Mac Chronicles ...
What others are saying:
James Grant – Grant’s Interest Rate Observer:
THE subprime mortgage crisis of 2007 is, in fact, a credit crisis — a worldwide disruption in lending and borrowing. It is only the latest in a long succession of such disturbances. Who’s to blame? The human race, first and foremost. Well-intended public policy, second. And Wall Street, third — if only for taking what generations of policy makers have so unwisely handed it.
Every crackup is the same, yet every one is different. Today’s troubles are unusual not because the losses have been felt so far from the corner of Broad and Wall, or because our lenders are unprecedentedly reckless. The panics of the second half of the 19th century were trans-Atlantic affairs, while the debt abuses of the 1920s anticipated the most dubious lending practices of 2006. Our crisis will go down in history for different reasons.
One is the sheer size of the debt in which people have belatedly lost faith. The issuance of one kind of mortgage-backed structure — collateralized debt obligations — alone runs to $1 trillion. The shocking fragility of recently issued debt is another singular feature of the 2007 downturn — alarming numbers of defaults despite high employment and reasonably strong economic growth. Hundreds of billions of dollars of mortgage-backed securities would, by now, have had to be recalled if Wall Street did business as Detroit does.
Benjamin Graham and David L. Dodd, in the 1940 edition of their seminal volume “Security Analysis,” held that the acid test of a bond or a mortgage issuer is its ability to discharge its financial obligations “under conditions of depression rather than prosperity.” Today’s mortgage market can’t seem to weather prosperity.
Understandably, it’s only the selling kind of panic to which the government dispatches its rescue apparatus. Few object to riots on the upside. But bull markets, too, go to extremes. People get carried away, prices go too high and economic resources go where they shouldn’t. Bear markets are nature’s way of returning to the rule of reason.
Richard Russell – Dow Theory Letter:
I’m constantly asked about the Dow Theory and its basis in values. And my answer is that if you want to abide by classic Dow Theory values, then you should probably be on the sideline in Treasury bills, awaiting the time when stocks once again sell at great valuations. Actually, as John Hussman has noted, you would have done just as well over the last seven years in riskless T-Bills as you would if you had all your money in the S&P 500. Actually, I suspect that the average investor has lost money in the stock market over the last seven years.
But life goes on, and the pressure is on the typical American family to make ends meet. How to do that? One time-honored method is to “make money in the stock market.” Yes, money can be made in the market, but it takes hard work, discipline, study, and patience. The average investor has none of these, which is one reason why he’s almost always a loser.
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