Entitled ‘The Subprime Crisis’, it was given by Professor Robert Shiller of Yale. Shiller’s well worth hearing on this stuff. A former advisor to new US Treasury boss Tim Geithner (“He had no idea this was coming”), Shiller forewarned of both the dotcom bubble and the more recent one in housing.
The lecture kicked off with a quick recap of how we got to where we are. These were the highlights:
- Psychological factors played a huge role. Irrational exuberance (a term coined by Alan Greenspan and borrowed by Shiller for the title of his 2000 book) caused bubbles to appear all across the world . Word spread that by simply buying stocks, or a house, you can become effortlessly wealthy. You can’t.
- Genuine financial advice was only available to the wealthy. Anyone who gives you free or “affordable” advice isn’t really advising you at all. They’re trying to sell to you. Hence many subprime borrowers got in over their heads – basic questions like “Can you afford this?” “What if interest rates rise, or you lose your job?” were left unasked.
- Individuals fell victim to Groupthink. Groupthink is where it’s in the interests of individuals to subordinate what they really think to what is acceptable to the consensus. Imagine a rating agency employee in 2006 saying to his boss: “I want to downgrade this debt. I think we’re going to have another Great Depression…” Not exactly a smart career move!
We were then shown charts of stock indices, p/e ratios and volatility going all the way back to 1870. Let’s start with the volatility.
There are only three points in history where we observe extreme volatility. One is right now. The others are 1987 and 1929.
The real terms p/e ratios chart was even scarier. The big bubble run up from 1982 to 2000 appears like the Matterhorn rising out of some hillocks. This, of course, is the bubble that’s now being corrected (for more on this see The Daily Reckoning, below).
In percentage terms, we’ve only ever seen such a bubble once before since 1870. Yep, you guessed it…before 1929!
Why you should remain wary of equities
Shiller told us that, in real terms, the S&P fell 80% in the 1930s. So far it is only down 54%.
This means you still have a once-in-a-lifetime opportunity to lose a lot of money very quickly. Will you take it? I for one hope you don’t…
Most of us have never been in this position at any time before throughout our lifetimes. Who alive today has first-hand experience of investing during a prolonged, worldwide, stock market and real economy Depression?
All we have to go on is the lesson from history. And that lesson says…stay out! Keep your cash as cash.
Why some will try to lure you back in…and why they might succeed
I believe we’re seeing a lot of Groupthink in the financial sector right now. Finance types make their living from stocks markets. So it’s in their interests to talk the best stock market game they feel they can get away with.
They did it during the bubble, happily perpetuating the notion that stocks generally go up so go ahead and fill your boots.
That nonsense won’t fly now. But there’s another nonsense that will – the idea that the correction thus far has left an unprecedented number of “screaming bargains” for you to put your money into. Thanks to Groupthink, many commentators are now crowding round this dangerous consensus.
Right now is not a time to speculate. It’s a time to protect your money. The best way to do that is to hang onto it.
It’s tempting to feel ‘contrarian’…to think that you could be among the financially savvy if only you’re brave enough. That’s why this consensus will enjoy some success…for a bit.
But it’s a thin line between bravery and foolhardiness. Do you wish to gamble that you’ll fall on the right side?
Another reason investors might be suckered back in early is that they worry about missing the boat. But I’m going to paraphrase a much smarter bear than my average self – Albert Edwards of SocGen. Investors needn’t worry about missing the party this time.
You can afford to be late.
Until next time,
Ben Traynor
Editor
Fleet Street Daily
You can’t even get pub work in Newcastle!
BY BEN TRAYNOR
As I was writing the above, I got a curious email from my mother:
“I just spoke to a man on the quayside who's been for an interview in a bar. There were 70 other people for the one job. I'm also engaged in a debate with someone who says that we're not on the brink of a recession, that the credit crunch is a media invented phrase, and that it has no connection with any possible recession.”
My poor mum’s trying to make the guy see sense. But I’ve told her not to bother. People will do anything to delude themselves if it helps them feel better. Another reason why the bargain-hunting Groupthink described above is able to prey on unwary investors.
Forewarned is forearmed…
The Daily Reckoning – Correcting the Errors of a 25-year Bull Market
BY BILL BONNER
Thanksgiving
Other Americans may take the day off. But not us.... not here at the headquarters of the Daily Reckoning. We’ve got some reckoning to do.
But let us take a moment to bow our heads and offer this Prayer of Thanksgiving...
Thank you, good Lord, for everything.
We are still alive. We are still solvent.
Help us stay that way. If not both, at least the former.
Lead us not into temptation. Keep us in gold and cash until this is over.
And thank you for bringing the man called Obama to the White House... he might not be any better, but he could hardly be worse; or could he?
Okay, we’ve said our prayers... now, down to business...
You can read the Daily Reckoning in full here
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