It was the best of times; it was the worst of times... (Part 1)

From a historical perspective, I believe the biggest difference in today’s economic situation compared to past recessions is multiple 24-hour news networks; especially those dedicated to business matters. Call it heresy, but I don’t believe there is enough news for one business news channel – let alone two. Living in Atlanta, I have firsthand knowledge of the power the media has to create a financial crisis. Our recent run of fuel was a classic case-in-point. (Check out “Fear & Loathing in Atlanta”)

So tell me when this was written? A group of 33 eminent economists from various nations met in Washington, DC, and collectively predicted that “the next few years could be the most troubled since the 1930s. “ (Answer: New York Times – December 26, 1987)

During challenging and difficult times, everyone feels that they’re in uncharted territory. If you were to read Business Week or New York Times articles from 1973, 1974 (during the first oil crisis), 1981 (when 85% of Savings and Loans lost money) or 1987 (during the S&L crisis and Black Monday), you would find references to these events as “unparalleled” or “not since the Great Depression.” It is only with time that we are able to put events into perspective.

But there are other factors exacerbating the current financial crisis, such as the speed of technology. Today we have the infrastructure in place to handle greater stock market trading volume, which in turn has created discount brokers that have removed much of the transactional costs from stock market trading.

In 1987, after Black Monday, the stock market was closed because the transactions overloaded the system and they needed time to process. This temporary close actually served as a sanity check and prevented a further frenzy. Also, transaction costs served as a barrier. In 1987, a full-service broker might charge $300 – 400 per trade, which would cause individual investors to pause. Did they really want to dump their GE stock or would they wait and see if the market stabilized? Today, with trades at $7 or lower, individual investors can easily “knee-jerk” in and out of the market. This further destabilizes the market and creates the volatility that we see today. That is why confirmation of something we all knew – that we are officially in a recession – caused the market to drop nearly 700 points on Monday, December 1. This again ties back to the pervasive influence of mass media.

Financial gurus such as Warren Buffet and Jack Welch are predominately optimistic about the strength of both the U.S. and global economy. In an October 2008 discussion with Charlie Rose, Warren Buffet affirmed that there were a number of attractive investment opportunities available in this market. He offered this sage advice, “Be fearful when others are greedy and greedy when others are fearful.” He followed by saying that, in his lifetime, this is the most fearful environment he has witnessed. In a recent Business Week article, Jack Welch encouraged readers and leaders “to talk about reasons for confidence. America is loaded with energy and creativity; it's a culture that exalts entrepreneurs, who drive every recovery. Its system of higher education is envied worldwide. The country is brimming with strong companies with sustainable cash flows.”

So before we continue this spiral into economic woe, reflect on the words of Charles Dickens from A Tale of Two Cities:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, … it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

In part two of this blog, we’ll explore some short-term future scenarios that – building on this historical perspective – could influence our economic decision-making in the coming years.