Why the Market Meltdown is Crazy


After Thursday’s massive stock market sell-off, a lot of people are talking about how we may be experiencing another year like 2008. I’m going to get right to the point: that’s impossible. Here’s what was happening in 2008:

A) Housing bust: housing prices were already down 20-40% off of their highs.
B) Financial crisis: two major banks had gone bankrupt and every other bank was at risk.
C) Mark-to-market accounting was ruining bank balance sheets.
D) The uptick rule had been abolished on short-selling.
E) We were already in a recession.

Let’s fast forward to right now and walk through those items plus a few more. But first, a reminder to follow me on Twitter.

A) Housing prices according to the Case-Shiller index are flat compared to a year ago. Not to mention new housing starts are ticking upwards. Inventories are also much lower now than they were in 2008.
B) The banks have a surplus of $1.3 trillion. They also make money for free by borrowing from retail consumers at 0.2% (our checking account rates), and then lending to the Fed at 3% (or whatever the day’s T-bill rates are). This is called “free money.” They’ve also increased commercial lending for 7 months in a row. The next step will be increased lending to the consumer.
C) Mark-to-market accounting was removed in March 2009. Guess what? That’s when the market went straight up; and it’s still 90% higher than it was then 2 years ago.
D) The uptick rule was also put back in place. As a result, the market went straight up. When it’s hard for people to sell stock, then there will be less selling. Basic fact.
E) Not only are we not in a recession, but GDP has 8 quarters in a row of growth and American corporations have $2 trillion in cash on their balance sheets.
F) Also, this is very important: household debt obligations (rent/mortgage + car payments + credit card payments divided by income) are at their lowest since 1992. In 2008,  this metric was at its highest since 1992. That’s a big difference. The consumer is healing, which is why real personal consumption is at an all time high.
G) The debt ceiling was all a big lie to scare you. Every media outlet was writing headlines about how the U.S. was going to default. This was ridiculous. Debt ceiling or no debt ceiling, the U.S. was already allowed to roll over debts to make interest payments. It was false that we were ever going to default. But it made for good headlines, so newspapers and TV networks kept talking about it, scaring people so they’d keep reading and tuning in. For shame!
H) Companies are doing fine. Seventy-five percent of the firms in the S&P 500 have beaten their earnings estimates. The S&P right now trades at 12x forward earnings versus the historical average of 15x. That implies an immediate 20% gain from here if not more.
I) Oil prices have dropped dramatically since their highs of 2008. This is like one huge tax cut for the American public.
J) The effects of QE2 and the Japanese stimulus have not yet been felt by the economy. It takes 6-18 months for the effects of Federal Reserve monetary stimulus to kick in. It just ended a month ago. Give it some time. We’re going to boom in 2012. You heard it here first.
K) Car sales are up 5.8% year over year. And this doesn’t even take into account the fact that Japan stopped shipping parts for an entire quarter, causing massive slowdowns here in car production and sales.
L) ISM Manufacturing and Services sectors still show expansion. They showed decline in 2008.

Everyone has this visceral fear that we’re going to have another year like 2008, so the trigger reflex is to panic and sell, since the memory is still fresh in our brains. But the reality is the U.S. economy is in better shape than it was three years ago. I’m only worried about the bubble potential when the monetary stimulus hits in 2012 and 2013. My plan personally is to be in all cash, or at least out of speculative assets, by the end of 2013. That’s the way people should think (and worry) – not day by day, but year by year. Or over the course of many years.

So, don’t read the news; don’t panic. How many people in San Francisco took iodine pills because newspaper headlines (The New York Times, for instance) were talking about the “radioactive plume” that was going to hit San Francisco the week after the Japanese earthquake? Not many, I think.
My take: Relax. Eat a doughnut. Enjoy the weekend. Oh, and follow me on twitter for more good advice.

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.



