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Will investors be able to see the "Aftershock" coming?

Robert Wiedemer
May 12, 2010
Video Transcript

One of the most interesting issues about how our economy evolves over the next few years, is summed up by a quote I have from Mark Twain. Mark Twain was asked how did he go bankrupt. He said, "Well, at first very slowly and then very suddenly." That's the way a lot of financial changes occur, economic changes occur. We like to think it's all on this nice, smooth line. It's not. I mean, think about it. Even the crash of 1929, it didn't go along a smooth line. In fact, 1928 stock market was pretty good. In 1929, we crashed. Going up in NASDAQ, we crashed very suddenly. In fact in January 2000, the year of the dot COM crash, January 2000 venture capitalist invested more money in early stage startups than ever in history. These are the most sophisticated investors in the country in many ways, betting long-term in January that things would do very well. Yet only three months later, NASDAQ started to melt down, in a melt down that took it down more than 50% within a year.

So, what happens is psychology can change very quickly. That's what Mark Twain was getting at. Is that the buildup of problems can be there for a long time and can always be masked by good times. Then something hits and psychology changes and boom, if the financial fundamentals are not there. That's why it's so important to know those financial fundamentals. That's why I look at things like debt-to-income ratio of the U.S., when it's 8 to 1, or 9 to 1, or 10 to 1. It means it's a toxic asset. Just because we ignore it now and live the good life, doesn't mean that at some point we won't see it and then it melts down. When we do see it, it's almost like the lights come on...and boom!

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