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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.