A Decade of Delusions: From Speculative Contagion to the Great Recession

Chapter 1

Lead Us Not into Temptation1

Source: © FactSet Research Systems.

Throughout the book, you will see charts that include an arrow indicating “You Are Here.” Like the ubiquitous directory map on a shopping mall kiosk, these charts are intended to orient the reader to what was known and what was yet to unfold as I took pen in hand to communicate with clients of Martin Capital Management. Since many chapters are constructed of excerpts from annual reports, the time period being reviewed is the preceding year. In some sections, the focus may be on a particular quarter or may involve a review of events over a long period of history. The first “You Are Here” map shown here, for example, tracks the market’s steep ascent as I wrote the first document—the 1998 annual report for Martin Capital Management. The journey through subsequent years takes on the appearance of a rugged and dangerous trek through the Himalayas, but at that moment it looked as if the only direction for the market to go was up, up, up. How could we have known what lay ahead?

For the mathematically inclined, a point of clarification is required. Under most circumstances, we would use logarithmic scales for the vertical (price) y-axis. Logarithmic scales represent an equal amount of percentage change. Arithmetic scales represent an equal amount of numerical change. However, for the time period in question, most ...