Is it Different This Time?

Jonathan Burton for MarketWatch recently posted a feature about the 4 most dangerous words in the vernacular of investing. Specifically... "This time it's different."

As Burton explains it, the late 90s/early 2000s tech bubble is a prime example. Stock market valuations no longer mattered... it was a new era of dot-com excitement and endless possibility. Of course, it wasn't a new era and the stock market suffered one of the worst bears in its history from 2000-2002.

Real estate's collapse is another. "This time it's different" led to the perfect storm of imprudent lending standards, get-rich quick home flipping and faulty declarations of ever-increasing demand amid limited  supply. It wasn't a new era for real estate either... as the 2007-2009 real estate crash continues.

Some say that energy and commodities may be the next to falter... if they haven't already; that is, you've got alarmist projections about demand for all commodities far outstripping supply, crippling consuming nations and causing greater geopolitical tensions. It's not that commodities haven't been hot, but "this time it's different" has led some to over-allocate to energy/resources at a time when demand could possibly slow.

Yet "this time it's different" thinking can be harmful in a different sense. Just as extreme optimism leads to an inability to see impending doom, extreme pessimism is going to keep investors from making wise purchasing decisions for long-term wealth.

If you read the mainstream media with any degree of regularity, you can't help but feat that the U.S. economy is lost forever. Our dollar is on its way to being worthless. Our system of credit will never operate smoothly again. And Wall Street will be mired in a bearish grip for many years to come.

Why? Because this time it's different. Recovery for the investment markets? Impossible... because this time it's different.

Hogwash!

History shows that the mid-point of a recession typically marks a stock market bottom. In other words, new bull markets begin when things couldn't possibly seem any worse. Just as they did in October 2002... or March 2003... depending on who's calculating.

The 2nd half of a recession and the 1st half of an expansion, then, collectively represent "the opportunity." And there's nothing different about that historical note since 1802. 

It follows that the challenge facing investors today is to feel reasonably confident that we're halfway through a broad market downturn. (As an aside, if you believe that we are halfway through the credit crisis, similar logic would suggest that financials, albeit very volatile, present an attractive opportunity for incremental purchasing.)

Here's how I am hoping to identify the recession's mid-point. In the initial stages of economic contraction, smaller businesses struggle more than larger businesses. This would be reflected in small business share prices of ETFs like the iShares MicroCap Fund (IWC).

Indeed, this is precisely the case. Since the October 2007 highs, IWC has trailed the large companies in the S&P 500 SPDR Trust (SPY). However, when these paths intersect for the first time since October 9, 2007, I would be inclined to see that as an initial sign that economic contraction is half-way through. And for glass-half full investors, that time would effectively mark a potential incremental purchasing opportunity into early business cycle leaders like tech and financials.

The chart above shows that we haven't quite hit the mid-point of our slow growth/stagflating economy. That said, this is a barometer that I will be keeping my eyes on. After all, this time it's not any different.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Buprestid:]

Sure "this time is different" is wrong 9 out of 10 times or 99 out of 100 times. But sometimes things are different. Large economies can go into decline forever and stock markets don't have to recover.

I hate statisticians in stocks. This is how I would prefer statistics to be done. Prove first fundamentally that something should behave as a statistic. For example rolling a dice mathematically can be shown to have a uniform distribution.

This is how you treat statistics. See a few "rolls" from the past behavior and then declare it to be some statistic and apply it to the to the current period. No proof on why fundamentally it should behave as say a uniform distribution other then incomplete set of variables.

2008 Aug 06 05:07 PM

[ValueHunter:]

I wonder if in the waning years of the Roman Empire anyone said "this time it's different".

2008 Aug 06 05:27 PM

[you_can_cal...:]

Have you ever taken a statistics class? If you had, then you would know:

1) not all distributions are uniform, and

2) what a statistic is.

How does one prove that something "should behave as a statistic?" What does that even mean???

2008 Aug 06 05:29 PM

[Buprestid:]

I am not talking about just a uniform distribution. Of course it can be any distribution.

I am explaining an example of something that can be characterized as a distribution. Then you can use all the charts and statistical analysis to say what will happen in the long run.

I suggest you take a class if you don't know if something can behave or described by a statistic.

2008 Aug 06 05:37 PM

[Mosh:]

YES! This is the bottom. Buy everything that was beaten so much in the last year or so. You'll make 50% guarantee within 2 years...

The markets are not gloomy here. They're just being realistic about how bad things really are. Maybe all of the "optimists" who have been calling bottoms in the last 12 months will finally wake up.

The biggest bubble in U.S. history just burst. History in the making...

2008 Aug 06 07:24 PM

[jse17:]

"I suggest you take a class if you don't know if something can behave or described by a statistic."

I have a suggestion; why not fill the pages of Alpha with knowledge by publishing a proprietary, peer reviewable document! Share your “expertise and resources” and empower we “muddled masses!”

