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.

Eric M. Jones.

"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


the big experts
if you can figure out all the reasons, how come you didn;t predict it?

James Altucher

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.


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.

Andrew N

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.

Peter Drier

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.

Michael Peters

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

Kentucky Packrat

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.



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!


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?

James Altucher

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.


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

James Altucher

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

M. Edward (Ed) Borasky

Yes, the economy is in great shape when the rich can borrow from the middle class at 0.2%, lend to the government at 3%, and lend to the poor at 529%! ;-) James, we live in a *global* economy. Inflation in China and India is out of control, China steals intellectual property rather than creating it, and Europe is struggling to maintain "socialist" economies. The only bright spots in the world seem to be Aftica and Latin America.


Only issue I have is G. Default. Yes we would have paid our bond debt and paid off bonds that came do. Yet correct me I am wrong, but we had $300B if bills to pay and only $170B in revenue coming in and the accounts were empty. The only way to pay the remaining $130B was to issue new bonds. Without the debt ceiling being raised we couldnt issue new bonds. So $130B of bills ranging from payroll checks to paying govt contractors wouldnt be paid and that would slice right through the economy. What am I missing?


Markets value the information they have. What we're seeing is not really new information but a shift in perspective about it. I note 3 basics:

1. Confidence arguments. Britain led the way into austerity, using the argument that credible austerity - which they enacted, which is really just hitting in full measure - would generate confidence and that confidence would persuade suppliers to produce more goods, hire more people, etc. That has not happened. We've been hearing versions of the confidence argument here. This issue confuses people because we tend to think of confidence as a demand issue: confidence in the direction of housing prices entices you to buy. But the supply oriented models that dominate macro, that dominate conservative thinking, that are most of the economic tradition, are using confidence to fill in the gap, the problem area of extended near 0 interest rates. The markets were hoping that confidence was more than a belief, that it would actually translate into more economic activity. It has not. That has become obvious with each British report. The last one came out just before #2.
2. The failure of Eurozone stop-gap measures has become predictable, meaning the markets expect any measure to fail. Markets aren't buying half-measures and they expect only half-measures. The ECB has been raising rates. I think that is part of the strategy of confidence: a show of raising rates sends a signal that the underlying Euro and debt problems are not as important as checking the rise of very low inflation. That strategy just failed: the ECB is now forced to back off rate increases. That's another blow to attempts to save the Euro, to the confidence argument, to the huge problem of sovereign debt rollover - which is big in Europe and not big in the US. Rollover issues are a huge short-term problem in the Eurozone. That could cause a solvency crisis.
3. The debt ceiling argument showed the markets that one party will be doubling down on contractionary fiscal policy, that we can expect no better than continued political warfare. I think the markets woke up and realized that shrinking is actually shrinking, that there is no magic in the act, that the idea of "expansionary contraction" is a political marketing gimmick. It's much easier to believe in nonsense when it's untried.



you realize the one year t-bill is at .11% and the 2 year note is at .296%, you can get 2.5% for a 10 year note...


does Altucher contribute anything freak-onomical to the discussion?


The uptick rule is an artificial market friction that creates winners (insiders, basically) and losers (price-takers, mostly).

Academic studies have studied the uptick rule. It does not support your analysis. Instituting the rulen gives a brief pop (if at all), and undermines market quality. (actually, event studies show instituting short sale constraints is associated with large market drops, but the causality probably runs the other way).

In a no-short shale world only existing share holders can profit from negative information. However, anyone with money can act on positive information. This divergence between information production and trading capacity creates an imbalance that pushes the equilibrium price above the "true" price. Short shelling acts to correct this imbalance.

Why is it ok to borrow money and buy stock, but not ok to borrow stock and buy money?


Well said. The only thing about the market that's been worth reading.