I think what some of the posters are getting at with the “this time it’s different” and “throw the models out” mantra is that we’ve only had three similar credit contractions like the current one in the last 20 years. So, while the “models” may “properly correlate” – to simplify the terminology – 90% of the time, serious credit contractions are fairly rare and throw everything into a tailspin. The late-80s S&L crisis (credit contraction I) wafted into the early-90s recession (credit contraction II); then we had the 1998 LTCM debacle (contraction III). The Fed basically stayed out of the way – correctly, in my opinion – for I and II, so we got a nice cleansing recession followed by some nice growth. We probably needed a recession and some financial distress in ’98/’99 to remind people that with reward comes risk, but the Fed arranged a bailout, thus engendering the “Greenspan Put” which has lasted until recently (we’re waiting to see if there’s a “Bernanke Put”). The point in all of this is that credit contractions of this magnitude are fairly rare and this one is particularly rare because it involved trillions of dollars of structured finance and derivatives, much of which existed on a MUCH smaller scale at the time of the last contraction. In other words, this one is shaping up to be MUCH larger than the previous three. Therefore, we are, in fact, in uncharted waters. That is why I believe that, in fact, “this time it’s different.” To quote Charles Barkley, “I could be wrong, but I doubt it.” Many people like to say that “this time it’s different” are the four most expensive words in investing, and 90% of the time that’s correct. But sometimes things are a little bit different… and when they are the “models” – generically – often miss it. Again, we could start a mega-bull market on Monday – I ain’t no trader man – but I think these problems have been brewing beneath the surface for several years and are just now starting to percolate to the surface. I think we’ve just scratched the surface of the ultimate damage to stocks.