2008 Aug 06 07:27 PM

[Buprestid:]

This is hardly a peer reviewed site. Anyway I asked for it by making the comment. I will spend sometime to make it an article so you can "review" it.

2008 Aug 06 07:47 PM

[Alex Filonov:]

It's always different. And always the same. Just a question of comparison base... Is it the same as 1970s now? Or 1930s?

2008 Aug 06 07:50 PM

[debtacid:]

This time its different?
Yes, this time, the fiat dollar won’t collapse like every other fiat currency before it.
This time, government meddling will actually help.
This time the Fed will inflate us back to a stable financial system. This time Wall street will flush out the corruption.
And If you believe any of that, I have a million dollar house to sell you in California because “After all, this time it's not any different.”

2008 Aug 06 08:13 PM

[bearfund:]

This time it's not different. debtacid has it dead to rights. This is same as every other rotten empire that debased its money, transferred unlimited power to its executive, engaged in frivolous and unnecessary wars, and allowed corruption and incompetence to pervade every sector and level of society while too preoccupied with spending ever more on bread and circuses. Like every other such rotten empire, this one is collapsing. Nothing different. Same old story.

2008 Aug 06 09:53 PM

[gabe borens...:]

Here we go again.WE are at the midpoint of what recession?All we have is past deceleration in the process of stabilizing due to the help from the FED,the Administration and the Congress.Yes ,cyclically this economy is different because recession was deflected by several key institutions mentioned above.
The market is volatile but in the middle of consolidating.The key difference is that this time around because of the major mistakes by the ECB,Europe is heading for historically relevant contraction.This will cause a massive capital inflows into dollar assets including the equities.We are heading for a major rebound -period and no there is no recession. I am sure CNBC will pick up this theme as well.

2008 Aug 06 10:12 PM

[otbricki:]

Do you know how to tell it isn't different? The fact that people can write articles like this. If it really were different it would be obvious.

2008 Aug 06 11:13 PM

[Jason Rines...:]

Gabe, I admire a lot of your work but please forgive me for taking up account of your recent statements. I don't believe you are considering 25+ years of a total collapse of an economic theory at play.

I hate doom and gloom, because things always get better someday so better to get busy working on it today to shorten the pain.

But are you really that confident in Fed, Administration and Congress? Fed bailed out liars and thieves at iBanks while an entire population twists in the wind. Bear bailout necessary in my opinion but extending the window into 2009? Treasury & Fed granted superman powers with taxpayer assuming direct and indirect losses? 9% approval rating for Congress? You do know it is polled at 13% for Democrats themselves? Dillusions of global grandier from Bush I, Clinton and Bush 2, ummm Doha? 9 T national debt, Boomers retiring but no funds or adequate plan to cover Medicaid? 45% of all Americans on some form of government subsidy? GDP and Labor distortions, manipulations, fabrications and ommissions?

This is evidence the whole house of cards will now come down at a point and we're just delaying it. Can we get on with it? Nope, must remove scoundrels from Washington first and that is not going to be an overnight mission. I must assume your mention 'help' of the political powers that be is sarcasm.

2008 Aug 06 11:14 PM

[otbricki:]

The US has had huge national debt and massive involvement in foreign wars in the past. It has also had banking crises. How is now any different?

2008 Aug 06 11:32 PM

[Jason Rines...:]

It's not Otbricki, it's actual very similar to the events leading up to the Great Depression. Socialism with an attempted fix at Socialism. Thank Emporer Hirohito for ending it. Shall we repeat in the age of nuclear weapons?

2008 Aug 07 12:06 AM

[gabe borens...:]

I am confident that cyclically I have seen the most dynamic cooperation amongst the FED ,the Congress and the Administration -and the timing was perfect.
This cooperation had deflected an economic Armageddon which could have been inflicted on the U.S by the various mega speculative sources.
I have issued a warning about the current debacle as early as June of 2005 (bloomberg -Mark Gilbert interview).Certainly I have discussed pending subprime debacle on September 18 ,2007 (Bloomberg TV -Brian Sullivan)-I do not recall much analytical support from the others.
Cyclically I have never witnessed such a massive speculation in the process of derailing the greatest bastion of stability -the U.S.A.
Our implosion would have derailed global economies as well.
Then again ,I have never seen so much wisdom and cooperation between political and the monetary institutions responding in cooperative and dynamic
actions ,catching speculators by surprise and injecting unprecedented basis for stability and mega economic/ market rebound.
It is the ECB's arrogance/ignorance,th... will lead to European economic demise in the period ahead fuelling our market/economic rebound via unprecedented demand for the U.S asset.
I am quite sure that I am right about this.
I recognize that volatility will continue.
We can express our gratitude to Mr.Greenspan for the unprecedented turmoil.

