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The Great Expression

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Opportunity awaits those who are proactively prepared.

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"Time is the only critic without ambition."
--John Steinbeck

Wall Street is dusting off its history books for lessons in how to deal with the financial crisis. Traders are quickly finding that this script has never been written.

I wrote a column in 2006 called The State of the Art. It discussed the shifting paradigm for the financial industry as it sat at the crossroads of technology and regulation.

Two years later, the new world order has emerged.

Fannie Mae (FNM), Freddie Mac (FRE) and AIG (AIG) have been absorbed by the government.

Bear Stearns (JPMorgan (JPM)), Washington Mutual, Wachovia Bank (WB) and Merrill Lynch (MER) were consumed by competitors.

Lehman Brothers ceased to exist altogether.

There are many ways to view this seismic shift. There's anger (as expressed by Main Street), sadness (as savings are destroyed), fear (as reality bites) and confusion (as folks try to understand how this could happen in the first place).

And then there's anticipation, as we cast an eye forward and look for the phoenix that will eventually arise from the scorched earth.


The unfortunate capital market destruction is an inevitable comeuppance, the cumulative result of risk gone awry. It's been percolating under the seemingly calm surface for several years, magnified by financial engineering and consumed by an immediate gratification society.

The socioeconomic consequences will be pervasive as we endure the other side of the business cycle, an unenviable retrenchment that politicians and policy makers tried so hard to avoid. It's certainly scary as new beginnings always are.

Therein lies the opportunity.

History Doesn't Always Repeat but it Often Rhymes

The longest recession ever The Great Depression lasted 44 months. In the thirteen recessions dating back to 1929, the median S&P bottom occurred 58% of the way through the recession.

If our current conundrum is on par with the worst financial crisis in history in terms of duration and we assume that the business cycle peaked in the fourth quarter of 2007, we could extrapolate that the stock market bottom will arrive in the first quarter of 2010.

The media portrays the Great Depression as a time when everyone in America stood on street corners waiting in a bread line. A closer look shows that similar to today, economic hardship for the middle class began well before 1929.

History teaches us that the stock market crash didn't cause The Great Depression, The Great Depression caused the stock market to crash. It was a manifestation of economic deterioration, much like the modern day sub-prime mortgage implosion.

Social mood and risk appetites shape financial markets, they always have and they always will. The current stock market malaise is, in many ways, simply catching up with preexisting societal acrimony.

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