This post is VERY, VERY PREMATURE. And that is putting it mildly. However, we thought it would be interesting to address this question, even though the current liquidation is still in its early stages.
First, let us consider how liquidations DO NOT END. They do not end when people are hopeful. They do not end when the authorities remain upbeat. They do not end when a large number of economists and assorted Wall Street gurus assert that we are not in, and will not enter a recession, in the face of overwhelming evidence to the contrary. Nor do they end when market gurus announce "a bottom is in," or, "the market has made an important bottom." Nor do they end when the central bank and the Administration, via their media conduits, are putting out the word that there is not much more that the FED can really do, that there is not much more that the government can do. Finally, they do NOT end when those in the seats of authority tell us that the "markets" will have to sort this out, and that this will take time.
Liquidations end when everyone who wishes to sell, and everyone who needs to sell, HAS SOLD. At this point, some of those who have preserved -- or increased -- their capital during the liquidation phase will want to buy. When they buy, prices will start to rise. They will rise because the liquidation has removed the generality of sellers from the market. Prices, at the end of a liquidation, are very low. Too low. Moreover, bearishness and FEAR are universal. Those who have been wiped out, or as good as wiped out, and those who have lost a terrifyingly large portion of their net worth, and/or seen their income shrink beyond what they would have expected, sit paralyzed with fear, hating markets they JUST KNOW will never recover.
We have not, in truth, had a real liquidation since the Second World War. The severe equity bear markets we have witnessed: 1969-1970, 1973-1974, 1987, 2000-2002, have certainly caused not insignificant losses in equities, mutual funds, and other equity-related investments. It is important to bear in mind that the totality of equity-based investments HAS NOT COMPRISED the bulk of household wealth in the United States. Indeed, during each of these equity bear markets, HOUSE PRICES ROSE. Since the home is where the bulk of household wealth resides for the great majority of households, the stock market losses were a ding, albeit a not insignificant one.
This time around we are looking at a severe loss in HOME EQUITY. Since this IS where the bulk of household wealth resides for most American households, what we are looking at, ABSENT A SUCCESSFUL GOVERNMENT EFFORT TO HALT THE BEAR MARKET IN HOUSE PRICES, is a TRUE LIQUIDATION. Losses in the equity market, as such, are a relative bagatelle. Of course, a serious bear market in equities, if one indeed ensues, would damage the wealth and confidence and spending of the upper orders, those who make corporate spending, production, expansion, and hiring decisions. Since we are all human, our own personal losses influence our thinking and emotions on a wide range of decisions.
