101 Things To Do In A Market Sell-Off
Oh just take it or leave it
And take it or leave it
Oh take it
Oh that's right, he's gonna let you down
He's gonna let you down
He's gonna let you down.
And gonna break your back, for a chance
And gonna steal your friends, if he can
He's gonna win someday
Oh he will
--The Strokes
Here are a few thoughts on the current financial and economic crisis, that you can take or leave, and add to your own analysis of the situation:
Don't Sell Your Stocks At This Point
If you are invested in blue chip stocks and haven't sold out by now, there really is no point of selling. Look at the historical trends during a downturn - If you had locked in your losses during the last downturn in 2001, there were huge gains that were lost in the aftermath if you had a stake in the main players. Unless you are going to retire in the next five years, just hold your head, dig deep and keep buying over the downturn in small measures to reduce risk and come away with larger returns in the upturn. It sounds like a bad bet, but Canadian blue chip stocks are in reasonably good shape and have adequate capital reserves.
Currently, the key Canadian stocks of national and international importance are our bank stocks, which are priced at 10:1 P/E, which is low by any measure, especially since historical prices of the US market trend towards 15:1. It's true that the future earnings of our banks will may be reduced because of the downturn, but so far, we appear to be in good shape, economically, and by comparison with other western jurisdictions (ie: Europe, the US) we are a great buy. Yes, things will get worse, but is anyone worried that the big Canadian Banks will go under? Not a good bet (knock on wood).
The Depression Matters - But Its Not That Bad. Yet....
There are historical parrellels that matter - a bursting bubble, liquidity issues, and a lack of confidence in the financial system. The mistakes of the Depression are legendary, and well-known to anyone with intro-Econ classes behind them, and not likely to be repeated...mainly.
Ben Bernanke, for all his detractors' legitimate issues with him, is amongst the top experts on the depression, and his appointment now seems like clairvoyence. The main regulatory mistakes were:
Tight monetary policy - the governments of the day were keen on strengthening their currencies to stop capital flight. Today, capital flight is occuring in the US, but the Fed is keeping its head and telegraphing its need to reduce interest rates to keep liquidity high. In a stroke of enlightened internationalism yesterday, the world's central banks all decided to drop interest rates by a half percent. Good work, policy wonks!
Tariff barriers were raised - In the Depression, tariffs went up to protect domestic industries in the US, and Europe answered in kind, throwing many wrenches, big and small, into the cogs of capitalism. Yes, the Doha round of talks at the WTO is on its deathbed, but tariffs have been on a historical downturn for better part of a century, and with the free markets of the Euro-area, ASEAN, APEC, NAFTA, and other FTA's, the open borders will keep commerce moving and prevent unilateral tariffs being raised.
Delayed Action - The Depression wasn't just famous for its poor decision making by governments, it was also known for its initial lack of decision making. In the US and in Canada, laissez-faire ideologues in executive roles meant that the market downturn and bank failures would be left to market forces. In the US, Bernanke seems to have gotten the message...but in Canada...?
...But There Are Mistakes Being Made
For all the good things that the US federal reserve is able to do, there are some problems outside the US that are going to be issues in the short to mid term:
Europe Lacks Unity - While we can be glad that the EU has a common economic and interest rate policy in this disaster, the lack of common policy on securing bank deposits or coming up with a common bank bailout fund mean trouble. The problem is that the EU may be already burdened with long term Euroskepticism from some quarters, already at odds with massive centralized spending from Brussels. Who in Northern England will want to see more money spent in bailing out banks failing in Poland? Merkel came out against Ireland guaranteeing Irish bank deposits, and promptly took the same action the next day.
Let's hope Europe gets its act together and realizes that, yes, bank failures in one corner of the EU could have a disastrous local effect (see Iceland's bank meltdown that had ramifications for depositors in Norway).
Running Balanced Budgets In A Recession Is Not A Virtue
I am a fiscal conservative, partly because of my disgust over waste during the Chretien years, when one Liberal minister famously said in discussing a budget "Y'know, a hundred million here, a hundred million there...pretty soon your dealing with a lot of money."
Also, there is a real moral issue when we consider the waste of government on an individual basis. How can we turn a blind eye to government waste of even a million dollars, when for many of us, that may be the culmination of a lifetime of paying tax? If an official can blindly throw the life's work of a Canadian down the drain with couple expense accounts of senior Ottawa officials, there is a moral necessity to keep a tight leash on government.
I've worked in government before, and I have a good idea of some of the issues surrounding government waste at a provincial and federal level. I know why there is a push for tight budgets from the public as a whole, and why in Canada it has become a moral obligation for governments to keep spending under control. I remember the end of the Mulroney years, and years under NDP governments out west where NDP leadership had no idea of how to form a budget, and the Bush years in the US. These are not lost lessons on myself.
