Timeline for the 2010s
For the wordly investor, the main event of 2011 so far has been the crash of the stock market in the U.S. and elsewhere, along with the bedlam in kindred fields such as commodities and currencies. As is often the case, the mayhem caused by the actors – be they part-time amateurs or full-time professionals – was for the most part a premature and avoidable ordeal for the entire community.
The smashup of the markets was prompted by the specter of a full-blown recession in the global economy in the near future. One reason for the jitters stemmed from the fitful progress of the industrial nations such as the United States, Britain and Japan. Another factor lay in the brouhaha over the debt crisis in Europe, along with widespread fears of a breakup of the euro plus the collapse of the regional economy.
For a number of years, the politicians in the developed world went out of their way to prop up the distortions in the marketplace that emerged during the run-up to the financial crisis of 2008. Instead of prolonging the malady, the politicos should have allowed the economy to heal itself. Better yet, public policy could have helped to undo the damage throughout the entire meshwork of production and distribution. Thanks to the counterproductive moves of the pols, however, the economy was doomed to struggle and flounder.
On a positive note, the crash of the stock market this year popped up in sync with the long-range schedule of meltdowns. As a result, the sequence of bombshells appears to be back on track despite the partial derailing linked to financial crisis of 2008. As things stand, the next crackup of the bourse is likely to occur around 2017 in line with the running sequence of flaps in the modern era.
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According to a widespread custom in financial circles, a
crash of the stock market refers to a breakdown in price of 15% or more in short order. The cutdown could occur within the span of a single day, or stretch out for more than a year.
By this criterion, the equity market in the U.S. has had a long-running habit of crashing a couple of times per decade. The nasty pattern has prevailed for generations on end.
From the vantage point of the late 1990s, we expected the first crash of the new millennium to occur around 2001. Moreover, the subsequent bombshell would show up sometime around 2007, followed by 2011.
As things turned out, the stock market has for the most part kept to the foregoing timetable. A case in point involved an upsurge of Internet ventures during the second half of the 1990s, followed by the burst of the bubble at the turn of the century.
Boom and Bust of Internet Stocks
The hoopla over online commerce led to a massive surge of the Nasdaq market that abounded with companies dabbling in digital technology. The bourse reached a peak in spring 2000 then crumbled in fits and starts over the next couple of years. Amid the tumult, the year 2001 straddled the middle ground during the drawn-out tumble from the summit to the bottom of the market.
The next spectacle in the marketplace built up in tandem with a frenzy in the housing sector. The motive force behind the ramp-up was a prolonged spell of loose money in the financial forum and the real economy.
In the wake of the Internet bust, the central banks of the industrial nations pumped a sea of money into the financial system. The purpose of the inundation was to lubricate the wheels of commerce and buoy the chains of production. In their zeal to stimulate the economy, the central bankers kept the basic rate of interest at abnormally low levels for half a decade.
On the upside, the global economy did regain its footing to some degree. On the downside, though, the deluge of money spewed out by the central banks led to a bubble of epic scale in the housing market.
Tizzy in Real Estate
After the bust of the Internet craze, the stock market struggled mightily over the next few years. As things turned out, the U.S. bourse touched a peak in October 2007 then ran out of steam.
Even so, the equity market did not break down all at once. The same was true of real estate.
On one hand, the housing sector began to falter in the United States in 2007. In March that year, the average price of new homes reached a zenith then drifted downward (Census, 2011b).
On the other hand, the hullabaloo was still in full swing in many other locales ranging from Europe and North Africa to Asia and South America. In Britain, for instance, the housing mania lasted until the first quarter of 2008 (Nationwide, 2011).
During the upswell of the housing bubble, a horde of punters had gobbled up gobs of financial assets built atop risky mortgages. The binge of bets on dicey rigs was led by an army of wildcats in the form of hedge funds. The punters of this stripe included boutique outfits standing on their own as well as cloistered groups lodged within larger concerns such as commercial banks.
