82 year old Alan Greenspan says this is a once in a century event. Could the current credit crisis be as bad as the Great Depression?
Last week I said this was “one of the most difficult stock markets I've experienced in my 20 years of investing.”
I was clearly wrong.
It is definitely the most difficult stock market I’ve experienced in my 20 years of investing.
All of a sudden, this week the stock market just got a whole lot tougher. And it’s not just the stock market you’ve got to worry about…
- What about the financial health of your broker?
- What about the financial health of your bank?
- What effect are these plummeting stock markets having on your pension? Has it affected your retirement date? Has it affected your living standards in retirement?
- House prices continue to fall, whilst interest rates and mortgages remain steadfastly high. People who bought in the past 12 months will likely be sitting on negative equity.
- What about your job? Is that secure? You may already be out of work. What are your prospects for future employment? Will you have to take a pay cut? City workers will obviously have to forget all about 6 and 7 figure bonuses.
- If you do suddenly become unemployed, will you be able to pay the mortgage? For how long? What about private education for the kids?
A Once In A Century Event
I don’t mean to alarm people, but when you hear people like Former US Federal Reserve Chairman Alan Greenspan say “This is a once in a half century, probably once in a century type of event. We shouldn't try to protect every single institution. The ordinary cost of financial change has winners and losers.” you know things must be bad.
Alan Greenspan is 82 years old. He’s seen the 1973-74 bear market, where the US Dow Jones Industrial Average lost 45% in around 2 years. To put that into perspective, if the FTSE 100 were to lose 45% from its recent peak of 6730 in October last year, we’d be looking at the FTSE 100 bottoming at 3700, still another 30% down from today’s levels.
Greenspan has also seen the collapse of junk bond trader Drexel Burnham Lambert in 1990. He’s seen the Asian and Russian financial crises of 1997-98. He’s seen the collapse of hedge fund Long Term Capital Management in 1998. He’s seen the September 11th 2001 terrorist attacks on the US and the dot com bust of 2000-2003.
Similar To The Great Depression?
Being born in 1926, Greenspan grew up during the Great Depression of 1929 to the late 1930s. That was a once in a century event. Could the current crisis be as bad as the Great Depression?
When you read words like those below on the Great Depression page of Wikipedia, there are some very scary parallels…
“American consumers and businesses relied on cheap credit…This fuelled strong short-term growth but created consumer and commercial debt.”
“Businesses began to fail as construction work and factory orders plunged…Massive layoffs occurred.”
“Banks which had financed this debt began to fail as debtors defaulted on debt…Bank failures led to the loss of billions of dollars in assets.”
“Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated.”
Who’s Next?
As I said, I don't want to scare you. And in spite of the similarities with 1929, I’m confident this is not going to be akin to the Great Depression. I’m confident most financial institutions will survive and prosper in the years ahead. I’m confident the stock market will recover and be higher than it is today, in the years ahead.
What I don’t know, like just about everyone else, is…
- When will this market bottom?
- At what level will this market bottom?
- What nasties are be lurking in the balance sheets of just about every financial institution?
- Who is next to fail?
What Next?
So what should you do now? Only you can answer that question.
As for me, I’ve been steadily selling some of my riskier smaller company shares. Obviously I should never have bought them in the first place, but hindsight is a wonderful thing.
I’m maintaining a healthy cash balance. But I’m not selling my holdings in quality companies. Sure I’d have been better selling everything a few months ago, and I might even be better off in a couple of months' time if I sold everything today, even at these depressed prices. But I’m willing to hang on in there, believing better times will be ahead.
I don’t need the money I’ve invested in the stock market today. I won’t need it in 5 and 10 years' time. That is one of the keys to investing, one of the original tenets of The Motley Fool from when we first launched here in the UK back in 1997 – invest with a long-term perspective and invest with money you don’t need to touch for 5, 10, 20 years or more.
Things will get better. I just don’t know when.
More: Letting Lehman Collapse Was Right Move | Five Ways To Beat The Credit Crunch
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