Government bail out plans are not about saving the stock market

Stock markets are plunging today supposedly in response to uncertainty over the Paulson bail out in the US. Actually that is not true. As I have said before, for the past couple of years stock markets have been wildly over-priced and blindly optimistic about economic prospects in 2008 and 2009. The real estate markets have been correcting for a couple of years already, the credit markets have been in severe contraction for over a year already. The stock markets of the world have been slow to get it and are now rather violently having to concede reality. Stock investors have been slow to wake up. There is an old adage in finance that the bond markets are driven by the brains, while the stock market is driven by hair brains. The adage is seemingly accurate this time again.
Recently I have seen many comments expressing a belief that governments will step in any day now and stop market declines: “they won't let the stock market go down, they won’t allow it.” Sorry folks this thinking is a fool's folly. The truth is the governments are not in charge of the stock market. It is not even meant to be on their radar.
Recent emergency government efforts are focused on trying to shore up the banking system. They are not meant to save stock investors. Stock investors are on their own. And those that did not realize that before today, are suffering greatly through this. The present downturn is the most serious global financial and now economic crisis that we have seen in decades. Once the economic contraction begins to abate, and the next bull market does begin, it is likely to take years before stock and commodity markets will retest the highs of 2007. This is just how market cycles work.
Meanwhile there was an excellent article by James Galbraith (yes John's son) in the Washington Post this weekend. Apparently he too sees green technology as the next growth area that North Americans can peg our economic recovery too. See “A Bailout we don't need” for some wise perspective.
The Canadian market had its biggest decline today since October 2000. But we should recall that October 2000 was not the end but only the start of the 2000 to 2002 bear market in stocks. It is very likely that today will not be the end of this bear market either. Having lagged this global downturn to date, I suspect that Canada has more catching up to do on the downside.

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8 Responses to Government bail out plans are not about saving the stock market

  1. Anonymous says:

    Hi Danielle, I figured there'd be an update today !
    Nothing seems to work for investors / speculators now except bullion ! As cynical as people might think some other people are, they haven't been nearly cynical enough…
    So much for buying something as recommended on tv and waiting patiently for the guest to come back in a month and update on it…
    Are GIC's safe ? i.e. from the major banks…I know about CDIC, but when I see miniscule t-bill yields and 2 yr major bank GIC's at 4 %, I wonder, should I take the lower yield and be as safe as safe can be, or is that overdoing it on the worry/bear/doomandgloom/fear scale ?
    thanks for any input…

  2. Anonymous says:

    Danielle. This has become my favourite blog. Your intelligent insights, opinions, statistical research, recommended links, is very much appreciated (your blog, Juggling Dynamite, and Unexpected Returns got me totally out of the market about 3 months ago, many thanks, down 9% in 08, after up 23% in 06 and up 42% in 07, thanks to fertilizers stocks, looking back I admit, I was just lucky ) , but most of all your honesty and genuine concern for the captital preservation of the retail investor is most appreciated. I did not know just how important timing the market, knowing where we are in the secular and economic cycles, is to preserve capital. Mutual Fund companies say it is a waste of time, one shouldn't to try and time the markets? Thanks again Danielle. You should give Dion a hip check and clear him off the stage, and run for PM, definetly have my vote.
    Ricky in London, ON.

  3. Anonymous says:

    Hi Danielle. This is my first post on your blog. I've been reading it since I heard you on Moneytalk with Michael Campbell.
    I finally had to post because I was reading on Globe and mail that some money managers were saying today was capitulation and people have nothing to worry about. What a huge conflict of interest. Of course they'll say that, so their clients won't pull their money and stop the MERs from coming in.
    http://www.theglobeandmail.com/servlet/story/RTGAM.20080929.wmarketvoices0929/BNStory/Business/home

  4. Anonymous says:

    Danielle, do you worry that currencies all over the world will lose value with this global slow down? What do you think about Gold or Silver? I am really regretting not buying either and instead choosing to stay in the USD. I just want to put my money in a place that is safe. With 700 billion dollar bail outs and potentially more problems facing the US economy, I am worried there is no hope for the USD.

  5. Anonymous says:

    Hi Danielle-
    I have been reading your blog since I heard one of your interviews on BNN. I really like your views and your candor. I was hoping to become a client but alas my capital to invest was not within reach. So I just want to say thank you for this service you provide with your blog! It helps me to keep perspective. I have similar concerns to the poster before me. I am in US dollars-all cash or CD's spread among a few small but strong local banks. I thought this was safe but now as I see all these huge institutions falling every day I am wondering if I should move to treasuries even though they pay nothing right now. Also I am wondering if I should be in some gold for insurance. I know you are bearish on commodiites right now and I'm wondering where gold would have to move to change your view on the direction? Lastly- what vehicles would you recommend? coins? Gold money or other bullion buy & store programs, ETF's or other? Thank you again! Becky

  6. Anonymous says:

    thanks Ricky, glad to be of value. But PM? There is a job I would never want. D

  7. Anonymous says:

    Hi Danielle, Great comments. I find your blog one of the best that keeps everything in perspective. You keep to the facts and do not sugar coat the market like the kool aid crowd on tv. I found an interesting article to complement yours. This is a post from a Frank
    Shostak. The article can be found here http://mises.org/story/3131.
    Keep up the great work. Scott

  8. Anonymous says:

    S, good article thanks for the link. D

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