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Investors compelled for years by Wall Street sermons to buy great companies with great products are suffering a crisis of faith in 2008, as shares of iconic industrial stalwarts like Coca-Cola (KO, news, msgs), Safeway (SWY, news, msgs), Merck (MRK, news, msgs) and Intel (INTC, news, msgs) have followed banks into the abyss with half-year losses of 15% to 30%.
The collapse of market value since autumn has actually wiped out years of progress, putting all but a few big companies' returns for the decade below zero -- an extraordinary development that has jeopardized thousands of families' financial plans and possibly soured an entire generation on the stock market.
Indeed, it's fair to conclude now that the bear market of 2000-02 never really ended and that the 2003-07 period of modestly higher returns will look from a historical perspective like a twitch of life in a moribund carcass.
Although the story of what's gone wrong in this Lost Decade has been well documented, by myself and others, fresh evidence suggests the last pages of this sad history have not yet been penned -- not even close.
For after months of denial that anything was seriously wrong, a few leading government, banking and industrial executives have decided in recent weeks that it's time to come clean and acknowledge that the collapse of the greatest credit bubble of all time will leave profits and price-to-earnings multiples impaired for years.
A deeper, longer downturn
In other words, don't expect lasting relief for your battered portfolio of financial and retail stocks. Because with growth estimates too high, asset values uncertain, regulators on a rampage and trust at new lows, this market's not yet finished putting the "ugh" in ugly.The most significant blow to honesty came last week from an unlikely source: the annual report of the Bank for International Settlements in Switzerland. The BIS, which cautioned presciently of growing risks at this time last year, is the rule-making body for global banking and is staffed primarily by central bankers on loan from the United States, Europe and Asia.
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Normally, the BIS is a model of upper-crust tact, but in the June 30 report, guided by retiring chief economist Harry White, the organization blasts Western monetary policymakers' mistakes and contends that global markets are set for a severe downturn that will crush bulls' sunny claims that all is well.
"The facts suggest that the magnitude of problems to be faced could be much greater than many now perceive," the BIS report states. "While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect."
Reading between the lines, financial derivatives expert Satyajit Das, who gave us the best warning last year of impending crisis, said the "astonishing" document is a "scathing indictment" that suggests the world economy is on the verge of "total financial breakdown."
The BIS concludes central banks are now virtually powerless to control the destructive forces of inflation that they unleashed by maintaining a policy of easy credit for the past decade and says the next steps taken to rein in the beasts must lead inevitably to a severe and prolonged deflation and global recession. It observes that central banks got away with creating inflation for two decades because emerging markets provided cheap labor and cheap oil that dampened prices, but it turns out that those factors were largely coincidental, not genius, and have proved unsustainable.
Blue chips suffer debt famine
In an interview from his office in Sydney, Australia, Das told me that he had never seen a major world economic body speak in such blunt terms, underlining the gravity of the situation."We've had a party for 15 years, and the house is a mess," he said. "You can't clean it up in 10 minutes once you discover your parents are coming home. You're screwed, and you have to face up to the fact that you're screwed."
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The metaphorical cleanup here is nothing more than deleveraging, or paying down debt accumulated over the past two decades -- a matter mentioned a dozen times in the BIS report. We've already seen the impact that deleveraging can have on hedge funds, banks and brokerages: As the value of the $1 trillion-plus in real-estate assets used as collateral has deteriorated, regulations governing liquidity ratios have forced financial institutions to shed billions of dollars worth of business assets and raise billions of dollars worth of new capital.
Continued: Credibility problems
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