Market Fluctuations and Subprime Morality

By Ben Stein

Long ago, when asked what the stock market would do, the famous financier J.P. Morgan, said, "It will fluctuate." How right he was, and how clearly we're seeing it recently.

The stock market has been on a wild descent, then a wild ascent, then a wild descent again. What to do, what to do?

Plenty of Liquids

Let me start with an anecdote. A few days ago, I had lunch with an old friend and her husband, who's a mortgage lender and builder of spec homes in Orange County, Calif. Two years ago, the couple thought they were rich. Now they're in a severe liquidity crisis.

The homes they built on spec aren't selling. The carrying costs in interest are eating them alive. Their mortgage business is extremely slow. Most serious of all, they didn't have a big liquidity cushion. They're continuously borrowing money at ever higher costs.

Frankly, I don't know what will happen to them. One alternative is for them to just give the houses they built back to the lenders. Another is bankruptcy. My own suspicion is that they'll sell the houses if they lower the price enough, and next time around they'll be a bit wiser about liquidity.

The Bucket Strategy

I know most of you aren't homebuilders and mortgage lenders, so I'm sure you don't face exactly the same problems my friends do. But as the market "corrects" and as the economy slows (if it does), liquidity is a lovely thing to have.

I've mentioned this many times before. I especially connect it with the fine "buckets of money" strategy of my colleague, Ray Lucia. His advice, somewhat simplified, is to keep a big pot of cash or near-cash so you can ride out slumps in the market for stocks -- or anything else you're in -- and not have to sell at the troughs. Like all of Ray's advice, it's darned good.

I know very well that it's tempting when the market is going up to plow your money into it and assume that it'll just keep going up. I do way too much of that myself. But the sad truth is that the market "will fluctuate," just as Morgan said. So, right now, I recommend that you take steps to build up a pile of liquidity in case we do have a severe stock market crunch or business slowdown.

Unwarranted Stock Jitters

On the other hand, neither now nor any other time that I know of is the time to bail out of stocks. (When I say "stocks," I mean broad indexes of domestic and foreign stocks, not individual stocks, which I find very dicey and hard to pick at any time.)

Indeed, I'm puzzled when I read that advisors are telling ordinary investors to approach the stock market right now with caution. What can that mean? Does it mean that when stock prices are high, you should approach stocks without caution? Does it mean that when stocks are low, you should avoid them?

As the historical record makes extremely clear (and my colleague Phil DeMuth and I have documented thoroughly in our book, "Yes, You Can Time the Market"), you make the best returns on stocks when they're down. So the time to buy stocks is when everyone is warning you against them.

Only do it if you can afford the loss of liquidity and a lot of time, though. It's entirely possible that it will take many months or even a few years for the stock market to calm down about credit jitters. But if history is any predictor, the people who buy and hold in this scary time will be well-paid for their efforts.

Tarnished Parachutes

In the meantime, let me switch gears and talk about moral responsibility. It's now clear that some of the major players on Wall Street were making fortunes bundling junky subprime mortgage instruments and selling this garbage into the financial markets. The heads of some of the major brokerages and investment banks approved of this conduct and reaped the rewards when the market was hot -- i.e., when the market was fooled by what was being sold.

Now some of these people are being fired. But when they leave, they get immense pay and benefits packages that would leave the rest of us speechless if we got them for good conduct.

There's something drastically wrong when a conspiracy of men and women can do this kind of damage to the financial well-being of the nation and get away with it. On a local level, hundreds of thousands of borrowers were sold on mortgages with terms they barely understood. Now some of them will lose their homes. As far as I know, punishment for this sort of misconduct is barely meted out at all.

A Broken Ladder

What's going on? Why aren't laws against fraud being enforced? Why do people get away with fleecing their neighbors down the street -- and their "neighbors" throughout the entire country -- without any sanction? What sort of system allows someone to leave an executive position rich after defrauding people to the tune of billions of dollars?

Where's the legal process here? Where's the basic accountability? Do we believe the ladder of law has no top and no bottom (as the Bob Dylan song goes), or do we simply assume that if a prosecution is complex we'll just let it slide?

Something very wrong is happening.


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