We Haven’t Hit Bottom Yet
[cross posted at E Pluribus Unum]
My son has asked me on more than one occasion recently, “So what do we do now?” Usually, in that conversation, I start out apologizing to him for the mess my generation has left him to deal with. Which leads to him asking his question.
What I tell him is that we don’t really have a good idea yet because we haven’t yet hit bottom. We don’t know quite how big this whole thing is. Every so often we think we have an idea, then a guy like Krugman puts in his two cents and then we get scared all over again.
“No analogy is perfect,” I say, “But It’s kind of like an enormous explosion has occurred. We’ve been thrown in the air.”
“It’s going to hurt when we hit the ground,” he says.
“Well, yeah, eventually. But at this moment we don’t even know yet if we’re still going up or if we’ve started coming down. It’s hard to say because we’ve lost our bearings in the shockwave after the explosion. All we know is that we’re suspended somewhere between the earth and the sky.”
“Not a happy place. Then what?”
“Well, at some point we’re going to come all the way down to earth. We’ll land — with a crunch — in some sort of blast crater.”
“Ouch.”
“No shit sherlock. But even then we won’t know how big and deep the crater is until we start trying to climb out of it. It’ll be like rock climbing a sheer wall. Brutal.”
“I’m so glad I asked.”
“You asked and I’m telling.”
“So once we’ve climbed out then we’re out of trouble?” he asks.
“Not exactly,” I say. “Only after we’ve climbed all the way out and walked away and then looked back, will we be able to begin to understand how bad this thing really was…and what we can do to make sure it doesn’t happen again.”
“No wonder Krugman is so freaked out.”
“Yeah. And he’s not the only one.”
November 24th, 2008 at 11:23 am
The bottom line here? Nobody knows. There is simply no real parallel to this crisis because it DOESN’T mirror the events and conditions that caused the great D.
However, a crash of that proportion doesn’t seem likely because the few months this one’s been dropping don’t mimic the spectacular one-day crash of 1929. So when we get to the bottom, it may end with a whimper instead of a bang.
And instead of waiting more than three years for a new president - a time of overall decline trend in the great D, that period has been shortened by the prez replacement calendar, so the bottom is likely to happen faster this time, which does make it very dangerous overall.
I am, however, glad to report that I see some standard trading patterns emerging still. For one thing, the trend remains downward heading into the Dec 16th FOMC. So Dec 15th has a high probability of setting a short term bottom. But a temporary rise through inauguration week could be the only nearterm positive to look for before the trend goes back down to the ultimate bottom some months from now.
It’s also important to consider predictable human behavior. Institutional investors and big money traders want to be sure of a profit when they jump back in, so they want all the quality companies to have stocks undervalued by at least 50%. It’ll also be tough on non-profitable companies who’ll find continued funding scarce, which means numerous tech and biotech companies will be bought at bargain rates or will go completely under in the interim.
To guys like us, it means 2009 and maybe 2010 will see the real trickledown that creates massive unemployment unlike anything we’ve seen in our lifetimes (if we’re younger than 70).
Scary? Yep. Which is why paying off debts NOW is critical, with savings following. And put in some gardening time, for some food insurance. We can survive this, but frugality and community values are necessary to do so.
The only thing we need fear is greed itself.
November 24th, 2008 at 12:45 pm
We have a long way to go. We have many more mortgage issues, foreclosures, job losses, retail disasters, and other catastrophes to go. Hang on tight!
November 24th, 2008 at 2:12 pm
I would agree that the bottom will be defined by more than just the low point of the market, although that is a handy historical metric.