A good friend of mine who is a professional money manager recently invited my family to hear former Federal Reserve Chairman Ben Bernanke speak at a forum here in Seattle. As you might expect, much of his talk centered on the 2007-2008 financial meltdown. As Bernanke described these events in detail, I had this vision of a large stock price chart above his head playing out in real-time. I envisioned this chart keeping up with his verbal descriptions of the events that occurred behind closed doors while simultaneously reflecting price action in the public markets.
Two observations struck me. First, it is only now, seven years later, that Bernanke has written a book (The Courage to Act) explaining many of the fundamental and economic reasons for the 2008 market collapse. It’s interesting to have his perspective, but after all the intervening years, it’s merely academic. The second observation is how amazingly accurate the markets were in reflecting the financial deterioration that was being dealt with out of public view. The charts revealed the deterioration long before the average investor understood what was happening.
Even the most dedicated fundamental analyst who reads Bernanke’s book, follows his timeline and in parallel plots events real-time on a chart of stock market prices will be immediately and forever converted to being a chartist. There is simply no denying the reality that a selling methodology based on fundamental revelations will not treat your portfolio kindly. This is my attempt at a polite understatement.
I found it interesting when Bernanke spoke about his PhD and how he had studied the Great Depression of the 1920s and 30s. Well-versed in market consequences from that period, he was determined to not allow a replay in 2007-2008. Here are some other comments he made:
- The financial system is based on confidence. If confidence in the system fails, panic and fear ensues, resulting in true crisis.
- The subprime problem was the trigger but not the cause of the recession.
- To use a metaphor, if you find yourself in the middle of a fire, you have to put out the fire first.
- There was a lot of pressure not to bail out certain corporations. A bailout was perceived as rewarding risky behavior by management.
- One Bernanke comment was my personal favorite: “it’s not illegal to make stupid investments – perhaps it should be.”
- Some inflation is always needed to give the Federal Reserve tools for the next recession.
- People often forget that fiscal policy is set by Congress but monetary policy is always set by the Fed.
- Markets over-react – it’s human nature. For example, if the media reports that just four cows are discovered with mad cow disease, people will totally avoid eating all beef.
- As I teach in my classes and write in my blogs, the stock market operates on the principle of groupings. You are the company you keep, and you can be perceived as guilty by association. Pick your cliché. As Bernanke said, one bad company in any particular industry can create antipathy towards every company in that industry, and that was certainly the case in 2008.
- History shows us that financial panics will inevitably recur. Expect them. Plan for them.
Trade well; trade with discipline!
-- Gatis Roze, MBA, CMT
Developer of the StockCharts.com Tensile Trading ChartPack.
Presenter of the Tensile Trading DVD, Stock Market Mastery.
P.S. Click HERE for information on my future appearances & seminars.