Tuesday, April 14, 2009

What is or What Was The Financial Crisis?

Here’s the bitter truth about the “financial crisis.” Things were never as bad as people thought, and now things are not as good as people think. Over the last six months, there was too much pessimism around what was going on, and now we are moving toward too much optimism.

Why is this happening? One reason is that too many investors and commentators take cues from the stock market and use that as a fundamental barometer for whether things are “good” or “bad.” This is reflected in media commentary by these pundits who go on TV and say something like this:

“The market doesn’t believe it.”

“The market is saying this….”

“What the market is telling us.”

The market is a poor substitute for doing fundamental research on stocks, yet millions of people use it as the Oracle of Delphi instead of what it really is – the uncontrollable collective mass hysteria of terrified investors and short term traders.

Bank of America traded as low as $2.52 last month and peaked two years around $47. Which was correct? Neither. Bank of America was never worth the 2-3 times book value it traded at when it peaked, nor was it ever worth as little as the 15% of book value it traded at in March 2009.

Yet now everyone is breathing a huge sigh of relief, as the crisis is over, and as evidence of this, the stock market is cited as the determinant of that conclusion.

Here’s the bottom line. Don’t use the stock market to tell you the fundamentals of our financial system, as it is a terrible indicator of those fundamentals.

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