Send in the shock troops. It's getting ugly.
With the Dow down almost 10% in the first three weeks of 2008, financial institutions clamoring to keep their heads above water, and the effects of our debt-happy days becoming more apparent, the financial storm we're diving into looks like it might give Hurricane Katrina a run for its money.
OK. But. The best time to buy stocks is when everyone leaves them for dead, when we can jump in and find the best bargains. Right?
Remember 2002? You could have bought Amazon.com
So, is it time to call it a bottom and hop aboard, and scoop up shares of our favorite companies at a fraction of what they were worth just a few weeks ago?
Eventually, yes. Right now? Eh, probably not.
Here are a couple of reasons we're in for more than a temporary decline -- what we're facing could leave 2008 bruised and battered.
Forget the last recession; we're on our own this time
The last recession resulted partly from the economy's hangover from the burst of the tech-bubble, and from consumers distressed by 9/11. It was unusually short lived. Why? For the first time in history, consumer spending actually increased during a recession.
How could this be? With jobs slashed left and right, how did consumers keep up their strut?
Debt. Lots and lots of debt.
Super-low interest rates and innovative financial products made it easy for banks to throw money at people as though it grew on trees. With more money being pumped into (and promptly out of) consumers' pockets, the economy picked up momentum quickly.
This time, we're facing a debt market locked firmly in its footsteps. Forget about a refi. Forget about taking equity out of your investment home to finance your trips to Macy's
One of the annoying side effects of slashing interest rates to bail out the economy is how it weakens the dollar. The U.S. buys a tremendous amount of oil from abroad, and the only way to compensate for a declining dollar is to agree to pay more dollars per barrel.
This inverse relationship is just one reason the price of oil continues to climb higher and higher, and that could mean ugly times ahead.
Lowering interest rates during our last recession came out of fear of something that might shock us today -- the prospect of deflation, or lower prices.
Today, much the opposite is true. Inflation, or a rise in prices, now stands at a 17-year high throughout the U.S. -- up 4.1% in 2007 -- much of which came from the rising cost of energy. When falling interest rates combine with runaway prices, you get one heck of a conundrum -- increase interest rates to slow down inflation (and the economy) or decrease interest rates to speed up the economy (and inflation)?
This extra thorn in the consumer's side makes it especially difficult to fight the effects of a weakening economy -- and might justify the recent stock slide as the consumer stares a slowing economy square in the eyes.
Fight or flight?
Well then, time to panic? No, of course not -- it never is. But don't think a fall in stock prices will be a short-term blip on the radar screen. Eventually we'll steer ourselves in the right direction and get back on track, but it will take time.
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Fool contributor Morgan Housel doesn't own shares in any companies mentioned in this article. He appreciates your questions, comments, and complaints. The Fool's disclosure policy has its hard hat on, windows boarded up, and is waiting out the storm.