I realize the perils of deficit financing (ie: interest payments, lowered credit ratings) and we do not need to the bad old days of ramping up spending in to the stratosphere.
However.
Canada and other G7 nations should not be held hostage by balanced budgets in a time of crisis.
If keeping our financial system in tact and liquidity high means that we raise our national debt by 1%, let's keep our potential deficits in perspective of the total national debt and the total GDP. Canada has a debt of approximately $400B, which is big but manageable in terms of our GDP of approximately $1.2 trillion. We have come a long way from a time when our national debt was almost 100% of our GDP and that is something we can thank Paul Martin (I hated writing that) for.
But what were we preparing for during the Liberal years when they created a contingency fund? Why did we care if we had high credit ratings during the years Canada was flush with cash if we couldn't utilize our relatively low debt levels to take on marginally more debt during a downturn?
The rainy day is here. We need to loosen the purse strings to keep things going, and yes, possibly run the risk of going into the red. I don't like it, but that is the reality of the current situation. That doesn't mean wasting money, and it doesn't mean opening the flood gates, but prudent government spending in a downturn will stave off some of the worst of the affects of a crisis, but the time to spend is now.
If a government waits too long, the possible positive affects of spending may not be felt until the downturn is over, meaning a wild whipsaw of an overheated economy during the upturn. The current government's inaction and lack of foresight may force poor and delayed decision making on this issue, and I hope it's not too late.
And finally, the silver lining....
Music Is Going To Get Better
Every economic downturn of the last 40 years or so has meant better music.
The first bad downturn during this period, was in the late seventies, which meant an end to glam rock, and bloated, private airplane touring, coke-binging supergroups, like Eagles and Led Zeppelin, which were way past their time, and gave way to leaner, meaner, DIY artists, intent on creative destruction. The Clash, Sex Pistols and Ramones effectively demolished the professional, executive run and polished sound of established and uninteresting studio artists.
The garage-punk bands may not have had the technical excellence (Joe Strummer and Co. could never pull off the live, dual guitar solo of "Hotel California") or audio precision (see: Steely Dan's "Aja", vs. The Clash's self titled debut), but what they lacked in corporate polish, they made up for in energy and creativity.
They took a science and made it an art again. They took an architectural blueprint of precision and made it a Jackson Pollock ink splattered mess.
The second instance of this phenomenon was the 90-91 downturn, which really started during the end of the eighties, post-87's Black Monday. The late eighties music consisted again, of the monolithic glam rock bands like Poison, G'n'R (yes, they didn't get out of this unscarred), Def Leppard, Van Halen, Bon Jovi, Skid Row, and others. While the Stooges and MC5 were the undercurrents of garage music that was under the radar before the emergence of the Ramones, the Pixies and Jane's Addiction defined the undercurrents of Alternative and Grunge before Nirvana.
As soon as Nirvana arrived, the idea of a Van Halen album and accompanying tour with oversized mullets, neon tights and synth riffs became ridiculous.
Fast forward to the late nineties/early millenium, and superselling boy bands, the modern day Bay City Rollers feasted on high disposable incomes and again highly polished music industry that focused mass attention on a few chosen pop groups. Almost as soon as the era of starlets and boy bands had begun, 9/11 and the long downturn of the US stocks and economy catapulted garage bands back to the forefront. The Strokes were the dark horses, coming out a previously stagnant NY rock scene, only to lead the charge of the Hives, the Vines, the Libertines, the White Stripes and the Yeah Yeah Yeahs.
Today, the oversized, over commercialized superstars that are due for a hard fall are obvious. Turn on commericial radio, and they consist of two categories of douchebags - the high flying R&B/Rap artists and the Nickelback, Default, Theory of A Deadman axis of rock evil.
While rap was, and is on certain levels, the greatest of subversive music to emerge from the late seventies, it is almost certainly due for downfall, similar to the early nineties, where the street artists took over from their overly commercial and wealthy brethren. This revolution was typified by one event, when LL Cool J, turned up for an charity event in the late 80's, with Mr. T type bling on, and was roundly booed by all who attended. It was the age of NWA, and the size of your gold chain(s) was being inversely proportionate to how "real" you were.
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To summarize, Canada is going to whether the downturn, but we and the Europeans are making mistakes that need to be corrected, and so far the best jurisdiction dealing with this crisis from their Central Bank is, suprisingly, the US. And music is going to get marginally better as the Age Of Bling dies a horrid death. Again.
posted by Shamrocks! @ 3:06 PM
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