In over 35 years of buying and selling stocks, I have learned a lot about the things that make me fail. As you can see from the Chart 1 above, as a general rule, as the price of a barrel of increased so did inflation. This repeal was signed into law in 1999 by President Clinton as a compromise with the right-wing conservative Congress both had forgotten the lessons of history. In all other periods of history prior to 1933, what was happening from 2006 to 2008 would have ended up in the worst world-wide depression the world had ever known. By mid-2008, lenders like J.P. Morgan began calling in their margin loans they made to companies like Bear, Stearns, a major hedge-fund manager.
Most of the mortgage loans made over the preceding six or seven years were based on a wing and a prayer”, meaning people prayed that home prices would keep going up indefinitely; I actually heard supposedly smart pundits say such idiocies back then, I could only shake my head, because I read and remembered my history. Among other things, this Act contained one arcane requirement that went into effect November 2007, and that was for publically-held companies to report assets mark-to-market”, in other words, to give their true value as best they can.
The risk, according to conservative economic theory, is so diversified over so many strong institutions that even if many of these loans in the portfolios these banks and insurance companies and the like were making bets with defaulted, none would be so large for any one institution as to cause a problem for the whole. Berkshire’s class B shares, now trading at around $113, could have been added to the Dow.
Consequently, from early Spring 2007 onward, some companies jumped the gun, reports started appearing across the nation painting an astounding portait of ill-health in the financial industry. In 2007 and early 2008 companies like Goldman Sachs, Bear Stearns, Citibank, Bank of America, Merrill Lynch, AIG, and all of the other big names you have heard of were in an internal panic, but publicly were lying their whatever’s off. The lines at the top of the chart are technical analysis lines know as Support-Resistance lines. In response, the stock market nose-dived 778 points, the one-day loss in its history.
The stock market understood what was happening as well S1 Chart xx tracks the Dow 30 Industrial Index through something called an Exchange Traded Fund (ETF) with the exchange symbol of DIA; I trade options in trying to guess whether it will go up or down each month. The index doesn’t need to track companies that insist on managing themselves into a death spiral.