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August 15 , 2008 Looking Back on the Summer of Fear Some remember it as the time when presidential history was made. An African American senator had just beaten a female senator in a protracted Democratic Primary. The daily details of the resulting McCain/Obama race filled the headlines…But there was the other huge story. There was no way to escape it. Whether you were on vacation, at the office, or in your home, a cloud of negativity enveloped you at every turn. Television anchors, newspaper reporters, and internet blogggers, feverishly competing for ever more dramatic headlines, warned of a failing economy, falling real estate values, a dropping stock market, troubled financial institutions, diminished auto sales, rising gas prices, runaway inflation, a crippled airline system…and I can go on.
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As is the case in every economic downturn, reporters and self appointed economists opined that, “This time things are different.” A deafening cacophony of shrill voices warned that the United States economy was in a hopeless state of disrepair. As a result, a near tidal wave of fear surged throughout the system, exacerbating the problems and damage. In retrospect, it is difficult to comprehend how the talking heads and supposed experts failed to realize the role their irresponsible behavior was playing in fueling the panic. Certainly, we had serious problems in the credit markets caused by rampant greed, speculation and idiotic behavior on the part of some of our most respected financial institutions. However, every responsible economist and financial analyst understands how detrimental consumer and institutional panic can be to maintaining the stability of our global financial system. For example, if there were rumors that a bank in Aventura was about to fail, those of you account holders with uninsured accounts would run to withdraw your capital and stock holders would rush to ‘dump’ their stock. Regardless of whether or not the bank had, indeed, been strong enough to weather its original problems, the panic driven run on the bank would have sealed its fate. Yet, local newspapers were running headlines throughout the summer calling into question many, if not most, of our local banks. Veteran readers of my e-mails know that I was writing about a coming credit crisis and real estate slump in the years prior to 2008. I was 100% prescient on the real estate bubble and on target about credit. I did, however, believe that the Fed’s and the World Banks’ actions early on during that credit crisis would be more effective than they actually were in containing the crisis. At the same time, I have always believed and written that our economic system of Capitalism is resilient and self-corrective. As we learned from the summer of 2008 and other trying economic periods, cyclical corrections do take time and can involve a large dose of suffering. However, the aforementioned common refrain expressed by irresponsible prognosticators in ’08, that “This time things are different” was not true then and, in fact, reflects a complete lack of understanding of our system of Capitalism. BACK TO THE PRESENT…. THE SUMMER OF 2010 As always is the case, it’s hard to pinpoint the precise moment the economy began to turn up again, and which events predicated the restoration of consumer confidence. Was it the distracting effect of the Olympic games of 2008, when record-breaking, near super human athletic feats captured our collective imagination? Was it the optimism that typically occurs after a Presidential election, which we experienced in the beginning of 2009? Was it the cyclical downturn in commodity prices, especially oil, when global demand began to drop due to rising prices? But as I write to you now, during the summer of 2010, I can state the following with complete confidence. Those that suffered, but survived the brutal ‘Summer of Fear’ of 2008 became stronger and wiser. Those that followed sound economic principles and bought stocks at bargain basement prices, and began to re-enter the real estate market during the latter part of 2008, profited handsomely. Those that succumbed to fear and panic didn’t fair nearly as well. My final bit of advice to all of you now riding the bull market of 2010 is that “trees don’t grow to the sky” and if you really believe that, “This time things are different,” please look at the tech bubble collapse of 2000-2002, or the commodity price declines of 2009. Everything is part of a cycle and everything has its time. No matter what year we are in, that is advice you can bank on.
Austin A. Frye, MBA, JD, CFP® The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee future results. Securities and advisory services offered through LPL Financial-- Member FINRA/SIPC
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