Due to the complexity of the new-fangled assets in the financial ring, nobody could grasp the full extent of the dangers posed by the gimmicks. To make matters worse, the plungers took up humongous amounts of leverage, up to a hundred times or more of the sum put up as collateral. The lofty levels of gearing ensured that the principal would be wiped out at once when the house of cards came tumbling down, as it was bound to do sooner or later (Kim, 2011).
As the frenzy in real estate started to fizzle out in 2007, the windfall bagged by the speculators was bound to do likewise. Worse yet, the spree of profits scooped up on the upswing would duly turn into a spew of losses on the downstroke.
The pullback of mortgage-based assets turned into a rout in 2008, giving rise to the biggest blowup of the stock market since 1929. Moreover, the smashup on the bourse was followed by the worst recession in the global economy since the Second World War. In these ways, the bust-up of 2008 was a nightmare to remember.
Hazy Horizon
Looking to the future, the bedlam in the marketplace brought on a heap of uncertainty in sketching out the trail over the years to come. To begin with, the housing frenzy and its aftershock had knocked out the banking system and bashed in the real economy at large.
For a second thing, the blubber in the housing sector and the credit market had disrupted the price signals in the marketplace. As a result, the chains of production and distribution were bent grossly out of shape.
So severe was the mangling that the warpage was unlikely to unwind in earnest anytime soon. In that case, the economy would have to limp along for many years even after it had managed to crawl out of an outright recession.
To add to the distress, there was worse news still. In their boundless wisdom, the fearless leaders of the West decided to pander to the lobbyists from the banking industry. The starkest examples popped up in America and Europe. In these blighted locales, the politicans gave birth to a litter of deformed schemes meant to support the mauled banks and save the bludgeoned outfits from their self-inflicted wounds.
For this purpose, the first act of the politicos was to scrounge up trillions of dollars in order to bail out the pulped lenders. A second, and related, move was to take active measures to shore up the housing market.
The refusal to let the crushed banks die a natural death came to impose a whopping burden on the larger economy. By propping up the bettors in the banking industry and the housing sector, the pliant regimes consigned the entire economy to a slow and stunted recovery.
Gore Galore
The financial fiasco and the Great Recession in its wake had nuked millions of jobs and nixed trillions of dollars of wealth in each of the major countries round the world. Thanks to the woozy schemes of the government designed to sustain the rot, the population as a whole faced a future chock-full of hardship and frustration.
The flogging suffered by the body politic was spotlighted by the upsurge of unemployment as well poverty. As an example, the jobless rate in the U.S. soared from 4.4% in May 2007 to 10.1% by October 2009.
On a positive note, the recession came to end by the summer of 2009. On the other hand, the plight of the labor force scarcely improved for years to come. To bring up an example, the unemployment rate was still hovering at 9.0% in October 2011 (Labor, 2011).
The devastation was worse in terms of the millions of souls thrown into abject poverty. According to official figures, 15.1% of Americans were living in poverty in 2010. The proportion, which had risen from 14.3% the previous year, was the third consecutive rise in the annual survey (Census, 2011a).
In the meantime, the economy was saddled by a load of bloated banks that had scant interest in playing their proper role in the economy. In delving into this issue, it helps to keep in mind that the fundamental role of a commercial bank is to take in cash from thrify folks and lend out the dough to needy but creditworthy users.
Brazen Banks
In the world of commerce, certain parties need to borrow money as a matter of course while others do not. To start with a counterexample, large companies as a group drum up enough profits from their operations to fund their ongoing activities as well as finance brand-new ventures.
Moreover, a big and established firm has the wherewithal to obtain capital directly from the investing public by issuing stocks or selling bonds. For these reasons, giant concerns are rarely forced to borrow money from any type of bank.
By contrast, small and midsize firms are often obliged to set up a line of credit in order to finance routine operations as well as fund projects for expansion. A case in point is the cash required to obtain a letter of credit whose function is to back up a purchase from a foreign vendor.
