Is the end of the equity cult nigh?

A deep and cold current of fear running through the markets right now is something market commentators will avoid speaking about openly.

I’m not referring to the credit crisis and widespread recession. That is worrying enough.

I’m talking about the meltdown of stock markets themselves.

Markets rise and markets fall, and then rise again. The fear is that this time, like the Great Crash of 1929, they are not going to settle down, dust themselves off and get back up again, but just stay down like a fighter who’s taken a knock-out blow.

In short we may be looking at the end of the equity cult, or at least what will seem like the end of the equity cult until memories fade, and that may take years. After the 1929 crash, it took until 1954 for the Dow to reach and surpass the levels it had attained before the Great Crash, and there were long doldrums.

As I write this the Dow Jones has fallen below the 9 000 level. I remember the remarkable feat of the Dow breaking through the 10 000 level. It took years to get there — a rise undone in a matter of days.

World markets have fallen in tandem.

Of course it’s too early to tell if the equity cult is over and if money will start seeking safe and unsensational investments like government bonds.

I am critical of writers, myself included, who spread panic by over-stating the facts and hype market moves, using words like “plummet” when they mean “sharp drop”. As journalists we probably all have been guilty of it.

This time, however, we may be under-reacting. What do you call declines like these, taken from a report on Yahoo’s finance page on Thursday evening: The following is from Yahoo:

“An avalanche of selling at the close left the Dow below 8 600 for the first time since May 2003, and down almost 40% from its all-time closing high hit exactly one year ago. The Nasdaq and the S&P 500 each also fell to levels not seen in more than five years.”

And all this despite massive intervention.

A 40% fall is clearly plummeting and this is clearly a Black Swan.

I hope markets will recover soon, for the sake of all of us who have, directly or indirectly, our savings invested in equities. I’m not living in hope to die in despair, though.

Incidentally, some believe that the current crisis was predictable. One commentator rightly pointed to the concern expressed by the sage of Omaha about derivatives being Weapons of Mass Destruction. Well, Warren Buffett is also famous for saying that in business the rear-view mirror is always clearer than the windscreen.

Credit where credit is due: some spotted weakness in financial institutions and foresaw disaster. But they didn’t know exactly when the crunch would come and there’s the snag. With investing, as with so many other things, from sex to comedy, it’s all a question of timing.

Nor, I think, did many see how the crisis would spill over into the broader world economy. And, remember, the crisis was sparked by bad home-lending practices rather than the hedge funds that some thought would be the source of chaos.

On the issue of the global crisis, I have written about how this constrains domestic policy options on www.ceja.co.za.

And on the issue of forecasting, I wrote on Thought Leader a while ago that the rand-US$ rate showed a remarkable correlation with Aus$-US$ rate.

As it happens, the exchange rates of the rand and the Australian dollar recently moved together again quite nicely — sharply downwards.

Like Australia, our fortunes are dependent on commodity exports.

The fall in the currencies of both countries seems to show that few now believe the “decoupling” theory that the emerging economies, chiefly China, are not dependent on the fortunes of the US and will continue to grow and suck in commodities.