2008 Aug 07 12:09 AM

[Alan von Al...:]

Hmm... well, one of us is correct. Double long gold, 80% cash.

2008 Aug 07 12:53 AM

[shure46:]

as taxpayers we should start demanding our money be spent wisely , and quit voting "yes" to build football and hockey stadiums for mega billionaires ie Jerry Jones Dallas Cowboys ........the dumbass taxpayers handed him over 300 million dollars ...what idiots ......I live near Dallas , and I have watched the Dallas taxpayers get screwed so many times ....and the city is always short funded , but they spend billions on BS crap that just lines more pockets with cash while we have to ride bicycles to save gas ........people are soooooooo damn stupid ....when are we going to wake up and just say NO to things we don't need .......governments should provide basic services ...THAT'S what taxes are for ......people wake up , if it isn't a necessity , then don't vote yes for it ......we need to use our funds for necessities ...roads , schools , hospitals , emergency relief , safety , basic city services , energy , water (this energy crisis is nothing compared to a water crisis ) , etc etc ......and this goes for all levels of government ...STOP BLOWING MONEY ON CRAP ....build some damn nuclear power plants , not football stadiums

2008 Aug 07 01:25 AM

[Kunst:]

The shenanigans of Mr. Bernanke, Paulson, etc can postpone the day of reckoning but not avoid it. "You can run, but you can't hide." It's also a pretty good rule of thumb that the longer you put off a problem, the worse it gets.

2008 Aug 07 01:41 AM

[mr clark:]

no, its the same this time... leave taxpayers on the hook for TRILLIONS and watch the country crumble from its own ineptitude...

2008 Aug 07 02:11 AM

[truthinvesting:]

Enjoyed this article .My free website has articles that discuss this

2008 Aug 07 09:06 AM

[Rage18:]

I am a Ph.D. statistician. The data here does not support the conclusion. I do rotate my index weights based on a similar statistic. I am making money using the similar statistic and options. The main difference this time is everyone is forgetting value investing. Real estate is an asset just like every other asset. Currently, buying a condo in Florida and renting it out is currently a cash flow negative adventure based on simple real estate investing assumptions.

In my opinion we will hit bottom when value investors start purchasing real estate for rental in Florida. We are much closer today than last year but real estate is still over priced using a FCF model. I track a proprietary index for several parts of the country to determine when real estate is fairly priced. Once rental real estate is fairly price the healing will start.

2008 Aug 07 10:29 AM

[CLH:]

Burton---Beautifully written and right on target but by the looks of the comments few listen. "This time its different" will fool people until the end of time.

People WANT to believe its different and cant be stopped. Thats why its so easy to buy stocks and houses at the bottom.

2008 Aug 07 11:15 AM

[ValueInvestor:]

The best quote on the "This Time its Different" idea is:

"The investment desert is littered with the bones of those who bet on new paradigms" - Jeremy Grantham

2008 Aug 07 11:51 AM

[Sr. Pessimist:]

I have a question. Has this ever happened before? The stock market was supposed to correct harder than it did. Instead, Bernanke led the Fed to employ a safeguard and cheapen the rates of the US Dollar. Back in 1929 and the early 1930s we had a huge correction, but the dollar was not spit out by whirring printing presses. Here we needed another correction, and instead of letting the stock market crash to rich-become-poor lows and therefore letting the non-working rich who owned the worthless holdings become workers, we suffered a devaluation of the currency and made liquidity bountiful for all thanks to the Fed saving the rich from becoming workers. Is the fate of all fiat currencies the same? It seems to me it would be. The rich become very wealthy and the workers get nothing, right?

2008 Aug 07 01:02 PM

[techzone12:]

I remember in the year 2000, a Financial advisor was telling me to put most of the money in tech stocks. I did not listen to him, instead I put 30% only.
In mid 2001, when I saw the 7% decline in the market (which happend in few days), I pulled all my money out. I was out of the market for many years. I returned in the beginning of 2007. And I bailed out again in December of 2007. I don't calim to be able to time the market, I guess I just got lucky.

If you have money you don't need for looooong time, then it is maybe a good time to invest. For an average guy, like me, I know I can loose my shirt in this market. That's why I am out of the market for the time being. There is so much uncertainty, and I don't know who to believe. Speculators are every where, and they are out of control.

I have learned not listen to any body, but instead do my own risk management.

2008 Aug 07 02:03 PM

[Repsonsible...:]

As Americans lose there homes , jobs and life savings
Kudlow and friends laugh and have a gay old time , they've declared the WORST is over . Bill and the Big Blonde are having lunch at the Four Seasons , whens the last time You had a $200 lunch ?? Thats per person mind You ! There meeting two banking "friends" that came out just fine in the financial mess , I just call them "crooks ." And so it goes just another day in NY . Good Day Dylan Radigan were ever You are . He was The Only HONEST and Geniune person at CNBC

Apr 16 12:36 PM