Despite their mission, though, the recipients of the public bailouts had little or no interest in fulfilling their charter. Instead, the bankers found other uses for the money much better to their liking.
A fine example lay in the handout of billions of dollars to pay princely bonuses to favored employees. Another common ploy of the hustlers was to buy up weaker rivals in the marketplace, thus reducing the scope of competition within the banking industry. As for the rest of the moola, the banksters chose to hoard the cash wangled out of the public treasury.
To top it off, the cash infusion from the government enabled the banks to hold onto large stockpiles of properties rather than sell them off in order to whittle down their holdings and pay off their bills. If the market were left alone to do its job, the average price of homes would slim down to moderate levels following the massive buildup during the property bubble.
On the other hand, the tight grip on properties held by the banks acted as an artificial plug that kept real estate from losing its froth. As a result, the housing market could not cast off the blubber as a prelude to regaining its health.
Thanks to the chokes on real estate, myriads of homes stood empty for want of buyers and renters. At the same time, millions of souls lived in squalor because the newly destitute could not afford to secure decent quarters for their families.
As an example, 15 million housing units stood vacant in the U.S. in 2010. The figure was 44% higher than the vacancy rate from 2000 (Gopal, 2011).
Granted, some of these properties would require large dollops of cash if they were to be refurbished and transformed into swanky pads. On the other hand, a lot of folks in a state of privation do not insist on the trappings of luxury. Rather, the down-at-heel would be happy to live in presentable surroundings furnished with basic amenities such as clean water and dependable heating.
Given the mass of artificial props in real estate, however, the property market continued to be way overpriced in relation to the average level of income. In this and other ways, the housing sector was prevented by the government from shaking off the deadweight and regaining its mojo.
At first blush, the ham-handed program of support for the housing sector might seem like a blessing for the folks who already owned their homes. Granted, the rigidity in the marketplace might appear to be beneficial for the owners over the near term.
Yet the impact over the longer range was the direct opposite. The reason stems from the fact that the housing market can only flounder in the midst of an ailing economy.
On the other hand, the cost of living for the population as a whole is destined to climb higher for generations to come. The main driver lies in the groundswell of demand for natural resources from the emerging nations.
More precisely, the price of food, fuel and other commodities in the global marketplace is fated to clamber upward. In that case, the ogre of inflation will rule the roost even if a maimed economy ends up going nowhere.
What happens if the price of a property stays fixed in nominal terms in an epoch in which the cost of living rises by a handful of percent each year on average? The real value of the dwelling of course shrivels up due to the inexorable press of inflation.
From a larger stance, the property sector is a cornerstone of the economy at large. Given the fetters on real estate, though, the housing market has turned out to be a brake rather than an engine of growth.
Forecasting the Next Crash
Thanks in large part to the ill-formed schemes of public officials, the global economy was slated to flounder and stagger well into the 2010s. Meanwhile, the financial forum would also continue to wallow in the doldrums. For these reasons, there was scant room for a bubble of any sort to crop up in the marketplace.
Given this backdrop, it was unclear to us during the recession of 2009 just when the next bombshell would pop up in the stock market. According to the long-range timeline, the bourse was destined to break down in 2011.
On the other hand, neither the real economy nor the financial bazaar would have recovered sufficiently within a couple of years to justify a full-scale blowout. Rather, an additional stretch of a few years would be required for the bourse to claw back a hefty chunk of the losses suffered during the financial crisis. After recouping a goodly amount, the market would then be ready for another sideswipe and knockdown.
Despite our reservations, though, the subsequent crash of the stock market did show up right on time according to the long-range schedule. In 2011, the feeble state of the economy in the mature nations cast a pall over investors in America and elsewhere. As the grody numbers on jobless rates and economic growth trickled out of government agencies, the investing public was seized by fears of a fresh lapse into a full-blown recession.
In this edgy climate, the U.S. bourse hit a ceiling in the summer of 2011, then broke down shortly afterward. As a barometer of the stock market, the S&P 500 index – the yardstick of choice among professional investors – touched a high of 1,370.58 points in the month of May.
