Investors in Canada were feeling fairly comfortable while we watched Bear-Stearns, Lehman Brothers and Merrill Lynch go under. “It can’t happen here,” Canadian bankers assured us.
Then, on the “Black Monday” when the Dow-Jones plunged more than 800 points, the TSX followed at -777.
Both rebounded about half-way the next day; that’s more than a “dead-cat bounce”, but it still left investors feeling wounded in the portfolio.
A few facts are required in order to get some perspective on this:
First: When the stock market plunges, the news media always trumpet headlines like: “Nearly a trillion dollars wiped out!” Hogwash. No assets were “wiped out”; they merely changed hands. Those who anticipated the plunge, and put assets into cash, are right now busy buying up companies at 50 cents on the dollar—or less.
Does that imply that someone(s) engineered the slump for their own profit? Maybe. Franklin D. Roosevelt once said, “If something happens in politics, you can be sure someone planned it.” And he was no “conspiracy nut”!
Second: What caused the US crash? During the Clinton era, Senator Chris Dodd, (D-CT), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs; and Congressman Barney Frank (D-MA), Chair of the House Financial Services Committee, put pressure on banks to make loans to unqualified borrowers. Government-sponsored mortgage underwriters Fannie Mae and Freddy Mac helped inflate the market with bad paper. (Two top executives from Fanny Mae and Freddy Mac are now Barack Obama’s advisors; FM/FM gave $330,000 to Senator Obama’s campaign while those men were still at the quasii-government mortgage companies; and the CEO of Countrywide Mortgages-who got a multi-million-dollar “golden handshake” when his firm went belly-up-is also on the Obama team now.)
When interest rates went up and energy costs put the price of everything through the roof, people who had bought homes with sub-prime mortgages and nothing down could no longer make the payments. Their houses flooded the market, and prices crashed (30% in some Florida neighborhoods).
Will that happen here, too? Probably not. Canadian bankers weren’t pressured to loan money to poor people who couldn’t pay it back; they continued to do credit checks on borrowers.
Canada’s biggest dangers are two-fold:
- House prices in some areas (e.g., BC’s Lower Mainland, Toronto’s suburbs) are too high, from years of overheated sellers’ markets. In the Lower Mainland, prices went up 30-40% last year. Combined with rising fuel costs that push up the cost of everything, that puts pressure on family budgets, and some houses could go into foreclosure. But not on the scale of the Fanny Mae/Freddy Mac debacle.
- Of the two forces that govern the stock market-fear and greed-the latter (greed, which has ruled in recent years) is in danger of giving way to the former. If fear becomes the dominant emotion on Bay Street-well, as the saying goes, “No one wants to catch a falling knife.” Fear could cause more roller-coaster rides, mostly downwards.
But Canada’s resources, productivity, and our intelligent, well-trained workforce haven’t changed. If we don’t panic, we can weather this.
As FDR also said, almost 80 years ago: “We have nothing to fear, but fear itself.”