An interesting perspective on market cycles was presented in cashandburn.com with a chart on grief modeling. Using the stages of grief developed by Elisabeth Kubler-Ross in her book On Death and Dying, we may say that the credit cycle follows a similar form. One more investment analogy but is a variation of some of the behavior models where investors do not want to realize loses.
The credit boom in housing had to die and we have to accept it before the markets can move on. There is a growth cycle in any business. (Note that we have also presented the hangover analogy in our last blog.) The market was in denial that the lending game was up with mortgages. We have been through that initial stage with the housing market peaking over 2 years ago. Some home-owners may still be in a state of denial by keeping their home prices up in the resale market.
Investors have tried to bargain their way out of this problem but that has not proved to be a solution. There is the the view that there is some way to get out of the crisis without paying a penalty.
Many are in a state of depression. There are a host of managers who are asking the question of how did this happen to them.
We are testing the new regime and learning to accept it, so to some degree there are people who have figured out how to move on with their grief. Others are still in the middle of the process. The market will not be ready to move up until this grief process has concluded for the majority of investors.
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