Exactly one year ago, the unexpected failure of Lehman Brothers set off a horrific 6 months for US and world securities markets. Between September 15th and Thanksgiving of last year, daily volatility of the S&P 500 quadrupled. Americans fixated on the "Dow bug," that useless data-point at the lower right corner of every television in every bar, health club and shoe shine stand in America, which swung intraday hundreds and on some days over a thousand points. Merrill Lynch, Washington Mutual, AIG, Fannie Mae and Freddie Mac all fell into the arms of rivals or were essentially taken over by the US government, while Goldman Sachs, Morgan Stanley, Citigroup and Bank of America teetered on the edge of insolvency.
By mid-March, sufficient liquidity had been restored to the system so that even the bankruptcies of General Motors and Chrysler in June could not deter the monster bull market, which, after 6 months, has lifted the S&P 500 59.5% from the March 9th 13 year low. For the year, the S&P 500 is up 20.3%, the NASDAQ is up 35.9%, European markets are up 18-23%, and emerging markets are up 53-90%.
Was it all a bad dream?
Unfortunately, no. Trillions of dollars of wealth was vaporized in the last 12 months, mostly the equity of leveraged investors who were forced by margin calls to sell during the crisis. Many banks remain undercapitalized and are at risk if liquidity dries up again. Citibank for example survived only by massive capital injections from the US government, which currently shows a paper profit of $10 billion on Citibank preferred stock that it owns. Citibank stock quadrupled from the March 5th low, but would have to increase another 1,224% to take out the December 2006 high. Millions of Americans have negative equity in their homes, primarily those who bought since 2006, or those who took out lines of credit against their property.
The wealth destruction couldn't come at a worse time for the leading edge (born in 1945) baby boomers who turn 65 in 2010. For most, Social Security will be inadequate. Many took their investments and 401K's to cash in March, only to miss the rally. Meanwhile, plans to sell their homes to fund retirement are on indefinite hold. Bottom line is that most Americans will work 10 years longer than they planned.