Why the Market Meltdown is Crazy

(iStockphoto)

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.


Josh

A sovereign debt failure in Europe would cause far more disruption than a Lehman/Freddie/Fannie failure ... even in the U.S.. This is what drove yesterday's concerns, and will likely drive volatility for at least a couple years (particularly since European nations are implementing growth sapping austerity measures).

BOB

I hope you are right. I bought some small and mid caps at S&P 1185. The way I see it, imagine the size of the problem, then divide by 2008. That is where to shoot for on the VIX. This can't be half as bad as 2008, so VIX peak at 40 coming down was a buy.

Hard call, but easy trades can't make money. Saving cash in reserve if I'm wrong though...

brazuca

James.. your wife is from Argentina, right?

I'm from Brazil and grew up during the 80s.. when the country was going down the drain (e.g., hyperinflation, debt default, etc). Today, Brazil is doing great and I am here in the US. What the freak? I'm carrying this curse with me wherever I go? LOL :D

Jokes aside though.... I find it curious that to see the roles reversed now. All these rich countries with so much debt and nothing to show for it. What a shame....

robertmiers

I love this guy. I do not love him because his agrees with me, nor do I because he tells me what I want to hear. I appreciate him for his sense of the macro market and common sense. He connects the dots without emotion or (most important) personal agenda.
Truth tellers are in short supply. I respect him and thank him

Ryan

Welcome to AA+.

MikeRB

Nice post. Just a quick question, where do you get most of your stats from? I am teaching high school econ in the fall and want to be able to pull up some of these stats. For example "corporations have $2 trillion in cash on their balance sheets." and "Seventy-five percent of the firms in the S&P 500 have beaten their earnings estimates."
Thanks,
-Mike

Joe A.

You make some good points, but you're misleading on others E) in particular.

Are you assuming that corporations are going to spend 2 trillion in the next year or 2?

Why wouldn't they just keep it or give it to their top people as "bonuses" or to shareholders?

Why would they invest any of it in the U.S. given our crazy political environment and increasingly uncertain economic one?

Stoive

I know you have a habit of writing dopey articles in an attempt to stimulate discussion. I hope this is the case. Your attempt to tell everyone that all is well is insane... Those of us in our late 30's - early 40's have lived the vast majority of our lives in a credit infused bubble. The pin has just hit the skin of the balloon we live in... Quick survey, how many of you out there have 6 months savings on hand? How many have 2 cars, tv's, iPods, etc??? I'd bet the latter group far outnumbers the former.

I am particularly offended by your "assumption" that because consumer credit has declined, that it implies that "Joe SixPack" is faring OK. This couldn't be further from the truth... Consumer debt has declined ONLY due to the fact that banks are writing off debt at a record pace. Those who are burdened with debt are not paying it down, they are walking away...

Final stat for you to digest... 1 out of every 7 Americans is on Food Stamps... Welcome to the summer of recovery part 2... Oh yeah we just got downgraded to AA+... Interesting fact, Enron was rated investment grade 4 days before it went under.

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Nilay Goyal

Well, Mr. Expert, I see so many flaws in your argument that pointing them out will be a huge task. However, to start with a few, you expect that the second dip could occur due to the exact reasons that caused the downfall in 2008!!!
The banks have cash, the corporations have cash, the consumers might too have cash to spend, but the government seems to be in deficit. Of course, US cannot default as all its bonds are valued in USD which US itself controls... But we already see the impact of US deficit on the value of US dollar. Even if the corporations/banks/consumers have cash sitting, the value of the their cash is decreasing (ever heard about PPP, Mr. Expert?)
The fact is that US economy's future depends more on foreign investment and not on the cash in itself. The monetary stimulus can kick in recovery and the high cash may increase spending levels, but still the current fiscal policies in US will still not be able to pay back the deficit (and so the hoopla about the debt deal, Mr. Expert).
Its good to be optimistic, and I appreciate your courage, but heard about confirmation bias? That is what is reflective from your article!

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avinash

Yes, Yes ...we will definitely have boom in 2012. God bless us!!!

Rafael

You have got it wrong the bubble bursting now is the public debt bubble remember you heard it here.

Claire Masterton

"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." --James Altucher

Compare this factually inaccurate statement by Altucher (who does this often by the way) to:

From the most recent Case-Shiller release:

"Nineteen of the 20 MSAs and the two Composites posted negative annual growth rates in May 2011. The 10-City Composite was down 3.6% and the 20-City Composite was down 4.5% in May 2011 versus May 2010."

"The chart above depicts the annual returns of the 10-City and the 20-City Composite Home Price Indices. In May 2011, the 10- and 20-City Composites recorded annual returns of -3.6% and -4.5%, respectively. "

"On an annual basis, Washington DC was the only MSA with a positive rate of change, up 1.3%. The
remaining 19 MSAs and the 10- and 20- City Composites were down in May 2011 versus the same month last year. Minneapolis fared the worst posting a double-digit decline of 11.7%."

Oh, and by the way, the national house price declines are much steeper than even reported in the Case-Shiller data which tends to lag. We could move on now to other truth-stretching examples in this post, but the fact a whopper was released without fact-checking in the first bullet point--well--that should make things pretty clear.

-Claire

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jake

Gas prices were $1.61 in 2008. I'm not feeling the oil price tax cut.

Brock

Bad advice. Donuts are not healthy.

Noe

well said. Everyone is going crazy and have fear, instead they should worry about 2013.

neil wilson

"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)."

I am clueless. The Fed is paying .25%. So you are off by a factor of 12.

choi

how can these things recover the low population working? we haven't seen any sign of recovered employment. I don't know if our income is going to rise.
when we can take off these senses of crisis?

robyn ann goldstein

There used to be this joke about the difference between those who do and those who don't get the Ph.D. I just wonder if the same applies. It is time to come to terms with why the concern has been with jobs (working for others and not on one's own behalf) and thus consumption and not production (working for our selves). Has the iron cage of bureaucracy gone so far as to strip America of its greatest strength. Just remember- Weber thought of it as a "cloak." I once brought one to class, wore it over my left shoulder and tossed it off. There is no reason why in earth we cannot do the same. Get a grip!