After 23 years on Wall Street, nothing really amazes me anymore. The one constant
is the capacity for otherwise intelligent human beings to behave like idiots
and lose truly incredible sums of money on bad investments. I remember being
told by my stentorian boss at JP Morgan, while discussing the 1987 market crash,
that these disasters “never happen more than once a career and we always recover
from them”. Well goodbye to all that. Since 1987, we have had meltdown
after crash after crisis -- nineteen financial wipeouts (almost one per year on average):
Not comforting
is it? Well
what is comforting
is that
the crises do
subside, the
former financial
wizards
are carried
out on their
shields and
the big banks
write down
enormous
losses for a
year or two.
One can also
argue that the central banks, while seemingly more powerless to prevent bubbles
and the subsequent meltdowns, are still proficient in mopping up after the
mess—the coordination and use of various liquidity devices by the U.S. regulators
this year did, in retrospect, head off an even deeper crisis.
The current problems--a housing bust and illiquidity in mortgage and most credit
markets—are different from most of the past ones in a very important respect:
they are impacting individuals, small businesses and homeowners in a business
cycle where there is very little room for error. $120 oil and higher food and commodity
prices are hurting small businesses that cannot pass on commodity costs
as efficiently as large corporations. So margins are compressed, cash is dear,
and--surprise--there is almost a complete lack of credit available from the
aforementioned financial wizards.
There is hope, and my partner Jack Mayberry alluded to it earlier this month writing that there
appears to be a “turning point in the market”. I believe that to be true, and the catalyst generally
is a financial house failing--Bear Stearns this time—followed by another round of huge writeoffs
by banks (coming to your Wall Street Journal at the end of this quarter). The other “turn” I
have been looking for is the Housing Market Index—a great gauge of local wealth generation
and financing activity:
Why housing? It is usually the largest investment most people make in their lifetime, it supplies
a stream of wealth to a number of businesses—contractors, painters. plumbers, hardware
stores, fuel companies, etc., and it is generally characterized as a true long term investment
(I’m not talking about the Florida and Las Vegas speculators of the recent bust). An even more
reliable measure of housing health is my own Local Anecdotal Index. Finally, after a long 18
months, the house up the road finally found a buyer--a young couple from New York City.
Second, the employees in the local Washington Mutual are finally talking about new business
again—not layoffs and restructurings.
Will the high commodity prices derail this “turn” or recovery? Is there enough growth in the
global growth engine to pick up the U.S. on the other side? My daughter Molly, when she was
3 (she’s now 17!), had a good answer, as she would solemnly intone in response to an unexpected
event: “never you know”. And never is not a long time anymore.
(c) Core Asset Management
www.coreasset.com
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