What Congress and Investors Should Understand About the Bear Stearns Deal, by John Hussman
Submitted by Reinhard on Tue, 2008-04-01 12:13.
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Just as market tops are marked by expectations that economic strength will persist indefinitely, stock markets hit bottom when an economic downturn is taken as full fact, when conditions are widely expected to get substantially worse, and when investors have largely given up on any hope that the economy will improve in the foreseeable future.
My impression is that the early calls for a bottom ignore a realistic sense of history about how market peaks and troughs are formed. Once an ongoing and worsening recession is taken as a matter of common knowledge, it will be reasonable to talk about durable market lows. Until then, investors should recognize that a standard run-of-the-mill bear market averages a loss of about 30%.
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For the complete article see http://www.hussmanfunds.com/wmc/wmc080331.htm
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John adds a lot of insights. I agree with everything, save for the argument of no new money created. If the Fed buys worthless mortgages and issues valuable treasuries, isn't that still a net infusion of capital?
Like what if the Fed replaces my used car with a new car. The used car can be crushed, fine, but where do they get the new car from? Sure, in case of the treasuries, they create them by the push of a button. So in essence they create more of the valuable stuff out of thin air, making the ones in circulation less valuable for all of us holders. So not the holders of dollar bills lose but the holders of treasury bonds. But a lot of the people are one and the same and affected in either way.