Then the benchmark thrashed around for a couple of months before plunging to 1,074.77 by October. From peak to trough, the index had flopped by a thumping 21.6%.
As usual, though, the stock market was shoved into the abyss by the madding crowd for no good reason. Apparently, the mob had not received the memo on mobility: a lame economy is not the same thing as a stalled one.
In line with earlier remarks, the chains of production and distribution had been twisted grossly out of shape by the monstrous geyser in the housing market and mortgage-based securities. Due to the mangling, the economy could only flail around and crawl along in fits and starts.
To compound the problem, the politicians had chosen to stretch out the misery by propping up a heap of dysfunctional banks and overpriced properties. The counterproductive moves of the government served to hamstring the natural process of healing and recovery throughout the economy.
In this cruddy environment, the economy was doomed to gnash and grind. Despite the stumpers, though, there was no reason why the chains of production and distribution should suddenly collapse en masse.
Even so, the lack of cause was not enough to keep the stock market from taking a nosedive. In any event, the first crash of the 2010s showed up right on time according to the longish timetable.
As a result, it appears that the sequence of blowups is back on track. In that case, the next bombshell is likely to crop up around 2017. Until then, the default forecast over the next few years calls for a spell of relative calm in the stock market.
Crackup without a Bubble
The crash of 2011 spotlights the fact that the stock market can blow up even in the absence of a newborn bubble. At that juncture, only a couple of patches in the marketplace were teeming with froth; namely, the portions that were prevented by the government from deflating properly after the previous puff-up.
In a host of countries round the globe, certain segments of the real and financial markets were still propped up by the numb hand of government. In particular, the blubber continued to saddle large swaths of the housing sector. The same was true of the financial sector, especially in the form of the comatose firms within the banking industry.
Crush of Debt
The rampant malaise in the housing sector and banking sphere in far-flung countries was attended by another bugbear in Europe. Since the turn of the millennium, a gaggle of reckless banks had bought up mounds of bonds churned out by the Greek government. The mindless quest of juicy yields was the handiwork of a bunch of big names located in France, Germany and other rich countries.
After feasting on fizzy bonds for years on end, the time had now come for the guzzlers to pay for their bacchanal. Once again, though, the wily banksters were not averse to calling on the taxpayer to come to their rescue.
In order to save the clodhoppers from their self-caused wounds, the European Union saw fit to lend even more money to the insolvent debtor. The pretext was that the bond market in Greece had to be propped up in order to save the local government.
Otherwise a simple and forthright act – namely, an official default on the bonds – would lead to the end of the world. The argument, such as it was, involved a series of amazing leaps of logic.
Suppose that Greece were to acknowledge its spendthrift ways and admit the obvious: the mountain of cash it had borrowed and squandered was far too big to ever pay back to any meaningful extent. If the government confessed to something that was obvious to the investing public, then Greece would be forced to leave the currency union. The latter move would be the first step on the icy road toward the total disintegration of the euro. The breakup of the common currency would then be followed by the implosion of the regional economy, and thence the demolition of the global economy.
Scary stuff, wouldn’t you say? Or maybe not.
Sadly for the prophets of doom, the throng of international investors found it hard to swallow the barrel of hogwash. Instead of calming the investing public, the bald attempts to mask the truth and stick the taxpayers with the tab for the bailouts stirred up even more angst in the marketplace.
With increasing concern, investors round the world wondered what other hellions the pols were keeping under wraps. If the tricksters were so fond of fudging the truth about bogeys that were plain to see, what else were they plotting with wraiths that were hidden from view? And how much more havoc would the perpetrators seek to wreak upon the financial markets and the real economy?
Amid the bluster and the muddle, investors on both sides of the Atlantic feared for the worst. As a result, the markets of the West stumbled and crumpled, and prompted the rest of the world to follow suit.
As we noted above, the housing sector makes up a hefty chunk of the economy at large. By adopting a course of ham-fisted support for the property market, the politicos were in effect going out of their way to buttress the distortions in the complex webs of production and distribution.
For starters, the dippy moves included direct ploys to prop up prices in the housing sector. A case in point was a heap of public guarantees for private loans. To add to the mischief, the indirect schemes were led by a pile of crutches for crippled banks that had gone overboard during the housing bubble and now continued to hold onto scads of distressed properties.
By this stage, the price tags for the dwellings held by the lenders were of course somewhat lower than the ditzy levels reached at the height of the housing craze. Even so, the puffy prices were still way out of whack in relation to the average level of income throughout the population.
As we noted earlier, the financial crisis had thrown millions of people out of work and wiped out trillions of dollars of household wealth in every major country round the world. In that case, the natural level for the housing market at this stage would be even lower than the hefty price prior to the huge run-up.
The phalanx of crutches designed to shore up the bloated markets and zombie banks hampered the process of adjustment and recovery throughout the economy. As is often the case in a financial crunch, the knee-jerk reaction of the demagogues served to exacerbate the problem and prolong the torment rather than cure the illness.
To sum up, the banking industry is too important for the economy as a whole to be gummed up and knocked about by a bunch of cloddish firms. It’s high time for the government to turn its back on the marauders that have a habit of stomping on the efficiency and stability of the financial sector.
At a minimum, the policymakers should leave the bunglers alone so that they can die a natural and well-deserved death. Better yet, public policy should be directed toward the nurturance of leanness and sobriety in the financial arena, along with innovation and growth of the healthy kind. To this end, the government has to level the playing field to ensure that responsible firms and progressive ventures can flourish in the banking industry.
Cloudy Skies over the Real Economy
The investing public was not the only segment of the population that was flustered by the willful choking of the economy by the politicians, along with their nutty antics in response to the debt crisis in Europe. As time went by, even the stalwarts in the business community began to wring their hands over the prospects for the economy at large.
A case in point was a survey of 1,500 senior executives in the late autumn. Among the respondents, only 14% expected to see an improvement in business conditions over the next six months.
Another way to gauge the mood of the top brass was to consider the overall level of confidence; that is, the balance of pollees who expected the global economy to improve versus those who thought the conditions world worsen. According to this gauge, the net tally of positive views in May 2011 was plus 19%. Sadly, the same yardstick turned distinctly negative by July, then dropped to minus 39% by October.
By way of comparison, the same type of survey placed the net percentage of upbeat views at minus 37 points in September 2008 (
Economist, 2011). Based on the last two figures, the respondents in the latest poll were even glummer than the sample at the onset of the financial crisis.
A dire outlook can of course turn into a self-fulfilling prophesy. For instance, suppose that a large cohort of executives decide to batten down the hatches and hold off on outlays. An example in this vein is a moratorium on hiring new workers to replace oldsters who leave their jobs as part of the natural process of turnover in the labor market. If the purse strings are drawn tight across the board, then the economy is bound to shrivel up and keel over.
From the standpoint of the investor, however, the prospect of a modest recession had already been baked into the stock market. For this reason, even a pullback of modest scale in economic activity was unlikely to pummel the bourse much further.
To round up, the politicians of the developed world went out of their way to prop up the distortions in the marketplace that had cropped up during the run-up to the financial crisis of 2008. Instead of a clampdown meant to block the healing process, the politicos should have allowed the economy to cure itself.
Better yet, public policy could have sought to undo the warpage in the chains of production and distribution. Thanks to the counterproductive moves of the pols, however, the entire economy was sentenced to a long and grinding ordeal.
Groundswell of Unrest
On the downside, the voices of reform in the public sector have been far too few and feeble to face up to the challenges in a serious way. A dose of bitter pills would be required to heal the financial forum as well as the real economy in a timely fashion. As a group, though, the putative leaders were unable to muster the grit needed to mete out the medicine needed for the purpose.
Given this backdrop, the developed nations of the world are destined to stagger and struggle for many years to come. The quandary resembles the plight of Japan during the lost generation that began in the early 1990s and continues to this day.
The lack of willpower to revamp the system wholesale has condemned the nations of the West to a similar fate over the decades to come. On the other hand, though, it doesn’t have to be this way.
Luckily for the flailing nations stuck in the muck, large numbers of citizens have been unwilling to take the racket lying down. A plain example lies in the grass-roots campaign known as Occupy Wall Street, a movement which started off in New York in September.
A precursor to the movement was a rally by the incensed citizens of Malaysia, numbering around 20,000 participants, who poured into central Kuala Lumpur in July 2011. For the mass of the protesters, the purpose of the gathering was to overturn the electoral laws that conferred an unfair advantage to the ruling coalition within the country (Fernandez, 2011).
A couple of months onward, the protests in the U.S. against corporate handouts and financial inequity spread like wildfire throughout the nation and beyond its borders. By the middle of November, similar campaigns had sprung up round the world and taken root in 2,414 cities (Occupy, 2011).
Going forward, the key task of the firebrands in the popular campaign is to converge on a concrete set of measures for public policy. This might be achieved directly by the activists through their own efforts, or indirectly by inspiring others to stand up and be counted in other ways.
If the throng should succeed in pushing through a workable agenda, then the United States and other progressive nations can look forward to a brand-new era of reform and renewal, of innovation and upgrowth.
Streak of Hope
Another morsel of cheery news lies in the vitality of the emerging nations. Thanks to the vigor of the go-getters, the global economy as a whole will continue to press ahead and push higher.
The antics of public officials in the West have served to hamstring the financial sector and hobble the real economy. Moreover, the noxious schemes have rattled the investing public and outraged the hapless taxpayer.
In this light, the chief bungle lay in the policy of propping up a bunch of dysfunctional banks along with a slew of bloated properties. A second, and related, offense was to pay for the mischief by raiding the public treasury to the tune of trillions of dollars.
On a positive note, the witless schemes of the policymakers in the developed world have thus far managed to stymie only their own countries. Luckily, the baneful impact of the boondoggles on the spry regions of the planet has been muted thus far. With a bit of luck, the youthful nations of the world will continue to forge ahead despite the barrage of roadblocks and deadweights thrown up by the sometime leaders of the industrial nations against their own citizens.
The opportunities for growth in the emerging markets is a lifesaver for the global economy as well as the financial community. In this vibrant environment, the sage player can look to the emerging markets as the groundwork for a lusty program of investment – at least, until the next crash of the stock market in the U.S. along with knock-on effects throughout the world.
References
Census, Bureau of. “Income, Poverty and Health Insurance Coverage in the United States: 2010”. 2011a/9/13. http://www.census.gov/newsroom/releases/archives/income_wealth/cb11-157.html – tapped 2011/11/8.
Census, Bureau of. “Median and Average Sales Prices of New Homes Sold in United States: 2010”. http://www.census.gov/const/uspricemon.pdf – tapped 2011b/11/8.
Economist, The. “Global Business Barometer”. 2011/11/12, p. 109.
Fernandez, C. “Occupy Protests Spread to Malaysia”. 2011/10/15. http://blogs.wsj.com/dispatch/2011/10/15/occupy-protests-spread-to-malaysia – tapped 2011/11/14.
Gopal, P. “Meet Uncle Sam, Housing Contractor”.
Businessweek, 2011/11/14, pp. 55-56.
Kim, S. “Wildcats of Finance”. http://www.mintkit.com/Wildcats-of-Finance – tapped 2011/11/22.
Labor Statistics, Bureau of. “Labor Force Statistics from the Current Population Survey”. http://data.bls.gov/cgi-bin/surveymost – tapped 2011/11/8.
Nationwide Building Society. “UK House Prices Since 1952”. http://www.nationwide.co.uk/hpi/historical.htm – tapped 2011/11/9.
Occupy Together. Self-organizing group at Meetup.com. http://www.meetup.com/occupytogether – tapped 2011/11/14.
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