I've known for some time that things aren't working the way people were thinking. I sadly didn't blog about it - in no small part because I couldn't figure out what the heck was going on - but I know the first time I really realized there was a problem was in June of 2007.
I believe it was around my birthday, that year. I went up to San Francisco to hang out with my friend, Jeff, and we went to lunch at Bossa Nova, which I am not nearly cool enough to hang out in, but has delicious food. We definitely went to a baseball game, afterwards - I clearly remember being a bit embarrassed about my Giants gear in such a hip establishment, and I know it was a weekend day, with a fairly rare weekend night game.
Anyway, at lunch, Jeff commented on a colleague from Europe coming to the US and going on a shopping spree because the dollar was so cheap. I'd been vaguely aware the Euro was up on the dollar, but I hadn't realized how much so. I remember being aghast at the idea that, say, a bellhop in London's work moving bags was worth, apparently, so much more than the work of New York bellhop's. Even taking into account things like trade imbalances, it just didn't make any sense to me that the same amount of labor in Europe was apparently worth more than the same labor in the US. I remember at the end of the day just shaking my head and saying, "there's something going on here that people don't understand."
Of course, the Euro was worth $.74 at the end of June, that year - it dropped further from there, hitting its nadir in April of 2008 at $.625. I was baffled why people thought the Euro (and European companies) were a better investment than those here, in the US, given that I believe the US's policies are generally more pro-growth. You can argue that the net trade-off for the average American is worse than for the average European, but I think it's difficult to argue that European companies are going to, on average, grow faster than American ones, or that European GDP will.
The good news (for me) is that it has recently turned around. The dollar is back to being worth about what it was in June of '07, as the financial contagion continues to spread. I say good news, because I'm long on the dollar - I pretty much have to be, since I live here. Most of my net worth is tied up in Silicon Valley real estate and a private, US company. If I measure my net worth in, say, Fiats, or oil I've actually had my net worth go up pretty well in the past few months, simply by virtue of currency exchange rates changing.
The bad news is that I mostly still don't understand what's going on, and I suspect that nobody does. I saw the oil bubble coming - I was advising my brothers to sell oil a good six months ago. But, the current financial crisis in Europe I didn't see coming. I thought the dollar was too low against the Euro, but it at the same time doesn't make sense that, the more we learn about the US crisis, the faster people buy dollars.
The best guess I have right now is that professionals are finally starting to understand that they don't understand. The scope of the crisis in the US, I hope, is mostly known - but what's going on in Europe is even less known. Iceland appears to have bailed out a bank with assets of six times their GDP, and hence literally nationalized the banking risk. Runs (on currencies, banks or any securities) become self-fulfilling prophecies as people panic.
I remain optimistic that this will turn itself around. This is probably just the darkest part, before the dawn. The fact that no one seems to really understand anything, or be able to predict the next problem, does not give me hope.