half of 2007 and many thought he was nuts including the Fed it seems. He's often yelling about something, but not like he was in 2007! He was right on.

[ziggy29]

Quote:

Originally Posted by enjoyinglife102 After the fact, there is always somebody who was spot on with their forecast/concerns and they become the sage of the day - just like that broken clock twice a day. The list of former Wall Street "gurus" who have faded into oblivion is endless.

Ah, yes. Elaine Garzarelli! I remember her milking the "call" of the crash of 1987 for all it was worth.... and her track record after that was rather terrible.

Besides, in the grand scheme of market crashes, the '87 debacle was a blip, noticed mostly because of the huge *one-day* drop. The equity market recovered quickly from that mess and almost no one who didn't panic sell got hurt by it.

[Midpack]

Quote:

Originally Posted by enjoyinglife102 After the fact, there is always somebody who was spot on with their forecast/concerns and they become the sage of the day - just like that broken clock twice a day. The list of former Wall Street "gurus" who have faded into oblivion is endless.

+1. 'Hindsight is a wonderful thing...'

Here's a good post mortem summary Investor Home - Who Predicted the Global Financial Crisis and/or Housing Crash, but it doesn't mean any of them will accurately predict the timing, depth or cause of the next downturn. And though there will be plenty of folks accurately predicting the next one, the odds we'll hear or listen to them are slim or none.

[John Galt III]

I remember a couple years before the 08-09 meltdown, hearing several alarmist radio programs on NPR about the epic abuses and frauds occurring in the mortgage lending industry, going unpunished and unrestrained ("take the money and run, it's immoral but legal at this time, and there's too many of us crooks for them to bother prosecuting us"). The point being, there were many people screaming it from the rooftops about the mortgage scams, before the meltdown started, but just as many people deriding the screamers. If you believed the rooftop screamers, you may have gotten out of the market in time. But the market kept going up, up, up......

[Lsbcal]

Quote:

Originally Posted by audreyh1 Starts of recessions are always announced about 1 year later as is the end of one - that's the way that bureau works (NBER - National Bureau of Economic Research). And it's not the Fed. ...

I will take your word for it that the NBER 1 year lag is standard. Won't use that as a timing method . I didn't mean that the Fed announced this (my sentence positioning might have led to this impression).

When I looked it up, the Fed did start reducing short rates quite a bit in late January 2008. So maybe Bernanke was quicker then I gave him credit for. I kind of admire the guy, but I liked Greenspan until the wheels came off the economy.