View All Comments »
  1. Eric M. Jones. says:

    “More than any time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose correctly.” –
    — Woody Allen

    Well-loved. Like or Dislike: Thumb up 31 Thumb down 5
    • lizzy fager says:

      Wow I totally disagree with Woody…if that is really what he said. Why be so pessimistic? Who needs the drama! I lost my job in 2008, was laid off b/c the bank I worked for downsized, have not found a new one yet, but still feel optimistic bout life. This is an opportunity to seize the moment…like the Phoenix rising from the ashes.

      We need to reinvent America and ourselves-through change in the work place, values, education system, etc. in order to create hope again. We have got to feel the dream again…yes no matter how corny that sounds in order to realize the Dream we need to feel the Dream. So I say dream big, embrace change, be passionate about who you are and what you want and you will realize your dream. So whom do you vote for Woody or Lizzy? I vote for Lizzy, of course!

      Thumb up 1 Thumb down 1
  2. wle says:

    Hidden due to low comment rating. Click here to see.

    Disliked! Like or Dislike: Thumb up 20 Thumb down 26
    • James Altucher says:

      How come I didn’t MSFT in 1986 either. Or AAPL in 1997? I agree nothing is predictable. But I’m just pointing out the differences here so we all don’t go around believing the media hype that is trying to scare us. Skepticism is not always the right strategy but it helps to think for ourselves, “what is really going on here and is what i’m hearing out of the megaphone mouth of the media correct?”

      The same goes for me. Fact-check me. Argue with me. Whatever. But the key always is for us to think of ourselves instead of gut-reflex react with the market.

      Well-loved. Like or Dislike: Thumb up 45 Thumb down 4
      • J1 says:

        If everybody else in the market is going by gut reflex, should we not take that into account? Wish I’d bought MSFT in 86 too; we wouldn’t have to worry about stuff like this now.

        Thumb up 4 Thumb down 1
      • jdbear says:

        Take it into account sure. But trade by it, no. Gut reflex is a really great way to lose money.

        Thumb up 1 Thumb down 0
  3. Andrew N says:

    With regards to companies beating estimates in point H:

    Estimates are worthless. Management always guides analysts downward right before earnings to that their company can beat by a penny.

    Well-loved. Like or Dislike: Thumb up 10 Thumb down 3
  4. Peter Drier says:

    And the % of the population working is the lowest since 1983, and is not trending in a good direction..

    Oh wait, that point contradicts your theories.

    Well-loved. Like or Dislike: Thumb up 25 Thumb down 12
    • Michael Peters says:

      Employment has always been a lagging indicator. Having bad unemployment now doesn’t mean that we aren’t on an upward trend.

      Well-loved. Like or Dislike: Thumb up 11 Thumb down 4
  5. Kentucky Packrat says:

    A. There are millions of houses in default or being intentionally left pre-default (90+ days in arrears), so that their lien holders don’t have to mark them down as foreclosed. Until these are dealt with, the entire housing market is one big sham.
    B and C. You are double-dealing here. If Mark to Market was in effect, then the banks would still be failing because their assets are crap, not making a profit. If the banks are making a profit by lying about the value of their assets, then they’re zombies, not healthy entities.
    D. Driving the shorts out of the market makes a warm fuzzy feeling, until there’s a large downturn and you don’t have anyone with incentive to buy. The shorts stop downslides by needing to close out the short by locking in gains.
    E. We’ve had 8 months of record government borrowing to make that GDP growth. It’s not sustainable without private GDP growth, which hasn’t happened yet.
    G. The debt ceiling debacle masks a more sinister problem: the US Government has no intention to ever pay off its debt, and probably isn’t able to do so. It’s the world’s largest ponzi scheme ever, and it will eventually collapse. If Moodys and S&P were honest, the 10 and 30 year T notes would be junk.
    H. Companies are sitting on their largest cash piles in history, even adjusting for inflation. Why do they all think they need that much cash, versus spending it ahead of a jump?
    I. Tell that to the person paying 3.50 at the pump and the equivalent jump at the grocery store. Gas prices hurt the poor and middle class most directly.
    K. We destroyed an entire year’s worth of used cars with cash for clunkers, and now it’s nearly as cheap to buy new as used. Imagine that!
    The big winners in the new car game: Kia and Hyundai. IMHO, that’s because they’re cheap but good. US car makers need people buying SUVs and luxury cars, not Focuses and Accords.

