Excerpt from my upcoming book.
In a true bear market, such as that which we face in the fall of 2008, the weakness of one sector seeps into all aspects of the overall economy. We see that as the financial sector has crumbled under its own incompetence, the ripple effect throughout the economy as a whole has dragged down every sector of not only the markets, but the overall economy. In the face of what amounts to a self-fulfilling prophecy, both capital spending and consumer spending begin to contract. As the spending contracts jobs begin to disappear. As jobs disappear, corporate profits erode causing further cuts in capital spending and the loss of more jobs which causes further contractions of consumer spending. This vicious cycle tends to present itself in huge lurches through the early stages of a bear market and eventually winds down to more focused, smaller contractions as the bear reaches bottom.
A true bear market is not a market correction, in my view. A true bear market is a seminal change in the economic structure of the capital markets and the corporate mind set. A true bear market is the result of years, perhaps decades, of mistakes that eventually culminate in a widespread realization that something is being done wrong. In the bear of 2008, it seems that the financial sectors years of pushing the credit envelope has finally reached entropy. The system can no longer support itself and is collapsing inward toward a deflationary spiral.
While government and industry cast wildly about in their vain attempts to stop a tidal wave, the market continues to dismantle that which it can no longer support. Once the dismantling of the weak foundations of the market reaches a certain level, the ripple effect increases in speed and strength throughout every sector of the markets and the economy. No corner of the economy will be left untouched, as we see in the coming collapse of the American auto industry. With the implosion of the financial, housing, consumer credit and corporate capital markets nearly complete, the industries that rely on those sectors will rapidly come apart. This is integral to the rebuilding of the capital markets on , hopefully, firmer foundations of corporate value and growth in real wealth.
If nothing else is learned from the bear of 2008, we must all realize that debt is not an asset. The collapse of the financial markets is the direct result of Wall Street breaking this fundamental tenet of capital structure. A house of cards was built on foundations of debt and roofed with reams of I.O.U.’s. Now we will all pay for the excesses of the few with market instability and lower economic expansion for years to come.
copyright 2008
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