Monday 1 October 2007

Financial Armageddon (Again)

I didn't read Ravi Batra's book "The Great Depression of 1990" (Simon and Schuster, New York, 1985) back in the "greed is good" 1980's and I probably won't get around to reading "Financial Armageddon: Protecting Your Future from Four Impending Catastrophes" by Michael J. Panzner. Ever since I read the Club of Rome's "Limits to Growth" as a naive teenager I've slowly come to be more sanguine about "doom and gloom" scenarios that occasionally come out with much fanfare. It's not that the premise in such tomes is necessarily incorrect, it's just that events tend to unfold more slowly than predicted, and people and systems tend to muddle through in most cases.

So I left a sceptical comment on a recent post on the Financial Armageddon blog:

I suppose if you keep predicting a market crash long enough, eventually you'll get it right. There's a saying that the market has predicted 20 of the past half dozen recessions. Looks like you'll end up having predicted 20 or the past half dozen market corrections!

The reply by the author was interesting:

You've got that wrong. I am not predicting a "correction," but a devastating bear market that slices at least 30% (and probably much more) off the value of the equity market. Of course, it's possible we'll see a crash, but I'm not so sure about that. It might just be one of these long, grinding affairs that keeps the permabulls hanging on until they've lost most or all of what they've got. At that point, it will be no wealth, rather than "Enough Wealth."

We'll have to wait and see if Michael turns out to be correct, but just a simple plot of how a 30% drop in the S&P500 would appear on the long term (55 year) chart (red line below) suggests that such a drop from current levels is unlikely, though not impossible.

While we may experience a similar period of poor market returns as happened in the 70's, I think the market performance since the unwinding of the tech wreck bubble looks relatively sustainable. Like I say, only time will tell if my black question mark or Michael's red one ends up closer to reality in the next few years.

Copyright Enough Wealth 2007

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