Thursday, 18 September 2008

Strictly Business: Don't Panic!

At the time of this writing it looks like the economic apocalypse many in the media have been predicting has been averted as the stock market, media companies especially, rebound after the massive plunges I discussed earlier.

Now I'm not saying that the roller-coaster ride
is over. The stock market, like everything, follows patterns, and in situations like this, things will go up when folks start buying to take advantage of the bargain basement prices. Then, when they have their profits, they will sell those stocks, causing the prices to go back down, though probably not as badly. So the market will be going like a pair of whore's drawers for a while yet, then things will calm down.

So don't panic, it is not the end of the world.

Now I don't want to sound like a know-it-all, two days of losses that I
even though that is my usual tone, but I actually did see this coming. Especially when it came to those sub-prime mortgages and the overheated housing market. I had one of those epiphany moments, much like the probably apocryphal tale about a Wall Street Bigwig in 1929, who was getting his shoes shined one day. While getting his shine on, the shoe-shiner bragged about how he made a killing on the market by buying stocks "on margin."

Buying on margin meant that the broker "loaned" up to 2/3s of the stock's price to the buyer, and thanks to the 1920s literally roaring with prosperity, speculation abounded, with everyone getting into the game.

The problem with buying on margin is that if the Stock Market does anything other than keep skyrocketing beyond the realm of reason, that shoe-shine boy, and hundreds of thousands of other small investors were looking at bad debts at best, complete ruin at worst.

That Bigwig, knowing the nature of markets and the inevitability of economic tidal gravity, saw what was coming and got his money out of the market.

I had a moment like that bigwig. I enjoyed the first season of an A&E show called Flip This House, where a South Carolina real estate developer took run down properties, rebuilt them, and sold them for a profit. The most entertaining part of the show was that no matter how crazy his scheme sounded, it always came together in the end. That and I developed lusty thoughts for the developer's positively adorable southern belle sidekick Ginger Alexander.

Now dozens of other shows popped up on just about every cable channel that could get away with it. I checked out one of these other shows, and in it a woman in Los Angeles' Echo Park neighbourhood was flipping a hundred year old house. She literally did everything wrong, and I mean everything, and she still ended up selling the house at a profit.

I then realized that there had to be thousands of similar amateur flippers roaming the cities and suburbs of America, drunk on cheap sub-prime mortgages, knowing nothing of what they were doing, and still making money despite their incompetence, because the real estate market was overheated and overvalued.

The turd of stupidity can only float so long before it gets flushed, and like those margin stock-players these people were accruing massive debts that relied on their market to keep shooting skyward, in order to avoid disaster.

Now Real Estate has always been considered the safe bet f
or investment, because as Lex Luthor said: they ain't making any more of it. And after the CEO perp-walk festival of the early 2000s, and in response to the wave of new regulations governing corporations, everyone, institutional investors included, were getting into real estate big time.

So, we ended up with a perfect storm. Amateur flippers walking the tightrope thinking it was the straight and narrow path, banks, backed by a completely dysfunctional Fannie Mae/Freddie Mac, doling out mortgages like candy at Christmas, and institutional investors buying up those freshly bundled mortgages as investment securities. Like tulips, margin stocks, dot-coms, derivatives, and all the other boondoggles, everybody got into the game, and they got in way over their heads, confident that everything was going to be all right.

It was all bound to come crashing down.

Except when you're on the heights, it's hard to see the bottom until your nose is slammed into it. Then comes the hard work of rebuilding and starting over.

So expect some mergers, acquisitions, and other activity for the next while, until things calm down. Too bad I don't have any money, because the past few days was a great time to buy.

All you have to do is not panic.

Damn, I did a whole post without mentioning movies. Somebody in Hollywood better do something crazy tomorrow.

I can't just write about money without relating it to the movie biz. I'm too narrow minded.

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