A Bad Day, Yes, But Enough with the Hyperbole

I don’t write about the stock market much any more — mostly because I wrote about it every day for about 15 years and kind of got sick of it, to tell you the honest truth — but today was one of those days where it’s hard to pay attention to anything else. Like many people, I spent much of the day hitting the refresh button on my browser to see how low the Dow and the Toronto stock indexes were going to go. I never imagined that some day I would watch the TSX come within a hair of a 1,000-point drop in a single day, or the Dow plummet more than 750 points.

On days like today, it’s tempting to use terms like “bloodbath” and “catastrophe,” and all those muscular-sounding adjectives that headline writers use to really pump up the hype, and plenty of media outlets were doing just that. Others were trumpeting the fact that this was the biggest-ever drop on the Dow and other indexes — but of course, that only applies if you’re looking at the number of points that they fell. If you look at it in terms of the market’s percentage decline, then it was definitely a bad day, but a long way from the worst ever. In 1987, the Dow fell by more than 23 per cent, while yesterday it fell by less than 7 per cent.

As a friend pointed out, the drop today — which came after a proposed Wall Street bailout package failed to make it through Congress — was also roughly equivalent to the amount the Dow climbed two weeks ago, when the $700-billion bailout was first announced. A number of people noted that the drop today obliterated all the gains of the last eight years, but of course that measures from close to the peak of the dot-com bubble. If you start measuring from the bottom of that precipice (which came in 2002) the market is still up by almost 3,000 points or about 40 per cent.

I’m not trying to play Pollyanna here. The financial meltdown that the U.S. has seen over just the past couple of weeks is unprecedented, and in many ways it makes previous government-led bailouts such as the Long-term Capital Management crisis in 1998 (which was also caused by overly optimistic risk-assessment models coupled with rampant greed) look like a kid’s birthday party by comparison (Mike Masnick at Techdirt has a great all-around background post). We are going to be seeing the unwinding of those bloody entrails for some time, and it’s not going to be pretty. But pouring gasoline on the fire of panic isn’t really helping.

Comments

[thedozer:]

we can't borrow our way out of the woods!

it's time to make some money

2008 Sep 29 11:48 PM

[ValueHunter:]

The problem with this "crisis" is that no one seems to understand why it is a "crisis". One day I read that because banks won't lend to each other, everyday business operations like payrolls, etc. are in jeopardy and threaten to shut down otherwise healthy businesses. That would be an emergency, but then the next day I read that that is not the case, that these arrangements are not in danger. Then I read that the credit gum up is putting the ability to borrow for expansion, mortgages, etc. under heavy stress. Well, that doesn't seem to me to be an immediate problem that needs fixing within 48 hours. I read and I read and I still don't have a clue as to what is happening or what any possible common sense fixes are. Honest experts that are studying the matter are confessing they don't know either. So on that basis, I find it difficult to support a 700 Billion bailout for gamblers and consider what has happened so far a correction. Are we on the edge of the Abyss? I have no idea.

2008 Sep 30 01:33 AM

[you_can_cal...:]

One thing that strikes me is the number of large 100+ year old institutions that have gone bust because of this thing. Is it a "crisis?" Not sure, but it is interesting to note that the firms that got taken out were able to survive the Depression. Don't know exactly where this is leading, but that does make me think.

2008 Sep 30 02:42 AM

[Aurelio:]

The panicky talk by politicians and pundits is irresponsible and a disservice to investors as well as the general public. They are throwing around words like "catastrophe" and "cataclysm," which, if taken seriously, will only make matters worse. Regardless of what else happens, the endgame will be consolidation, either by corporations or government. Unfortunately, there is a bumpy road from here to there, and much wealth will be destroyed along the way.

2008 Sep 30 04:16 AM

[unfaire:]

I have said a few days ago in a comment that historically DJI should be at about 10,000 at this time and, in some way, this is a correction of the excess in the Wall Street of the last few years. Given a historical deviation of about +/- 25% or so, DJI may move up and down around 10,000 +/- 3,000 for some times to come.
We know that our financial situation has been worsening for years but no serious fixes have been made. And it has gotten worse in the last few weeks. The trouble started when both Fed and Treasury tried to make a “bold” move without any clear direction and created a crisis situation. When the move did not get where, the market “crashed.” What we needed were cool heads to negotiate through this financial storm with some done-to-earth measures such as Federal intervention of the bad mortgages to make both the lenders and borrowers “half whole.” Such moves would have benefited both Wall Street and Main Street. Instead, the “bold” move had the appearance (and, may be the substance) of Main Street “bailing out” the Wall Street, making lenders “whole” and borrowers “empty,” and the whole thing ended up bankrupting both of them, leading to the liquidity problems. The move was hailed as also a bail out of Main Street only after it was failed. It was a mess.
The situation was brought to a crisis proportion by the wrong move of Fed and Treasury. Apparently the “bold” move, my guess, by the Treasury was a flop. The Congress did not help. The media were no help either. What we need now is some cool heads and cool hands to guide us through this storm. Hopefully, both the Fed and Treasury have realized that they have been “hot” headed. They should now come up with some concrete steps in the days to come. It is important that they come up with something really workable, even if it starts with a little step in the right direction. DJI may drop another 3,000 points in the mean time. However, as long as the nation as a whole is moving in the right direction, the market will recover and the nation will also recover.