    Of your items, A, B, and C still aren’t fixed. D isn’t a real problem. We’re only out of the E recession because the government borrowed our way out, and that’s why it’s facing a credit crunch itself.

    Sorry, I don’t see the improvement.

    Well-loved. Like or Dislike: Thumb up 83 Thumb down 17
  6. gomez says:

    hahahahah..yeah right maybe we can just print some more money,the whole system is crook and sinking bow first under a wave of toxic crap that has been kicked down the road since 2007…try listening to the likes of Gerald Celente & Peter Sciff if you want to hear how it really is!

    Hot debate. What do you think? Thumb up 12 Thumb down 12
  7. Dancer says:

    I am a wee bit thick when it comes to this stuff, however – are you missing a key factor – QE2 ended in June. Then just this week the La-La Times reported this http://www.latimes.com/business/la-fi-money-market-20110804,0,1331360.story Losing $103 gazillion dollars has to hurt, a bit at least. Is it just possible the underlying fundamentals are not as perky as we hoped they might be?

    Thumb up 2 Thumb down 2
    • James Altucher says:

      The Fed finished printing money in June, yes. That doesn’t mean jobs are created by July 1 with money in your pocket on July 2. it takes 6-18 months for the effects to even BEGIN. Everyone needs to calm down while this works through the system.

      Well-loved. Like or Dislike: Thumb up 16 Thumb down 9
      • pater tenebrarum says:

        Sorry, but you fundamentally misunderstand how a debt deflationary secular contraction works. There will be no ‘working through the system’ of the Fed’s monetary pumping. You wrongly assume that ‘money’ funds economic activity. It doesn’t – ALL economic activity that is taking place is already funded, by real goods. Additional money does not provide additional funding, it only distorts prices and misdirects resources. Unfortunately the last credit and asset boom has consumed so much scarce capital while concurrently creating a tower of unproductive debt that there are no longer enough resources left that can be misdirected by money printing. This is why the ‘recovery’ has been largely nonexistent so far (unemployment remains at one of the highest levels of the entire post WW2 period, which kind of contradicts your claim that the ‘economy is better now’ than in 2008. It isn’t).
        The Fed stuffs the banking system full of reseves, but the banks are just hoarding these reserves as they would all be technically insolvent otherwise. They can at present hide losses by not marking assets to market, but in essence they are ‘zombies’ – the only lending activity they engage in is lending to the government (they ‘ride the yield curve’ with Ben’s money from thin air) , which consumes these funds or spends them on unprofitable ventures (that government spnding is unprofitable can be gleaned from the fact that it produces a large deficit). Contrary to myth, this does not ‘help’ the economy at all – it only redistributes resources from A to B, as the government neither possesses nor creates economic resources – it must take every red cent it spends from the private sector either by taxation, borrowing or inflation.

        Well-loved. Like or Dislike: Thumb up 22 Thumb down 2
      • Ryan says:

        I’m not sure I understand 100% of what you said, and what I do understand, I’m not entirely sure I agree with. But your points are all sound, and your arguments seem to logically follow from the last, and therefore there is a good chance that you’re right on almost every count. But if you are, what exactly is the way out of this?

        Thumb up 1 Thumb down 0
  8. SenorSwiffer says:

    Don’t scaremonger now… scaremonger 2 years in the future? LOL.

    Thumb up 2 Thumb down 2
    • James Altucher says:

      no scaremongering at all. just laying out exactly what i plan on doing from this perspective in time.

      Thumb up 7 Thumb down 3