StockFetcher Forums · General Discussion · 25 years to recover<< >>Post Follow-up
11,043 posts
msg #61292
Ignore johnpaulca
4/10/2008 1:07:47 PM

This in Wednesday, via a Reuters conference in London: Hugh Hendry, CIO of hedge fund Eclectica Asset Management, declared that financial stocks could take 25 years to recover from the subprime disaster and added that Citigroup Inc. would fall below $10 a share.

His logic: Subprime represents the puncturing of a bubble that began the last time Citi collapsed, in 1991 (bottoming at less than $10 a share). "The origination of the bubble in U.S. financing is circa 1991, with the bailout of Citigroup," Hendry said. "It is my presumption that we will return to such levels." Hendry argues that when a bubble is created in a sector's stock it takes a quarter of a century to return to prebubble levels. Oil stocks, he said, made up a third of the S&P in 1980, then suffered a 25-year period of "scorched earth" before their recent recovery.

There are a number of oddities here, some of which may come from the rather sketchy Reuters story itself. Twenty-five years is a long period in the markets, and over that stretch market fundamentals tend to be swamped by real economy factors. The Japanese bust and deflation lasted more than a decade, despite multiple policy errors. Based on Hendry's notion, it took until 1954 to recover from the Crash of 1929, with the ultimate real-world event -- World War II -- playing a small role in the middle. Is our situation analogous to that? What role will policy -- good, bad, indifferent -- play?

Hendry's theory raises other questions. Does his 25-year cycle apply to single firms -- Citi, say -- or entire sectors? Is, say, Morgan Stanley on the same treadmill as Citi? The usual notion is that real economy supply and demand -- from OPEC to China -- determined the '70s bubble and our current runup in prices and shares. Did China suddenly get thirsty for oil because 25 years have passed? Why would the subprime bubble have begun in 1991 with the Citi "bailout" -- technically it was less a bailout by the Fed than benign neglect -- which involved highly leveraged loans and commercial real estate? We've had ups and downs since then, including a tech bubble, a recession and down real estate markets, all of which hammered financial stocks. Why is 25 years the magic interval? And what's so magic about $10 a share? Hendry, a longtime bear, has suggested in the past that there's a sort central bank conspiracy -- he's not an Alan Greenspan fan -- to flood the world in liquidity and that we've been living a loose-money, false prosperity for years. Has that now come to an end? Or is he communing with some deeper technical wisdom that's not evident? Has subprime exposed a fundamental flaw in financial stocks, beside a collective speculative boo-boo, that will keep them prostrate until 2033?

We may well be in for an ugly stretch here, and financials may be down for awhile. But the future is still uncertain, and Hendry is cavalier-bordering-on-the-absurd with his use of the term "bubble," which, like any cycle theory, can be tossed around so promiscuously because the future is so unknowable. It's good conference fodder, but just that, particularly in these gloomy times. Maybe Hendry has a quarter-century short on. - Robert Teitelman

1,373 posts
msg #61298
Ignore EWZuber
4/10/2008 2:53:31 PM

I think that people are always searching for simple answers. The author points to a 25 year cycle but I suspect that what he is referring to is nothing more than a very long term cycle that took place and it just happened to last 25 years. Because of other mitigating factors that he is unaware of, the next cycle will be longer, shorter, of greater or lesser amplitude.
His observation is too simplistic and does not reflect the natural timing of events.
It reminds me of the alleged, and often referrenced 7 year snowshoe hare cycle here in Alaska. It's been over 25 years since the last big population peak in this area and I'm just now starting to see indicatioons of a resurgence.

2,824 posts
msg #61299
Ignore nikoschopen
4/10/2008 3:07:13 PM

I dunno about Canada, or Alaska for that matter, but in 25 years Uncle Sam will most likely bedridden and so will I.

On a separate note, recount the sham these same banks cooked up for the last few years. They knew the credit market would implode due to subprime woes and yet they shut the lid to intentionally mislead their investors. Just witness Bear Stearns who lied to the day they declared their insolvency. Are we now suppose to have complete faith in these banks' claim that the whole fiasco is behind us?

129 posts
msg #61308
Ignore msummer2007
4/10/2008 4:50:12 PM

Good reading, Valid point Niko. This whole sub-prime mess is a sham. Just look how many stories were cooked up during market trading days, in order to have ones position turn favorable. This market is corrupt to the core. I had spent a considerable amount of time in Europe last summer, and had the privledge to listen to Bloomberg Europe. They had this man from Australia who said (this was in June) that the US sub-prime debt is over 500 billion. When I returned to USA, I was listening to all the usual pundits saying " the sub-prime mess is contained". Even Europe knew the extent of the situation, but heaven forbid the American investor was allowed to know the truth. This would cause to much competition heading for the exits. Think about it! We should have a poll on Stockfetcher, where you cast a vote whether you believe any of the reports coming out of Washington. I for one think their all full of SH&T. While I am on a roll, who likes any of these candidates running for President. Another sham again.

1,373 posts
msg #61313
Ignore EWZuber
4/10/2008 5:36:21 PM

msummer2007, as far as I'm concerned newz is noise. I don't read any market news. If you read newz to try and figure the market out, I submit it will interfere with how you trade.
It will tend to make the trader form an opinion based on their take of the newz and thats where the danger lies. Personal opinions are often in direct conflict with market movements.
IMO, we must learn to listen to the market and not try to force the market to conform to our will.
The current situation is an excellent example. The more that is read about the current mortgage crisis and the economy the more difficult it becomes to make a trade based on technicals without mental interference from the newz.

The only thing that matters is what the market thinks and that can be gleaned from the charts.

2,824 posts
msg #61328
Ignore nikoschopen
4/10/2008 8:08:57 PM

I quite agree with Zub. No matter what you might otherwise think, don't fight the tape. But, no matter what, the market has always been and will always be full of crap to the core and it will faithfully remain as crap in my mind.

1,373 posts
msg #61330
Ignore EWZuber
4/10/2008 8:22:15 PM

Where ever Big Money is involved there's always a bunch of crap.
It makes a lot more sense though if I just just watch the chart and not listen to the hype.

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