Tuesday, October 2, 2007

"It's different this time"

I was watching The Nightly Business Report last night when I heard the magic words: “It’s different this time.”

In 2000, I watched with wonder as tech stocks skyrocketed. Not just the stocks of good companies, but every company. It seemed like madness to me. What was the rationale for this stock price boom? “It’s different this time. The old valuation models don’t apply to these new economy stocks.” I never bought into that notion. Unfortunately, that made me too nervous to get in on the action. Fortunately I didn’t get in on the action. The result – it wasn’t really different that time, as evidenced by the market correction that followed shortly thereafter.

In 2005 I watched with wonder as the real estate market kept registering enormous gains quarter after quarter. “Shouldn’t I get in now before it’s too late?” “You can’t lose." "Prices have nowhere to go but up." "People will always need a place to live.” And so on. And when those who were warning of a bubble spoke, they were greeted with a chorus of “It’s different this time.” A growing population, strong employment from globalization, and a global savings glut resulting in low interest rates would support continued growth in housing with the possible exception of some immaterial softness. The homebuilders had learned from the last time and not over-invested in property. And so on. As it turns out, it’s not so different this time except that the decline is worse than last time because everyone thought it was different this time.

Last night the question was why is the stock market booming to new highs as the economic indicators point to a slow down at least, and possibly a recession? It’s different this time? The FED learned how to moderate economic cycles better? The global economy will sustain us because the weakening dollar will increase demand from overseas, and global growth is strong? The DOW 30 get 40% of their revenue from overseas? Maybe, but just in case I’m picking up some of my marbles and going home. Is this market timing, which almost always fails? Yes, and it’s no different this time.

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Anonymous said...

Like the weather, it's the same but different - more drastic swings. That we blame on global warming. Maybe we'll blame the US economy's up and downs on the global economy.

I am concerned for the US economy and the fall out effect on struggling middle class and poor.

What is different this time makes that potential fall out all that more difficult for many people.

* This time the consumer representing 70% of the economy, is much more heavily burdened with debt. Those that had equity have tapped out their equity. Those that thought they had equity are watching is dissolve.

* Inflation of non discretionary expenses; Fuel, taxes, food, insurance, education and health care is much greater. And at rates significantly greater than income increases.

* Global competition for resources is much keener, which will increase costs and prices.

Ok so the Dow 30 gets 40% of their revenue overseas. What about the other 60%. It's profits that enable companies to increase wages. It's future earnings that should fuel investment, not fund managers dumping money into overvalued under performing companies because there is no other place to put it creating a false valuation run-up. Companies face the same challanges as consumers. If US companies struggle, so will consumers - and the market up's and downs will be as drastic as the weather, which is blamed on global warming, might as well blame that on global economy.


Michael Nugent said...

The market will always test you, and it seems like my expectations are being tested by the current run up in stocks against the likely recession.
I don't get it at all, and I agree with you that it's not something different this time, just more if the same unrealistic expectations of the money runners.

everybody loves Ben

Palermo's Blog said...

For some interesting commentary on the current banking situation check out this blog post:

Anonymous said...

Looks like someone was reading this - check out this article from David Wessel at The WSJ Online Edition: