Many pundits speak about these turbulent times as a recession, depression or somewhere in between. I personally like to view the glass half full and pronounce this time in our economy's history as an epic correction. Times of unprecedented growth are almost assuredly followed by times of unprecedented 'shrinkage'...you know, markets are cyclical in nature, yada-yada-yada.
However, there are some interesting facts to consider besides traditional logic...
The ironic part is that the forces that helped bring this market to its knees may be the same that build it back up. Let me explain...
Back in July 2008 I questioned whether some of 'this' wasn't a bit contrived...I still do.
These two posts written in July 2008 speculated on possible alternative reasons Fannie and Freddie stock was plummeting...special note to the link citing the Financial Accounting Standards Board decision to favor a simpler accounting method for Qualified Special Purpose Entities that serviced mortgages into securities for the benefit of adjusting distressed borrowers ARM's. What? In a nut shell, at the end of the day, lenders wouldn't be able to bury losses from the public's eyes like they used to and their financial reports would suffer.
Coincidentally or not, on July 6, 2007 the SEC eliminated the 'Uptick Rule' which was implemented in 1938 to curb the type of concentrated short selling of stocks where speculators make money when the stock price drops.
New accounting methods for financial institutions will show increased losses on paper, naturally priming the pump for plummeting stock prices. Sans uptick rule, speculators smell bearish conditions and short stocks with fervor, driving companies and portfolios values into the ground.
By October 2008 blood was in the streets and investors start shorting financial institutions stocks in historical volume, acting as if they were...going out of business...? Fannie and Freddie are sequestered from the chaos.
Conventional money (401(k), Mutual Funds, regular people etc) got the hell out of the way and out of the market. Institutional investors ate each other for lunch. Everything went 'Pear Shaped'. Many stocks are today worth less than 50% of their value from 18 months ago.
The Government announces plans that they are going to Bailout 'the worthy' using a hodge-podge of methods, some useful others akin to little more than a circle-jerk, including buying preferred and common shares of these floundering financial (and related industry) behemoths that are 'too important to fail'.
The Return of 'Favorable' Accounting and Keeping The Bears on a Leash...
March 10th 2009...The Dow surged 6%+ on the following news (Courtesy Wall Street Journal)
Federal Reserve Chairman Ben Bernanke said in a speech it was important to address the valuation of illiquid assets. Banks want leeway in accounting for illiquid holdings, and investors were encouraged by Mr. Bernanke's statement, though he said that he wouldn't support the suspension of mark-to-market rules.
"Bernanke said the magic words -- that the Fed was considering looking at accounting standards," said Fred Dickson, market strategist at D.A. Davidson.
It would appear after looking at yesterdays market swing that the accounting standards that Mr Bernanke is alluding to will favor banks, shoring up value in investors eyes, hence the mini-rally. Were his words transcribed as 'We'll let you get back to some creative accounting soon'? It looks that way.
Barney Frank also stated the SEC may reinstate the 'uptick rule' as early as April, which has to re-establish overall market confidence by keeping the Bears on a bit of a leash, mitigating the extreme volatility.
Is it That Crudely Simple?
Was this all contrived to flush out all of the 'toxic' securities faster rather the wade in the muck for years? Where the floodgates purposely opened only to close them back up when the time was right?
I'm often asked when I think the real estate and mortgage market will bottom out. My answer usually coincided with the end of the 2-5 year period after NINJA (No Income/Asset/Job) loans were banished from the marketplace...around September 2007...so September 2009 is when support could naturally start to manifest.
There are now a myriad of artificial factors suggesting this 'time to bottom' could be 'moved up'. Coupled with the news yesterday, it very well could be sooner (end of '09) rather than later (end of '12).
A real sign that the markets are back on track would be when lenders will get back to sensible underwriting standards. From 2002 to 2007 mortgage underwriting was as fast and loose as a brothel in Amsterdam. 2008-current, you can't pull a pin out of a lenders ass with a John Deere tractor they're so tight. There is a middle ground, which is a topic for another post...
I'm not here to call the beginning of the end to these crazy economic times, there is still a looong way to go with many details to be worked out and ups/downs in front of us...I just can't help but wonder aloud if aspects of this 'economic meltdown' weren't contrived to push the crap out of the system quicker, knowing full well there would be (justified? acceptable??) collateral damage...It sounds ridiculous to say, yet resonates as plausible to the (my) mind...