I just read something from a TD Asset Management letter where one of their US-based fund managers said the following:
A major step towards resolution occurred with the formal insolvency of Lehman Brothers and the potential of Merrill Lynch. While being rumoured for some time, these events are still sad and shocking for anyone in the investment business. But in relation to the markets, despair is a healthier phase than denial. For much of the past 18 months, we had been concerned that most financial companies and federal officials were acting as if the problem of too much debt could be solved with more debt which meant that loans just needed to be restructured so everyone could hold onto the assets they could not afford or accurately value. While we do not believe the credit crisis is over – given that there may be more global write-offs – we do believe the process of capitulation and healing has begun.. Paul Ehrlichman, Chairman & CIO, Global Currents Investment Management
That got me thinking about the stages of dealing with tragedy. According to Wikipedia the stages are:
- Example - “I feel fine.”; “This can’t be happening.”‘Not to me!”
- Example - “Why me? It’s not fair!” “NO! NO! How can you accept this!”
- Example - “Just let me live to see my children graduate.”; “I’ll do anything, can’t you stretch it out? A few more years.”
- Example - “I’m so sad, why bother with anything?”; “I’m going to die . . . What’s the point?”
- Example - “It’s going to be OK.”; “I can’t fight it, I may as well prepare for it.”
If the illness - it isn’t dead - refers to the global financial system, I think we’re still somewhere between stages 2 and 3. I say global financial system, but mostly we’re talking about the US - investment banks, PBGC which insures pensions as well as ESGs and other entities - but which have an obvious effect globally.
Denial was the bull market and perhaps even up to just a few months ago (say, the peak in May). Thain saying everything was OK at Merrill Lynch and that they were getting into yet another round of financing (once it was discovered that they were in deeper crap) is a good example of the denial stage.
The stages of “Anger” and “Bargaining” can be represented as both investors bailing from the markets and the authorities trying to “band aid” things. I hope we don’t lead to point #4 which ironically is not just a medical term but also an economic term. But if capital can’t move around the planet well, then that surely is a quick road to economic depression. What else is happening but the major central banks of the world in a concerted effort trying to re-establish some form of normal liquidity?
I don’t mean to be a pessimist but it’s hard not to be one when watching the news and reading the latest coming online. I think step #5 will not come for quite a while … certainly not this year but likely not in 2009. These will be very volatile markets for some time. It will interesting to see how the adamant buy-hold advisors/investors common to the traditional ETF industry stomach events.
Will the new alternative exposure ETFs (timber, intl real estate, real return bonds, gold/oil) and other altenative positions (hedge funds, private equity, etc.) do their job and provide the diversification needed to survive the storm? Will they deviate somewhat from buy-hold to allow for some tactical asset allocation or … market timing?
If there’s ever been a time when investors of all types will be tested - this is it.