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Fool Video: David Gardner on the Market Meltdown

The Dow and the S&P 500 had their worst week ever. Is this the bottom? What does the future hold? What should investors do now? In this installment of "Fool Video," Motley Fool co-founder David Gardner gives his take. (Note: The video was taped Friday afternoon, before the market’s late-day rally.)

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David Gardner is co-founder of The Motley Fool, co-advisor of Stock Advisor, and advisor of Rule Breakers. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (48)

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  • Report this Comment On October 10, 2008, at 7:23 PM, Marnic235 wrote:

    Right, Frank, everyone should simply lock in their losses. I don't think you've been listening, have you?

  • Report this Comment On October 11, 2008, at 10:31 PM, Maggadoodle wrote:

    right on target in my opinion-it takes a cool temperament and discipline. the news needs to be ignored-the companies need to be watched.

  • Report this Comment On October 12, 2008, at 12:46 AM, UniqueMiner wrote:

    Finally. Thanks for giving us some face time, Mr. Dave. Everything sounded right on. Now, go buy some NILE.

  • Report this Comment On October 12, 2008, at 3:19 AM, Maverik30 wrote:

    With all due respect to a man who is far more knowledgeable about the market than me, I'm not convinced. David, you repeatedly stated that you don't try to time the market, but you also repeatedly stated that the market looks 6 months ahead and went on to forecast the timing of its rise according to the economic news surrounding us. I remember you and Tom having to retract some of your optimism and advice on one NPR's market shows when the tech bubble burst. I love this site and your services, but with the kind of jumbled mess going on in the markets right now, might it be better to avoid blanket statements?

  • Report this Comment On October 12, 2008, at 12:24 PM, Popa17 wrote:

    loved the perspective that the market is somehow ahead of the economy ... probably means that we may see some market corrections down the road and ¨.... lets not be surprised when the slowdown shows up in April May and the market corrects some down again to be in line with the economy¨

  • Report this Comment On October 12, 2008, at 9:27 PM, USAeconomist wrote:

    In banking, we are no longer tied to the gold standard, we use a system call Fractional Reserve Lending. FRL allows banks to Banks create money. For every $100 dollars we put into a bank, 20% is kept and the remainder is put into other banks, 20% of each deposit is kept by each bank until you create $357.05. Basically, if you take out $100,000 loan and that money is deposited into another bank, you have just added $357,050 to the money supply.

    Banks run on a 20% reserve. If you deposit $100,000 into a bank or savings account, you are actually loaning the bank money, they keep 20% as a cash reserve and then loan the remaining amount to make money and pay you interest. Suppose, the bank has 10 depositors each with a $100,000, that bank has a million in assets and has lent out $800,000 and has $200,000 in cash for reserves. If 8 depositors came to the bank and took out $50,000, the cash reserves would not cover the withdrawal; the bank would be $200,000 short and will have problems giving back your money.

    If the bank had lent out 40% of its loans to subprime people and the loans failed (i.e. ) the bank would have to foreclose and sell these homes. If the homes loans equaled $400,000 in value, the market value in foreclosures is $300,000 the bank would lose $100,000. The bank would have to write off $100,000 and work harder to recoup the interest.

    If bank wants to stay in business, it won’t make subprime loans. In 2004 to 2006, banks got greedy and decided to lend money to the un-credit worthy. They wrote billions in garbage loans, we now call it toxic paper. Lenders would write these bad loans, make a quick fee then sell then sell these loans to investors. Eventually these loans became toxic a portfolio that poisoned the banking system in 2007.

    The banking crises of 2007 seemed to fix this mess. Goldman Sach’s shorted its poison portfolio leaving other banks to pick up the tab. Many big banks suffered charge offs and the feds thought they had the problem under control.

    Banks borrow from other banks to fund loans. They use commercial paper. The commercial paper they have been purchasing is supposed to be AAA, it means that there is no risk to these investments. Recently, banks around the world have been using SIV and or conduits to fund loans and create money.

    Goldman Sachs created these SIV & conduits. These products were called CDC’s (credit default swaps) suppose to be guaranteed instruments. They created a complicated algorithm to describe the portfolio, but the investor could not see what was in the portfolio. These were CDC’s, were made up of c (subprime loans) paper hidden under a scientific formula guaranteeing its value. Guess what, these instruments were garbage, it was this portfolio:, the investment was bad. AIG did not have the money set aside to cover the exposure on this toxic paper and the company went bankrupt.

    The problem; Banks are still stuck with the bad loans from 2004 to 2006, that is what the bailout is for. These bad assets have now made it through the world wide banking system clogging the reserves and making it impossible to lend. Until we come up with a plan to liquidate this toxic portfolio, we will always be faced with these problems.

  • Report this Comment On October 13, 2008, at 3:07 PM, macrophyllum wrote:

    Great post USA Economist. Do you have any ideas of how to unclog the system.

  • Report this Comment On October 16, 2008, at 9:39 PM, 181736065 wrote:

    Hi David,

    Thanks for the vid.

    Cramer (I know he is despised by many around here) claims that the tech bubble stock deflation of the NASDQ (which lasted waaaaay longer and fell far deeper than most people thought) kept going as long as their were consistent earnings downgrades by companies and analysts. Is this true? And do you think that relentless earnings revisions will happen this time as the contracting worldwide economy will certainly force slower earnings for most companies (and the analysts which cover them) for many months to come.

  • Report this Comment On October 17, 2008, at 3:00 AM, dividendgrowth wrote:

    China's big banks used to have 30-40% non-performing loans prior to 2002.

    How did they solve that problem? By exchanging bad loans for good ones with the central government.

    Our government is doing exactly the same thing.

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