Trends Make Investors Less Afraid of Risk

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Yesterday was beautiful in London. We wandered along the banks of the Thames and crossed Waterloo Bridge over to Covent Garden. Everywhere, people were sitting out on the grass…standing outside pubs…walking hand in hand. Everyone had the same idea – to take advantage of the nice weather before it goes away.

Last year, London had a beautiful summer too. But we were gone that week and missed it.

Alas, many of the best things in life are fleeting. And thankfully, so are the worst things.

What put us in such a reflective mood were yesterday’s news reports. The Dow rose again – up 19 points this time. Gold edged closer to the $1,000 mark – at $984. Oil traded at $68. And the dollar fell to only $1.43 against the euro.

These trends – not to mention the broad rise in commodities and stocks worldwide – lead many investors to think that the fair weather is back, permanently. Asset prices are rising. Investors are less afraid of risk. Hallelujah – a dove with a sprig of green in its beak!

Of course, it may be true. But our advice, dear reader, is to take an umbrella with you anyway. As far as we can tell, nothing has happened to disturb the major weather pattern that began developing two years ago. Anyone could see it coming years in advance. “You gotta expect trouble when the average house is more expensive than the average person can afford,” we kept saying.

But it was only when high winds hit the housing market that the newspapers took notice. Then, for 40 days and 40 nights the rain came down.

First, the house flippers were caught off guard. They were in the middle of flipping condos when all of a sudden the wind shifted and sent their contracts aloft. Mortgage rates were rising and buyers disappeared. The flippers lost their deposits and walked away from empty buildings.

Then, resets and higher rates blew the roof off the subprime market.

Then, the whole housing sector was getting knocked down – builders, suppliers, and financers.

Next came the credit crunch…when major lenders and investment banks realized that they were in heavy seas. Their ships were swamped with mortgage-backed debt and derivatives…and their captains were morons. Lehman went down. Wall Street abandoned ship. And the feds sent out rescue planes.

By late in 2008, everyone was taking shelter. Businesses were cutting payrolls. Banks were squeezing their reserves. Consumers were staying at home. And GM was hiring bankruptcy lawyers.

Everything was falling in price – houses, office buildings, stocks, commodities…practically everything except the US dollar, US bonds, and gold… These three were seen as the only safe refuges for storm- tossed investors.

But on March 9, 2009, came a lull. Reluctantly, investors came out of their storm shelters. The skies lightened…the sun shined. Oil has gone up 53% since then. Stocks worldwide are up about 30%.

And now…people say “the worst is behind us.”

We meteorologists here at The Daily Reckoning watch the skies like everyone else. But we also read reports from big storms of the past. And what we notice is that this doesn’t look like the passing storms of the ’80s or ’90s. It looks to us like a major change in weather patterns. To be more precise, it looks to us like the Great Storm of the ’30s. Do you remember that one, dear reader? No? Well, we don’t either, but we’ve read the histories. It was a doozy. And it began…well…just like this one.

In 1930, six months after the initial storm front passed, world output was down about 15%. Today, it is down about 15%, too. Stock markets were only down about 20% in mid-1930. Today, they’re down about 35%. And world trade slipped about 15% in the six months following the onset of the Great Crash of ’29. Today, it is down 25%.

One thing you notice is that like the Great Depression, this downturn is global. A collapse in world trade followed the Crash of ’29. It is usually blamed on two protectionist bumblers in Congress – Smoot and Hawley. But in a real depression, trade falls anyway. World commerce needs to readjust to new realities…whatever they are. That’s happening again now.

The other thing you notice is that this adjustment takes time…and takes the losses much further…much deeper…than anyone expects. The actual bottom in the ’30s didn’t come until 2 to 3 years after the crash. And it took stocks all over the planet down to about 65% below their peaks. World output eventually fell to only about 2/3rds of what it had been in the late ’20s.

It took two decades and a major world war before the world was back on its feet.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. Indeed a storm; a hurricane. The eye is upon us and there is more to come…

    Reply
  2. The tempest is upon us. Hell hath no fury and time passeth forth. Lighten the ship. Toss the US motherboard…

    Reply
  3. This is the eye of the storm, that’s for sure. Halfway thorugh a hurricane, the weather goes calm and quiet again for a while, and a lot of people think the hurricane is over and they go out again. Then boom! the rest of the hurricane hits with massive fury. Prepare for the next wave now while you still can. Failing to prepare is preparing to fail.

    christina
    June 8, 2009
    Reply
  4. Goodness… even Shakespeare’s ‘Tempest’ gets into the act!

    Biker Pete
    June 8, 2009
    Reply

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