We had a great conversation in our second hour today with Vanguard founder John Bogle and economist Jared Bernstein. Here’s an ear-catching exchange, right off the top, between Tom and Bogle.
TOM ASHBROOK: Where are we in this crisis?
JOHN BOGLE: Well, there are two different elements that are involved here. One is where are we in the stock market, which is what everybody seems to be focused on at the moment, and which has taken about a 40-percent header, one of the larger declines of the, uh –
ASHBROOK: history –
BOGLE: — in history. I was actually going to limit it a little bit to say of the ten bear markets that I’ve been through personally, experienced, during my career. But two of them did get to 50 percent, so we’re not at the worst one yet.
And the other is what happens to the economy. And it’s the second one that is far more important than the first. Because the stock market is a very speculative machine going on there, and basically you should look at the stock market, I think, as speculators trading with other speculators. I often describe its daily movements as a tale told by an idiot, full of sound and fury, signifying nothing.
ASHBROOK: Except our retirement accounts and all our hopes and dreams, that’s all!
BOGLE: But that has very little if anything to do with the daily moves of the stock market. In the long run, the stock market is going to give you the same returns that business earns. A simple truism. And in that sense, with all these jumps in the market, as I said in my previous book, “Little Book of Common Sense Investing,” the stock market is a giant distraction to the business of investing.
But to move from the stock market … to the economy, we’re obviously going into some tough times. I said for a long while we’re in a recession. That seems to be the consensus now. The measures are kind of peculiar for a formal recession, and not worth paying much attention to, but the bottom of the recession that we’re now in could be, I’d say, somewhere between one to two years away.
ASHBROOK: The bottom a year or two away, never mind the recovery?
BOGLE: That’s when the recovery would begin.
You can listen to the whole show here.
Yes, I caught that too. I thought what he said was both credible and incredible at the same time.
Posted by Richard, on October 15th, 2008 at 6:57 pm EDTI agree with Bogle that we’re a long way from the bottom.
House prices are STILL way too high, for one thing. Also, we’re about to see a meltdown in credit cards similar to what we just saw in mortgages. If you think there are a lot of subprime mortgage borrowers, wait till you see who they “qualified” for credit cards! Basically you need a pulse to get a credit card, and probably not even that if you have a co-signer who has a pulse. And while, granted, credit card balances are less than mortgage balances, there are a lot more OF them, and no collateral house to back them up.
Also this recession is worldwide, unlike most previous ones, so there won’t be any bright spots to carry us along while we straighten out our own mess.
The deepest part of the Great Depression was in 1933-1934, even though the stock market crashed in 1929. And we didn’t really exit the Depression until maybe 1939. This could be a long grind.
Posted by Peter Nelson, on October 16th, 2008 at 4:36 pm EDTThe stock market lost $8-trillion in the last 16-months; $4-trillion of it was lost within the last 30-days. Panic selling caused some of it along with the market adjusting to a new economic reality.
Individuals purchase stocks for one reason; in anticipation that the price will rise with the result that this will increase the net worth of the investor owning the stock of the company. Stocks fundamentally rise or fall as the investors’ expectations of the profitability of the company rises or falls.
It is true that much of the decline in the stock market results from a “selling panic” caused by the many bank failures and the ineffectiveness of the federal government to solve the credit shortage. Eventually the investing public will understand that life will pretty much go on a usual as the weak banks fail and as the credit crisis indeed is resolved.
However, much of the market decline is a result of investors adjusting their expectations of the future income of the companies that they hold in their stock portfolios. With expected returns from investments lowered, it means that “values” of stock portfolios will also fall. A lower expectation of earnings is the harsh reality we are facing; it is not panic driven.
The new reality is that the average household lost trillions of dollars by the value of their homes falling precipitously and now the decline in the stock market. This then results in a significant drop in demand for the goods and services offered by companies that investors have purchased. These companies will earn less and therefore the value of their shares will decline.
The issue for bargain hunters is to determine what portion of the sell-off is due to panic and how much is due to fundamentals.
http://banicki.biz
Posted by steve Banicki, on October 17th, 2008 at 10:56 am EDT. . .
The issue for bargain hunters is to determine what portion of the sell-off is due to panic and how much is due to fundamentals.
You already posted this to another thread. Cross-posting is frowned-upon.
Anyway, the answer to your last comment is unknowable. Reasonable positions can be taken on both sides of that argument, just as reasonable positions can be taken on whether we’re heading into a low-inflation or high inflation environment. Prominent, respected economists have lined up on both sides of both questions.
My personal guess is that we’re heading into a long, deep, multi-year recession, but I’m not convinced it will be a 1930’s-style depression, although that cannot be ruled out.
I’m expecting inflation to initially be negligible but then to climb rapidly as the government tries to inflate its way out of the stubborn recession after it becomes clear it won’t lift on its own after a few quarters. Expect years of “stagflation”.
Baby-boomers who bought into the GOP’s snake-oil that we can privatize our retirements will find that they won’t have enough to retire on and will stay in the job market competing for scarce jobs, producing high unemployment and low wages.
Posted by Peter Nelson, on October 17th, 2008 at 1:53 pm EDT