Comparing Disasters

March 9th, 2009 by · 1 Comment

On Friday, a blog on the Wall Street Journal site discussed a new milestone that we recently passed.  The marketcap of financial shares in the S&P 500 is now down 83% from its high, surpassing the low point after the tech bubble popped when the marketcap of technology shares fell 82% from their peak.  The article then notes similarities and differences between this crash and that one,  notably this bit which as a tech crash survivor I take slight issue with:

.. the two sectors are similar in that investors became overly enthusiastic about investments that were more complex than originally thought.

For investors, there was no bubble this time.  Investors in financials weren't shooting for the moon, heck Citigroup traded up and down between 40 and 55 for 5 years.

In the tech crash, a shiny and sexy sports car that had been drag racing in uncharted territory went off a cliff that it should have seen and fell into the ocean.  The driver wound up in the hospital or went to jail, the owners cried, the media circled in a helicopter, and the safety experts noted how stupid all of them had been.  That was especially true in telecom with all the fiber build-outs; investors willingly aimed high and crashed hard.

In this financial crash, a boring gray dump truck that nobody but the driver knew was carrying nuclear waste went out of control, hit a school, and contaminated the rest of the city to boot.  Nobody is sure exactly who was driving, the owners are crying, literally everyone is radioactive, the safety experts have blamed everyone except themselves, and the media is still circling in that helicopter.

It isn't the investors that were irrationally exuberant this time. They mostly thought they bought a dump truck that paid nice dividends, and really didn't know they needed a geiger counter.  Last time we knew the risks and took them and got burned.  This time we didn't know the risks, someone took them anyway, and everyone got burned.   Yeesh.

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Categories: Financials

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  • Guy says:

    Great post. I am in awe of your ability to post as intelligently and as actively as you do on this sector. Keep up the good work, and don’t pull any punches. Blogs like yours are the only places these days to get good, unbiased commentary on this sector.

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