When we talk about wild markets, we usually use the Great Depression and the WWII era as the benchmark for extreme market discussions. This is understandable, as the 1929-1932 was the most extreme market decline in the history of our country, with stocks falling 89% from peak to trough. Interestingly, perhaps because of the extraordinarily beaten down price that existed in 1932, stocks never moved more than 30% from any particular high or low between the start of WWII and the end.
My own view is that it is time to dust off the history books and use WWI as an example, particularly because it had the Spanish flu pandemic striking in waves during 1917 and 1918. When you look at the WWI-era stock market, there were 50% swings throughout the war. People who invested in shares of American business were called “stock cowboys” and Andrew Mellon was prompted to … Read the rest of this article!
In May 2007, the financial sector replaced the energy sector as the largest component of the U.S. economy. Banks, notably Wachovia, Citigroup, Lehman Brothers, Bear Stearns, Bank of America, JP Morgan, and a few others, began employing “high-grade structured credit strategies” in building the real estate portfolios on the bank’s balance sheets.
What that means is this: A bank like, like New Century Financial, would lend $150,000-$200,000 to borrowers with shaky credit histories in order to purchase a $200,000 home. But New Century Financial didn’t just sit on these mortgages and collect the high interest + principal on the payments from the families that had taken out mortgages. Instead, what they would do is bundle these mortgages together—with the thousands of other low-credit quality mortgages in their portfolio—and sell little slices of them to the banks mentioned above. During ordinary and good economic times, and when property values were rising, … Read the rest of this article!