2008 Sep 30 06:48 AM

[Schweizer:]

I was a bit shocked at the failed vote, but I watched several post-mortem speeches, both by Democrats and Republicans, that perhaps indicates that this was the right vote based on balance of power. Although Paulson (Executive branch) believes in this plan, and labels it an emergency, it is up to Congress to agree, or modify it, perhaps significanty, before passage. I am now pleased it didn’t pass and that other ideas that do not involve the governement confiscating our own property and using our own money, will be pursued!

This makes America great.

Enjoy:
www.youtube.com/watch?...

2008 Sep 30 07:20 AM

[M-P:]

Agree w/ a number of comments here. The story of why it's a crisis and the root causes is a little convoluted. At the end of the day, many of the institutions had too much leverage - see the waiver around the net capitalization rule in '04 - too much opaque derivative exposure (CDS's and it's breathren), and too much correlated risk (one domino falls, and ...). Look at the increadible rise of the derivative market over the last 10 years. Look at the same rise in sub-prime. I think we need to do something - and we have been - I'm just not convinced it's 700B and/or the players really know their exposures and root causes.

2008 Sep 30 07:32 AM

[buyitcheap:]

Good comments here - and when you have dog owners arranging birthday parties and playdates for their dogs, you know we need a good recession or some kind of washout to snap people back to their senses. I'm not convinced we're at the bottom yet, we need a good high % down day maybe a 15% to really snap people into paying attention. I'm still hearing too many people talking about buying dips when we're down 33% from the highs with no bottoming in sight. Grantham was spot on - this is a slow motion train wreck.

2008 Sep 30 07:53 AM

[freeAgent:]

Thanks for putting out a level-headed article on the stock market drop. It seems all too many people and news outlets were ready to trumpet this as some sort of death knell for the economy.

2008 Sep 30 08:43 AM

[wdhalgren:]

The hyperbole is a tactic used by the likes of CNBC to force their will on people who block a bailout. It's the most blatant form of brinksmanship and could blow up in their faces.

2008 Sep 30 09:30 AM

[doubleguns:]

M-P the root cause is that people who should not have a home were given loans because congress made the banks develope subprime loans to ensure all americans could have the american dream. A home. When they did not pay for that home it became a problem for all of us. These people never pay thier bills and they should not have a mortgage.

The banks, Bush, Paulson, and the Dems now want us to give them money, 700 billion, so they can keep thier fancy life style. We get to pay for it. As I have pointed out in any blog I can these canibalising banks are eating each other up at 1 cent on the dollar and they want to sell to us at the low, low price of 60 cents on the dollar. 6000% profit. We must be fools to fall for this.

We can not allow this to happen. They get the gold mine---we get the shaft.

We are very fortunate that the Republicans said no deal, NOT THIS DEAL. Cooler heads are prevailing and not being panicked into buying this deal. A weekend to decide? Any time a saleman tries to put the hard sell on you it is a sure bet the deal stinks. We dont want no stinking deal! Just say no!!!!

2008 Sep 30 09:56 AM

[MSmailbox:]

This IS "the worst drop in history," if you're under 21 years of age,which may be the case, with some of the media headline writers. AOL has been pouring gasoline and other combustables into the mix, like crazy. Why has AOL started "playing to the cheap seats?"

2008 Sep 30 11:09 AM

[chefmax:]

The root of the problem:
Nationwide: an overactive, underinformed press with it's own agenda!
Washington: too many corrupt , uncaring , incompetent politicians!
Wall street : too many Ivy-Leaguers without the common-sense of
a houseplant !

2008 Sep 30 11:56 AM

[WAKEUP:]

The bailout is/was a last-ditch attempt by the Bush administration to rob the taxpayers one last time, on their way out the door. Damn the bailout, damn the hyperbole, and damn all attempts to vote on the bailout again. And get this straight, once and for all time: This "bailout" is not going to save anybody's house, for more than a short time. The financial forces in play now will have to grind away until all this B.S. wealth that has been created is dissipated. What is so terribly hard to understand about that?

2008 Sep 30 01:37 PM

[hrant:]

THE CURRENT ADMINISTRATION HAS FOULED US AGAIN AND AGAIN ON VARIOUS "MUST DO" THINGS . ALL BENEFITED THE TOP 1% AT THE EXPENSE OF THE REST OF US.
I DO NOT BUY ANY OF THIS $700 BILLION BS. I WILL START LISTENING IF I SEE WALLSTREET PEOPLE ACTUALLY GO TO JAIL FOR ACTIONS THAT HAS HURT THIS GREAT REPUBLIC MORE THAN ANY ENEMY EVER COULD !!!

2008 Sep 30 02:02 PM

[TinyTim:]

BogJanie-- www.youtube.com/profil...

gives new meaning to the law of unintended consequences

astute comments:

valueHunter-The problem with this "crisis" is that no one seems to understand why it is a "crisis".

The story of why it's a crisis and the root causes is a little convoluted.

I doubt it is. If the people that got us into it weren't smart enough to foresee it, why are they now smart enough to tell us what to do about it?

2008 Sep 30 09:33 PM