Smith Faculty Opinion Article	March 2008
By Dr. John A. Haslem, Professor Emeritus                                                                       E-MAIL       WEB SITE

The 30 Seconds Outlook
March 1, 2008

". . . George, this is no time to go wobbly." Margaret Thatcher to George I at the time of the Kuwait war.

The (rationally not unexpected) decline in the subprime mortgage market has spread rapidly to both domestic and foreign financial markets. The rapid change from excessive market optimism to pervasive pessimism is matched perhaps only by the collapse of portfolio insurance in October 1987. Excessive leverage lies at the heart of the subprime problem, and one can only guess how long it will take to unwind in markets fueled by cheap money. As Tweedy, Brown (2008) stated in its letter to fund shareholders: ". . . [W]hen optimism turns to pessimism borrowers get crushed by lenders and the rest of us have to put up with the mess." Since 1997, the stock market has endured nine (count them) crises, but each time it has survived and returned to prosperity. Today's credit crunch and worsening house crisis is crisis number ten, and it too will be survived with a return to prosperity in financial markets. The current "scary time" is also tempting "classic" value fund managers to follow Margaret Thatcher's dictum. This is seen in reduced fund cash levels and reopenings to new investors.

by John A. Haslem

John A. Haslem, Professor Emeritus of Finance, University of Maryland.