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Smith
Faculty Opinion Article
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.
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