Never Say Never?

After 23 years on Wall Street, nothing really amazes me anymore. The one constant is the capacity for otherwise intelligent human beings to behave like idiots and lose truly incredible sums of money on bad investments. I remember being told by my stentorian boss at JP Morgan, while discussing the 1987 market crash, that these disasters “never happen more than once a career and we always recover from them”. Well goodbye to all that. Since 1987, we have had meltdown after crash after crisis -- nineteen financial wipeouts (almost one per year on average):

Not comforting is it? Well what is comforting is that the crises do subside, the former financial wizards are carried out on their shields and the big banks write down enormous losses for a year or two. One can also argue that the central banks, while seemingly more powerless to prevent bubbles and the subsequent meltdowns, are still proficient in mopping up after the mess—the coordination and use of various liquidity devices by the U.S. regulators this year did, in retrospect, head off an even deeper crisis.

The current problems--a housing bust and illiquidity in mortgage and most credit markets—are different from most of the past ones in a very important respect: they are impacting individuals, small businesses and homeowners in a business cycle where there is very little room for error. $120 oil and higher food and commodity prices are hurting small businesses that cannot pass on commodity costs as efficiently as large corporations. So margins are compressed, cash is dear, and--surprise--there is almost a complete lack of credit available from the aforementioned financial wizards.

There is hope, and my partner Jack Mayberry alluded to it earlier this month writing that there appears to be a “turning point in the market”. I believe that to be true, and the catalyst generally is a financial house failing--Bear Stearns this time—followed by another round of huge write-offs by banks (coming to your Wall Street Journal at the end of this quarter). The other “turn” I have been looking for is the Housing Market Index—a great gauge of local wealth generation and financing activity:

Why housing? It is usually the largest investment most people make in their lifetime, it supplies a stream of wealth to a number of businesses—contractors, painters. plumbers, hardware stores, fuel companies, etc., and it is generally characterized as a true long term investment (I’m not talking about the Florida and Las Vegas speculators of the recent bust). An even more reliable measure of housing health is my own Local Anecdotal Index. Finally, after a long 18 months, the house up the road finally found a buyer--a young couple from New York City. Second, the employees in the local Washington Mutual are finally talking about new business again—not layoffs and restructurings.

Will the high commodity prices derail this “turn” or recovery? Is there enough growth in the global growth engine to pick up the U.S. on the other side? My daughter Molly, when she was 3 (she’s now 17!), had a good answer, as she would solemnly intone in response to an unexpected event: “never you know”. And never is not a long time anymore.