As I posted the other day, the market has been volatile of late. After reaching a high in Mid-July of 1555.90 the S&P touched 1427.39 on Monday (Aug 6) a drop of over 8%. But now back to 1497.49, the S&P has come back 4.9% from this recent low. This recent blip will look just like any other, meaningless in the long term. What will the market do tomorrow? Random Walk tells me I don’t know, and that short term movements simply don’t matter.
JOE
I am haunted by an article in the Boston Globe Magazine from June 24, 2007 titled “Here Comes the Repo Man” a reference to the author’s father who was a repo man for GMAC when the author was a child. She learned the lesson that when you can’t pay for what you’ve bought, it gets taken away from you, in this case, sometimes in the middle of the night. She then goes on to discuss the current rise in foreclosures. You can read the whole article, it’s barely a page. The author shows little sympathy for those who got in over their heads, suggesting that many people couldn’t afford these homes to begin with, and, lacking common sense, deserve what they get. I’m sorry, I just can’t get to that level of cynicism. I do believe that most people suffer from some degree of innumeracy (the inability to make sense of the numbers that run their lives) and that common sense doesn’t bring with it the understanding of complex financial products such as mortgages, especially those which are not simple, fixed rate products. It’s easy to say in hindsight that these adjustable rate loans were mostly accidents waiting to happen. Did anyone believe that the 1 year t-bill would actually stay at 1% forever? Borrow $250,000 interest only at 3% and you pay $625 per month. When the rate goes up to 6% the payment jumps to $1500. This is the message that the banks and mortgage brokers failed to deliver. ‘Caveat emptor‘ may be fine when buying a TV or toaster, but when banks are originating mortgages and then selling then back into the financial markets, they have a moral, if not legal obligation to qualify their customers. The author of ‘repo man’ suggests the buyers weren’t undereducated, and cites some of the cities now hit by foreclosures. I maintain that the common person, not in the financial industry, did not, and doesn’t today, understand these products pushed so hard by the lenders.
JOE
The market has gotten more volatile in the last month. Average point move on the S&P in the last 30 days has been 14.4 compared to the last year’s average of 6.9. This kind of volatility can certainly turn your stomach, but it’s the long run that matters. I touch on this topic in my article Market Timing, and also would recommend a look at MoneyChimp for an interesting take on how volatility for longer time horizons decreases.
Edit – I offer this chart courtesy of Yahoo Finance, illustrating the recent upturn in the VIX, the CBOE Volatility Index.
While short term, volatility has spiked up, we have just returned to the range of 1998 – 2003. We survived those days, and this, too, shall pass.
JOE
This is the blog companion to my website JoeTaxpayer.com where I publish a feature article each month. Here, I intend to be more stream of consciousness along with more frequent posts. For now, please take a peek at my main web site, or see my recommended reading list. Welcome to my blog.
JOE
