The point is important enough to bear repeating, and repeating. Especially when the issue is so salient to all of us. So, for the third time this week I want to emphasize that the bear market is being fed by an excess, not a deficiency, of hope. It will not end until we succumb to despair. See previous posts of February 22 and 28.
Some people are more sophisticated about these matters than others. Sophisticated or not, we are all dealing with them and we all need to have some understanding of this new reality. Ignoring them or failing to understand them is no longer an option.
Today's New York times offers James Grant's thoughts on this topic. I have occasionally quoted Grant who is an authoritative voice on money and markets, and especially on interest rates. And not just because his view correlates with what I and others have been suggesting. Link here.
Grant begins by quoting a wise old broker who told his client that the bear market will end:"when investors give up hope."
Grant reasons that people got into trouble by borrowing too much to buy assets that they could not afford. When the bills came due, they decided not to do the responsible thing and sell their assets to pay off the debt. Hoping that things would return to normal, they held on.
Grant writes: "Wishing this weren't happening to them, hopeful business people and homeowners resist making necessary adjustments. Some refuse to sell the house they can't afford. Others won't think of selling the stocks for which they paid what seemed to be a reasonable price only last year but which are one-half that reasonable price today."
Grant sees the current recession as the normal hangover from an orgy of indiscriminate and self-indulgent spending. Didn't we all have the right to live as high as our credit limits would allow? Wasn't self-indulgence a positive virtue?
We borrowed too much to buy things we could not afford against too little equity. As many have insisted, we are suffering a global margin call.
Today the markets are dealing with the problem. At best, it is going to be a messy and painful process. People are going to be hurt, and lives are going to be disrupted. But as long as people's spirits are buoyed by hope, as long as they continue to refuse to face reality, as long as they hold on to devalued assets and refuse to meet their margin calls, the pain will continue.