Wednesday, October 21, 2009

The calm before the storm?

Last year I found some graphs showing similarities in tracking of several economic indicators which showed a clear correlation between the current "Recession" and the lead-up to the Great Depression of the early 1930s.

Now there is some new data, but the news is not any better.

Yahoo Finance: Tech Ticker
1929 And Today - Sobering Parallels Abound
By Simon Maierhofer
On 1:14 pm EDT, Thursday October 15, 2009

...If there is just one time you want to take a lesson from history, it is RIGHT NOW. The parallels between today and the Great Depression are numerous and strikingly similar. This 5-minute history lesson might be the best investment you'll ever make.

Optimism preceded the 1929 and 2007 market tops

Even though a major storm was brewing, prior to the 2007 market top, Wall Street saw no 'cloud in the sky.' In its Global Economics Report, released in the summer of 2007, Merrill Lynch's analysts published the following outlook: 'The Merrill Lynch global economics team believes that the economy will continue to grow in 2007 - with no sign of a significant cyclical slowdown.'

From 2007 to 2009, the major indexes declined some 50%.

On December 4, 1928, President Coolidge sent the following message on the state of the Union to the reconvening Congress: No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. You may regard the present with satisfaction and anticipate the future with optimism.'

A few days before leaving office in 1929, the parting President cheerfully observed that the economy was absolutely sound and that stocks were cheap at current prices.

Following the 1929 highs, the Dow Jones (NYSEArca: DIA - News) declined 48%.

The market rallied 50% in 1929/1930 and today

Following the initial 48% decline in 1929, the Dow Jones rallied 48% within a period of six months. This rally was powerful and retraced 52% of the Dow points lost in the initial decline. Even though the market was far from its previous highs, investors had once again gotten excited about owning stocks and felt confident that the market would continue to move higher.

On March 25, 1930, just a few weeks before the waterfall decline resumed, the New York Times reported that 'Wall Street was in a cheerful frame of mind as a result of numerous vague reports of improvement in business and industry.'

Once the bear market resumed, it erased another 86% of the Dow's value.

Following the 54% 2007 - 2009 decline, the Dow Jones rallied 54%. So far, the Dow has retraced 45% of the points lost in the initial decline. The 50% mark, a Fibonacci retracement level, often exercises a magical pull and provides an upper target for bear market rallies (chart below includes data up to 8-15-09).

...Similar to the 'vague reports of improvements' reported in 1930, today's 'good news' reports are merely an adaption to lower expectations; many consider it the new normal. Just like in 1930, vague reports of improvements (in 2009 they've become known as 'green shoots') are enough to propel stocks. For savvy investors, the parallels between the two declines and subsequent rallies are certainly too close for comfort.

...If this sounds impossible, consider the following:

1) The Dow Jones measured in the only true currency - Gold (NYSEArca: GLD - News) has already declined over 80%. To reset valuations, the Dow measured in dollars will have to follow.

2) Japan's Nikkei has lost as much as 80% since its 1990 all-time high. This drop came amidst a global bull market. Imagine what a global bear market can do.

3) A look at current dividend yields and P/E ratios shows that U.S. stocks are grossly overvalued. The current P/E ratio of 141 (reported by Standard & Poor's) dwarfs even the P/E ratios seen during the bubble, where technology companies with no earnings traded at $100 a share and more.

The human tendency to shun overpriced stocks will take over once this emotional buying frenzy has run its course. That's how it's always been, that's how it will prove to be. Once that happens, the majority of investors will wish they'd listened to the subtle but clear advice presented by history...

Every realistic analysis concludes that the Fat Lady has not yet sung. This crisis is not over and isn't going to be soon. This stock market rally is based on nothing but moonbeams and fairy dust. These companies have not gained any intrinsic value. They are not more valuable and not more likely to make sales in 2010. In fact, they are less likely.

CNBC Online
Recession Will Be 'Full-Blown Depression': Strategist
Published: Friday, 16 Oct 2009 | 8:03 AM ET

This global recession will turn into a "full-blown depression," Nicu Harajchi, CEO of N1 Asset Management, said Friday, adding that global stimulus hasn't come down to Main Street.

Wall Street is making money, while consumers aren't, Harajchi told CNBC.

"We have seen the G20 coming out with cross border capital injections of $5 trillion this year… But a lot of this money hasn't really come down to Main Street," he said.

"When it comes down to corporate America, corporate Europe or even in Asia, in Japan, we are not seeing Main Street making any money," he said. "Consumers are losing their jobs. They are struggling with their mortgages, with their credit. And we are just seeing this continuing."

The $5 trillion injection is "monetary expansion," according to Harajchi. "At some point, which we believe to be 2010/11, some of the central banks are going to recall some of that money and that will turn from monetary expansion to monetary contraction."

He also said he doesn't see the corporates or the public "being able to pay back that debt."

"We see 2010 becoming a much more risky year than 2009," he said...

No amount of fantasy bookkeeping is going to keep the large corporations running when Main Street is flat broke. There simply isn't any real end in sight to unemployment, and without jobs, people simply don't have money to spend. It's a vicious cycle than has nowhere to go but down. The idea that bailing out fat cat CEOs somehow leads to ordinary people becoming employed and having economic security is delusional. Trickle down economics is a myth that needs to be shot dead.

New York Times Online
Safety Nets for the Rich
Published: October 19, 2009

...we still don’t seem to have learned the proper lessons. We’ve allowed so many people to fall into the terrible abyss of unemployment that no one — not the Obama administration, not the labor unions and most certainly no one in the Republican Party — has a clue about how to put them back to work...

...Even as tens of millions of working Americans are struggling to hang onto their jobs and keep a roof over their families’ heads, the wise guys of Wall Street are licking their fat-cat chops over yet another round of obscene multibillion-dollar bonuses — this time thanks to the bailout billions that were sent their way by Uncle Sam, with very little in the way of strings attached...

...We need to make some fundamental changes in the way we do things in this country. The gamblers and con artists of the financial sector, the very same clowns who did so much to bring the economy down in the first place, are howling self-righteously over the prospect of regulations aimed at curbing the worst aspects of their excessively risky behavior and preventing them from causing yet another economic meltdown.

We should be going even further. We’ve institutionalized the idea that there are firms that are too big to fail and, therefore, “we, the people” are obliged to see that they don’t — even if that means bankrupting the national treasury and undermining the living standards of ordinary people. What sense does that make?

If some company is too big to fail, then it’s too big to exist. Break it up.

...Enough! Goldman Sachs is thriving while the combined rates of unemployment and underemployment are creeping toward a mind-boggling 20 percent. Two-thirds of all the income gains from the years 2002 to 2007 — two-thirds! — went to the top 1 percent of Americans.

We cannot continue transferring the nation’s wealth to those at the apex of the economic pyramid — which is what we have been doing for the past three decades or so — while hoping that someday, maybe, the benefits of that transfer will trickle down in the form of steady employment and improved living standards for the many millions of families struggling to make it from day to day.

That money is never going to trickle down. It’s a fairy tale. We’re crazy to continue believing it.

Any government policy that is not aimed, directly or indirectly, at living wage full time employment for the masses is a waste of taxpayer resources. But government isn't doing that - so those "green shoots" are weeds, nothing more. We are on track for a disaster, because weeds will not feed your family - only cultivated crops do that.

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