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Interesting, though not terribly uplifting, perpsective on what's currently going on.

My Take on This Very Risky Market
by: Larry Swedroe October 27, 2008

I have been working hard to keep the 120 or so RIA firms with which my firm works informed of what has been happening in the markets and why it is happening, so that they can communicate effectively with their clients. On Friday, I gave the third in a series of talks I have given over the last two weeks or so as the crisis has played out. Below are some notes from Friday's discussion.

We certainly live in interesting times. While I have witnessed events like this before, never have I seen so many at one time and with such a big impact---again, the lesson to remember is to never treat the unlikely as impossible and don't take more risk than you need to (at least without being fully prepared for the possible consequences). With that said, here is a short summary of what I believe is happening.

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We are certainly living in historic times with almost everyone clueless. I fail to understand why we are not going to have a depression 2.0. It will hurt in a different way, if it happens. Different times. Just becoz the govts around the world are working together in tackling this beast does not mean we will avoid depression. It only means we will not have the exact pain of 1932 when savings were lost suddenly with bank failures.

Much of the developed world's economy has been based on consumer credit and I think that is now going to change in a big way with consumers potentially changing their spending habits in a big manner. To expect that normalcy will reign again with consumers getting back into debt as earlier is unreasonable. We are likely to see a sea change in spending habits with people trying to live withing their means for the next few decades (after which the history shall repeat itself). I feel that those who invested when DOW was in 10-14K range have suffered a permanent loss of some of their capital. DOW at current levels is far more reasonable and a growth of 4% per annum over the next decade from the current levels would be quite reasonable. It is entirely possible that DOW bottoms at 6K and reaches 10-12K in next 10 years. From a 6K level 10K would appear far more impressive than from the current level.

Let us see what happens.

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You may be a bit overly bearish long term, though I agree near term... As for a permanent loss of capital if you invested near the top I agree - just like if you invested in Yahoo, EMC, etc in 1999. I'm thinking the signs of market stability will bring a massive rally - similar to the 1000 point gain we saw mid-October - but that rally will only bring the dow to the low 9000's by the end of next year. I'm thinking it'll cross 10,000 again sometime the year following (2010) ... as for 10 years from now who knows, the dow could go to 20,000 as the dollar loses over half its value; it could stay roughly the same; there may be an entirely new bubble in place or the bottom of the next bear market. I would expect at least a temporary rally to bring us close to 12 again in the next decade - and we'll have to decide at the time if it seems sustainable or if it's just the early-mid 70's all over again.

-John T
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