THIS TIME it IS very DIFFERENT
Many Wall Street firms and investment professionals are continuing to recommend holding stocks, sometimes albeit defensive ones, through this economy and are refusing to learn from the full historical record. The underlying assumption they are making about this downturn is that it is fundamentally not different from other post-40’s recessions. In September of 2010, there is still a very large camp of investment advice givers who continue to argue that double-dip recessions are extremely rare and that we will not see one after the 2008/2009 experience. In other words, business is as usual and the “make us whole” long-term bull market is right around the corner.
Reinhart and Rogoff, leading economists, in a comprehensive investigation of global financial crises going back 800 years compiled in their 2009 book titled This Time is Different, have this to say in the preface – “If there is one common theme to the vast range of crises …, it is that excessive debt accumulation, whether it is by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt build-ups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short-term and needs to be constantly re-financed. Debt fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly.” In other words, this crisis is not made of the same cloth as other post-World War 2 recessions.
The Great Depression of the 1930’s was a crisis similar to this one in that it was also caused by excessive debt accumulation, rather than inventory corrections or inflation which have been the cause for other post-40’s recessions. For an investor who invested in the stock market in the late 1920’s, it would have taken 25 years before their account values were back to break-even. Hope does not preserve capital.
Can you afford to wait?
