Don't Panic
The best way to mobilize people is to make them panic. That is why so many institutions have incentives to may you panic over the environment, or global warming, or the threat of terrorism, or the economy. In most cases (Naomi Klein's hypothesis not-withstanding) these folks want you to get so worried you will give up something, either money or freedom or both.
Some kind of recession at this point is unavoidable, I guess. But in fact, we really haven't seen what I would call a real recession since the early 1980's. We've had a really long run, and now its time to cut back on that spending and board up the financial windows for a little while. The economy has to de-leverage itself some, and that is going to slow things down for a while. People keep talking about the Great Depression, and I don't see it. I don't even think its going to be the 1970's.
The most visible symbol of financial problems seems to be the falling stock market. But all those companies in those indexes are the same ones that were there a month ago, and are still healthy and making money. The fall in the markets does not represent and change in the current health of industrial America. The lower prices reflect a changing expectation about those company's future prospects, but the folks driving the market are just guessing, and really, their guesses aren't really any better than yours or mine. Similar expectations drove oil up to $145 and now back down under $80. Wall Streeters work really hard to portray themselves as smarter than you or I, but they are not. I went to school with them. I know these guys. They aren't smarter, and they aren't any less susceptible to panic. In fact, because they are often highly leveraged and are worried about making payments on that new Jaguar they just bought for their mistress, they tend to be more easily stampeded.
In October of 1987, the stock market fell 22.6% in one day. If you date the current financial issues to about September 22, when the market closed around 11,000, then the market has fallen over these tumultuous weeks by 22.0% at last night's close -- dramatic, but still not as bad as the one day drop in '87.
stan:
Right now, the selling is being driven by hedge funds and mutual funds which have to sell to get cash. Fundamentals are not involved.
Wall Street and the big banks have crashed because of hubris. They fooled themselves into thinking they were too smart to screw up. And they screwed up.
Anthony Kennedy suffers from the same malady of hubris. And the law of unintended consequences will play out so that history records that he, too, was too clever by half.
The first step on the path to wisdom is a recognition of one's ignorance and fallibility. Wall Street wasn't wise, Anthony Kennedy isn't wise. I think we are going to learn how unwise Obama is, too.
October 10, 2008, 10:55 amgmsc:
I was talking to a neighbor who was panicking recently. She was really worried about the economy collapsing. I asked her, "Are you worried about XYZ (pseudonym for her favorite clothing store) closing up?" She looked at me and said, "No, of course not." I then asked, "Are you sure? Just a week ago you were telling me about the storewide drastic drop in the prices they had." She replied, "The sale? That was just a temporary drop in prices, and it was a nearly irresistible chance to buy some of the stuff I've been wanting at bargain prices."
"Exactly," I replied. You could almost see it sink in by the way her eyes widened.
October 10, 2008, 11:28 amNewEnglandDevil:
Don't Panic is a phrase used in the book The Hitchhiker's Guide to the Galaxy by Douglas Adams. It comes from the fictional intergalactic travel guide The Hitchhiker's Guide To the Galaxy, that theoretically served to show planet-hoppers how to see the Universe on less than thirty Altairian dollars a day. The words are printed on the cover of the Guide (always capitalized) "in large friendly letters".[1] The novel explains that this was partly because the device "looked insanely complicated" to operate, and partly to keep intergalactic travelers from, well, panicking.[2]
In the novel, it is said that despite its many glaring (and occasionally fatal) inaccuracies, the Hitchhiker's Guide To The Galaxy itself has outsold the Encyclopedia Galactica because it is slightly cheaper, and because it has the words "Don't Panic" on the cover.[1]
Arthur C. Clarke said Douglas Adams' use of "don't panic" was perhaps the best advice that could be given to humanity.[4]
October 10, 2008, 11:29 amDrex Davis:
Stan hit the nail on the head. This is selling being driven by the twin tempests of redemptions and margin calls. Once the hedge funds have sold off and blown up we'll have a bottom and we could rebound fairly violently off that level.
Or not.
And you are right about the market vs. the economy. People want to trade, but credit markets are mucking that process up. If the market is allowed to, assets will find their best uses and trade will resume.
I got up today, the sun was out, I felt good, I hugged my wife and kids, I came to by job, the credit markets are a nuisance, there are some worries about how strong the consumer will be, my Roth IRA took it in the shorts, but the world hasn't come to an end.
It's really important to keep perspective and realize that right now "it's winter and summer clothes are on sale", so buy a little while the prices are good. Can things get cheaper? Sure. Will things get cheaper? Probably a good chance in the near term. But when is it good enough. I've been buying shares of good companies I felt were undervalued all the way down. And each time I buy I'm dollar cost averaging at a cheaper basis. "Don't try and catch a falling knife" they say. But hey, at some point, it's cheap enough, and if you're a buy and hold guy, you just ride it out.
