Wrong Wrong Wrong

JOHN HEINZL

Globe and Mail Update

November 13, 2008 at 6:00 AM EST

As we watched the stock market take another sickening dive yesterday, a thought occurred to us. Two thoughts, actually.

Thought #1: Boy, things really suck out there.

Thought #2: Everything we were told about investing was dead wrong.

There is no need to dwell on #1, for it is now widely understood that things well and truly suck everywhere you look. But it is worth delving a little deeper into #2, because we all probably wish we'd been more skeptical of the assumptions we accepted as gospel before the financial world blew up.

For example, we were told time and again that nothing would stop Americans from spending. “Never bet against the U.S. consumer” went the refrain, and for years that was a smart strategy, because whether they were facing high gas prices, hurricanes or rising interest rates, Joe and Jane American kept shopping as if it were part of their genetic makeup.

Of course, we now understand what was behind the great American spending spree: an obscene amount of debt. It wasn't rising incomes or job growth that kept the malls packed, but credit cards, home-equity loans and various no-interest, money-down schemes made possible by asset-backed securities markets that were hungry for any paper you could feed them.

These sources of credit have either dried up or been seriously curtailed, which is why we have retailers such as Circuit City going into Chapter 11 and Best Buy slashing its forecast yesterday, citing “seismic changes in consumer behaviour [that] have created the most difficult climate we've ever seen.”

Best Buy's grim outlook – it warned that same-store sales could tumble by as much as 15 per cent between now and February – helped cut the knees out from under the stock market again yesterday, sending the Dow Jones industrial average down 411.3 points or 4.7 per cent to 8,282.66.

Another investing “truth” that turned out to be a myth was that the price of oil – being a finite resource in a world of ever-growing demand – could only go up. A related myth was that China's huge appetite for commodities would keep resource-based economies such as Canada's humming right along, thank you very much.

Both of these assumptions have now been exposed as false. With the global economy sinking fast, the price of oil yesterday slid another $3.17 (U.S.) or 5.3 per cent to $56.16 a barrel – the lowest close in 21 months and a far cry from the $147 it fetched last summer. As oil plunges, so does Canada's main stock index, which dropped 501.43 points or 5.3 per cent to 8,922.57 yesterday.

China, meanwhile, is looking more and more like a bubble in the process of popping. Property prices are plunging, factories are closing and the government – in a desperate move to prevent a severe economic slump that would spark widespread social unrest – is pouring more than a half-trillion dollars into infrastructure projects. Focusing on its domestic economy makes sense, given that Americans are no longer in a position to buy the goods rolling off Chinese assembly lines.

It's easy, in hindsight, to identify all the faulty assumptions that have now landed investors in a world of hurt. The hard part will be spotting such falsehoods the next time around, before they become so obvious to everyone.