The most important four words of investment guidance I can provide are the same ones I have been providing: It’s a bear market. The trend has been and is down. There may be bargains cropping up for those like Buffett who know values and are willing patiently to wait for the eventual recovery. Yet the trend is down and bargains can become even greater bargains.
The bear market is like Space Mountain. Space Mountain has a ride up — and then down. It takes only a few minutes. Space Mountain is an experience which, when you are halfway down, you are wishing that it were over. But the stomach-churning descent continues for a very long 60 seconds that seems like 60 minutes to its exhausting finale.
Why is the bear market continuing? This is guesswork. Many causes come in for attribution by different commentators. Forced selling has been a popular explanation lately. I will simply point out the following: (1) Governments around the world are announcing multi-billion bailout packages. These announcements have two negative effects. The first is the direct negative effect of any bailout. It prolongs the depression. Second, the announcement acknowledges that the country is experiencing large difficulties. (2) Currencies in a number of countries are failing. Most severe stock market declines are associated with currency problems. This was the case in 1929 and 1973-74. These problems disrupt world trade severely. (3) A coincident occurrence is that commercial real estate has renewed its severe decline, worldwide. The wealth effects are very large, as real estate is an important asset class. And the negative signal about business prospects is also important. The real estate investment trusts (REITS) began declining in February of 2007. They fell 33% in the U.S. The decline stopped in January of 2008 and they held until October, 2008. They have now fallen by 63%, another 30% this month. This is not only residential or apartment REITS, but also office buildings, warehouses, and malls.
Basically, the full extent of the mal-investments of the prior inflationary boom are now being discovered and revealed. There is serious mis-allocation of capacity. The emerging countries such as China and India had even higher inflation rates than the U.S. in the last few years, and the problems there are being unmasked day by day. The carnage among investors is severe. I was told yesterday of suicides in India and of people with portfolios worth a tenth of peak prices.
Low growth in the U.S. imperils all social welfare promises. Baby-boomers who already had low savings have even less now and can count even less on government promises. Saving needs to rise and rise a great deal. Government borrowing at this juncture is exactly the wrong medicine. The government should at the very least withdraw from Iraq and Afghanistan, close military bases worldwide, suspend defense procurements, and give a massive tax cut with what is saved.
6:58 am on October 24, 2008