October 10, 2008, 1:09 pmEsox Lucius:
Panic. It's time. I was there post 9-11 when they reopend the stock markets, dropped the fed funds rate by 2% and told us it was our "Patriotic" duty to not sell all our stocks. For some extremely stupid reason, I listened. The proper thing to do was click "select all, Sell". I saw this coming a mile away when it became obvious that the only way this could end was with a crash. I sold out when the S&P was at 147. I sold everything, moved to cash and waited for this to happen. Panic your ass off when it is time, just don't be late and right now, it's too late.
Also, your comparison to 1987 is flawed. Back then, it was computerized trading that tripped more computerized trading to create a cascade that was unstoppable. This time, we have had days and days to think about this and we are still selling. That should scare the crap out of you. It's time to panic your ass off.
October 10, 2008, 1:12 pmDrex Davis:
Oh, and great point about stock prices merely reflection expectations about the future. that's all they are - expectations about the future cash flows that would be received by holding claim on the earnings stream. In times like these the future is murky, expectations drop, it's easy to conjure up nightmare scenarios . . . so doom gets extrapolated.
Doom gets extrapolated.
October 10, 2008, 1:12 pmDr. T:
"The best way to mobilize people is to make them panic."
That is incorrect. Some people freeze. Some run around in random directions. Some scream or cry or rage. Almost none mobilize.
I think you meant that generating panic is the best way to make people agree to a stupid plan. And that's certainly what the federal government has done.
October 10, 2008, 5:12 pmDr. T:
"...stock prices merely reflection expectations about the future"
This is unfortunately true, but it is a stupid change from the way stocks used to be. Owning stock is owning part of the company. Most of the value of the stock should come from the actual value of the company (real estate, equipment, inventory, copyrights, patents, etc.) and the intangibles (quality of employees, customer good will, name and brand recognition, etc.). Only a small percentage of stock price should reflect current and expected profits. But, we've turned that on its head. Expected profits drive stock price, not corporate value. I remember years ago when Apple stock fell, and fell, and fell because of two mediocre quarters. The stock fell so low that the total value of all shares was less than the five billion dollars of liquid assets owned by Apple! (Just prior to this 'crisis', Apple stock was twenty times higher than that low value.)
Valuing stock primarily on next quarter's expected profits is idiotic, and it is partly responsible for the increased volatility of the stock market over that past twenty years. This is one of the downsides to the Information Age.
October 10, 2008, 5:25 pmSaloner:
Thanks for the bracing good sense.
October 11, 2008, 2:22 amAs the old saying goes: "It's never as good as it seems; never as bad either."
Mesa Econoguy:
But all those companies in those indexes are the same ones that were there a month ago, and are still healthy and making money.
Nope:
Deletions
S&P 500 Lehman Brothers Holdings Inc. LEH 2008-09-16 00:00:00
S&P 500 Washington Mutual Inc. WM 2008-09-29 00:00:00
S&P 500 Federal National Mortgage Association FNM 2008-09-10 00:00:00
S&P 500 Federal Home Loan Mortgage Corp. FRE 2008-09-10 00:00:00
S&P 500 Countrywide Financial Corp. CFC 2008-06-30 00:00:00
S&P 500 Ambac Financial Group Inc. ABK 2008-06-10 00:00:00
S&P 500 The Bear Stearns Companies Inc. BSC 2008-06-02 00:00:00
Kent Brockman: Professor, would you say it's time for our viewers to panic?
October 11, 2008, 9:16 amProfessor: Mmm, yes I would, Kent.
Sameer Parekh:
Unfortunately, I think you are wrong.
What your analysis fails to consider is the fact that credit markets are FROZEN. In order for these companies you speak of to continue operating, they must get credit. Our economy runs on credit. I don't just mean the stupid consumer credit, spending more than he can afford. That fueled the bubble. But credit and leverage fuels our economy. Firms can't afford working capital without credit. They can't pay their employees without credit. I'm sure you know all this, but perhaps since you are (luckily) out in Arizona you don't see it. The credit markets are frozen. overnight LIBOR is through the roof. The only signal that things will recover will be if LIBOR goes back down to reasonable levels. The fed can't do a thing about it. 'pushing on a string' and all that.
The comparison with 1987 is invalid. The market is falling because there is a very real chance that the economy will just stop. In '87 it was just a program-trading based short-term crash, as the commenter said. It was not due to any fundamental economic factors.
The crash was 20% in one day. We're down 22% in 7 days, if I recall correctly. We'll see a 20% down day before too long.
I was too late in selling all my equities. I got out last week, continuing to think, "well the various doomsayers have a good point, but they can't be right. Let me keep my head in the sand". Now I think the doomsayers are more likely right than wrong. I have now bought puts on the SPY. If the market spikes and the LIBOR doesn't come down, I'll buy more puts.
Check out the following blogs/sites:
Mish's Global Analysis
October 12, 2008, 7:18 pmMarket Ticker
Nouriel Roubini (NGE I think)