Beware the Dead Cat Bounce
Perhaps you’ve been hearing this very graphic Wall Street trader term bandied about during these tumultuous times. It’s actually been used for decades as a warning to investors that buying into temporary rallies during bear markets can be wealth-threatening.
The other well-worn phrase is “Don’t catch a falling knife”. That refers to watching your favorite stock taking a plunge, and buying more in the often mistaken belief that the fall is temporary.
Actually I think these terms are perfect warning signs right now. After a brief four day rally some Wall Street pundits are predicting the bottom has been reached, and the markets will soon come roaring back. I am an insufferable optimist, and wish I could share their enthusiasm. It’s just that facts get in the way.
Banks are still trying to figure out exactly how to value all those toxic home mortgages rotting on their books. There are millions of new and foreclosed homes sitting on the market, so homebuilders cannot recover until that inventory drops. Small and medium size businesses are shedding workers, or just shutting their doors. Either way, there are fewer employees to fill up offices, so expect a lot of commercial leases to be broken this year.
Hundreds of thousands are losing their jobs every month. Those still employed are worried they will be next. Both groups are cutting back drastically, even cutting their own hair and their own grass. And many are not paying their credit card bills, so expect more consumer credit defaults. People are also not buying cars or airplanes, both of which employ millions of workers. Like an oil tanker, those businesses cannot turn around on a dime.
Things are even worse in Europe, where many countries are not being nearly as aggressive as the U-S, stepping in with massive government assistance. Because so many Europeans get free health care and job security, they don’t seem to feel the pain the way Americans do. Unfortunately that means politicians are not getting the public pressures necessary to get actively involved. Europeans will not be flocking to our shores to spend tourist money, nor will they be buying our goods.
Japan has been in the economic doldrums for decades. China’s growth, while still positive, has pulled back drastically. With millions out of work, that country faces enormous political, as well as economic pressures. The drastic drop in oil prices has oil producing countries scrapping huge development programs. In Dubai, once considered the economic engine of the Middle East, huge cranes dotting the landscape sit quiet while office buildings sit vacant.
Our economy will certainly recover, as it has though countless recessions, and one Great Depression. We have the experience, capital, energy and entrepreneurial spirit to come back, perhaps better than before. And we have the political will to pass regulations to help make sure Wall Street traders and Main Street homebuyers do not cheat the system.
We cannot legislate against greed. But we can learn from our mistakes by being patient. And not make another mistake right now by trying to “catch that falling knife.”
(Brian Banmiller is a national Business Correspondent for CBS News Radio, free lance writer and public speaker. The former television business news anchor in San Francisco can be reached at brian@banmilleronbusiness.com .)
