Honey, I Shrunk the Net Worth

By: Kevin Duffy | Fri, Mar 4, 2005
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"It's totally different in the real estate market than it is in the stock market."
- Thomas Kuntz, CEO, Century 21, February 25, 2005

To the seasoned investor, four of the most dangerous words in the English language are "It's different this time." Five years ago, this country experienced the mania to end all manias for anything tech-related. Today it seems the public has merely shifted to all things credit-related.

Manias share four common characteristics:

Admittedly, there are differences. In 2000 Wall Street underwriters raised equity for marginal businesses; today they raise debt for marginal consumers. Five years ago the federal government enjoyed a surplus; today deficits run as far as the eye can see. In 2000, the dollar was strong, inflation dead, and commodities weak. In the five years since, the U.S. Dollar Index dropped 22%, money supply (M3) grew 44%, and the CRB Index gained 40%.

One question keeps nagging us. Manias are rare occurrences, gracing us with their presence every 30 or 40 years. How can a crowd delude itself twice in just five years? Perhaps at least part of the answer is that there are actually two crowds at work. The tech mania, it seems, was primarily driven by testosterone - Ferrari driving CEOs of dot-com and Silicon Valley startups, napkin-scribbling venture capitalists, master of the universe investment bankers, and hyperactive day traders. The present day mania appears to have more balance, with women playing a greater role. Men are more prone to think in terms of abstractions and do things like chase technology stocks into the stratosphere, while a house is tangible and appeals to both sexes.

Tech Mania, 2000

Credit Mania, 2005

The severe Nasdaq bear market of 2000-2002 took the male ego down a few notches. Wives who were suspicious of the boom, but reluctantly supported their husbands anyway, knew who to blame when the couple's finances unraveled. Many refused to adjust their lifestyles to the new reality. Enter Alan Greenspan offering a cheap and seamless way to keep up appearances, upgrade the kitchen, and buy that new home theater system: simply tap into ever-rising home equity. The wife was able to spruce up her nest, the husband salvaged his marriage, the finger pointing ended, the house climbed in value, and they all lived happily ever after.

Predictably, the residence has become an emotional hot button, making this credit mania all the more terrifying. Popular mortgage ads feature the woman in control as lenders line up to provide cheap credit on her terms. Attention personal bankruptcy specialists, divorce lawyers, and marriage counselors. Business is about to improve.


Kevin Duffy

Author: Kevin Duffy

Kevin Duffy
Bearing Asset Management, LLC

Mr. Duffy is a principal of Bearing Asset Management.

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