Friday calls for lighter fare, so today I thought I would present evidence that this financial crisis we are now living through is not particularly unique. Realizing that some may find the idea that we are doomed to go through this every few decades less than cheering, I will present it in the form of a quiz. As I’ve said before, everybody likes a quiz.
Question 1: The Buildup
In what year did BusinessWeek editorialize as follows about the stock market?
For five years at least American business has been in the grips of an apocalyptic, holy rolling exaltation over the unparalleled prosperity of the "new era" upon which we, or it, or somebody has entered.
Stock prices are generally out of line with safe earnings expectations, and the market is now almost wholly "psychological."
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I know I shouldn’t be doing this. I talked about home prices yesterday, and I’ve singled out the Wall Street Journal’s Brett Arends way too many times already. (This will be his sixth mention in this blog. See also one, two, three, four, and five.) I don’t want to give the impression he is exceptionally bad. He’s merely typically bad, but writes often and on topics I like to talk about.
But Arends ran this column yesterday sharing his thoughts on house prices and, well, fish gotta swim and birds gotta fly.
He starts out by mentioning the previous day’s release of the Case-Shiller home price indexes for March. This update, which was, let’s face it, more or less as expected, was “startling” to Arends because of “What the latest data show about the long-term of the real estate market.”
Apparently, this last set of numbers was the missing piece needed to allow Arends to make the observation that since the late 1980s and early 1990s, house prices have only beaten inflation by one or two percentage points a year.
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Yesterday was the last Tuesday of the month, so it’s time for our monthly update from the good folks at S&P who bring us the only home price index worth watching, the Standard & Poor’s/Case Shiller Index. This time ‘round the media coverage of the event was light, which I suppose I could spin as a good sign. Perhaps things are looking up and we are just not that worried about home prices any more.
But readers of this blog know I am a glass-half-empty kinda guy. My view is that the media doesn’t consider the release of some data on house prices to be all that interesting, however important it might be. Also, the release coincided with the release of some surprisingly strong consumer confidence numbers and a few other stories of the trivial type that the media likes to report on, like a Supreme Court nominee and some North Korean missile tests.
House prices are down. That’s not exactly news. The Case Shiller 20 City Composite was down 2.2% in March from February, 18.7% from the previous March, and 32.2% from the July 2006 peak.
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You may have heard of something called the Efficient Market Theory. If you did, it was almost certainly in a negative context, some writer or blogger excoriating those egghead finance professors for confusing the world with their crazy and dismal theories. This is a rant mostly heard from the advocates of investing in individual stocks, but is also found occasionally in the arguments of those in favor of active funds over passive (index) funds and market timing over passive asset allocation.
Apparently, this poisonous heresy has been spread by overly educated academics near and wide for decades. They convince their innocent students that it is categorically impossible to make money picking stocks, that anybody who does anything other than buy an index fund is a fool. It’s a viewpoint that is not just wrong, it’s dismally pessimistic and, let’s face it, simply un-American.
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This week’s Carnival of Personal Finance is up at Greener Pastures. It includes my post on Credit Cards and Our Nation of Children. There’s lots of other interesting stuff there. One link that caught my eye was Why Inspiration has no Place in Investing at Invest Wisdom. Click and enjoy!