As you guys know I am short term (a couple of weeks) bearish, intermediate term (through summer) bullish and long term (several years) uber bearish. I believe that the deleveraging we are in has only been experienced once in this country's history. That was the Great Depression. Am I saying we are in another Great Depression? Perhaps, but perhaps not. I am saying that this bear market is not over and that in the end we could get second place.
The numbers suggest that at best an economic turnaround will take place in late '09 or early '10. That may be, it is too early for anyone to know. The equity market sure is acting like it is. In fact the equity market did the exact same thing in 1930. The INDU peaked in 1929 at a whopping 381.17. It dropped later in '29 to 198.69 for a loss of 48%. In 2007 the equity market peaked at about 1450. By early 2009 it had fallen 54% to 666.
In 1930 the stock market managed to rally 50% back up to 294.07. I believe, and have posted here, that we should encounter a similar rally. If we follow 1930's pattern we should hit 1050 to take back 50% of the losses.
In 1930 it became apparent to all that the bear was not slayed. Prices fell, and fell, and fell. Finally the low was put in in 1932 at 41.22. A whopping 86% fall from 1930's 294! If we were to suffer a similar fate, an 85% drop from 1050 (assuming we get there) would take us down to 147 on the SPX. Yikes!
This can be seen in a terrifying chart here:
http://stockcharts.com/charts/historical/djia19201940.html
Now fundamentally, from what I know which I acknowledge isn't as much as many others, the Fed was NOT accomadative in the 30's. They actually RAISED interest rates making the situation worse. Our current Fed could not be more different. Will this make a difference? Perhaps.
Lets look at some other comparisons from the GD to today. In the 1930's in order to maintain a balanced budget, President Roosevelt raised taxes on business and the wealthy. He also created many government spending programs to get people working. Sound familiar?
On a positive note the household savings rate was very high prior to the GD and as I said before the country had very little debt and a balanced budget. In contrast our savings rate had been negative for several years prior to 2009 and our budget? Not balanced. Our debt? Monstrous. In fact our national debt has exploded as seen here.
http://www.screencast.com/users/J-So/folders/Default/media/1586f4b3-db1b-4a1a-a8bd-63634469a5c6
Under the Obama administration it is expected that ANOTHER $10 trillion will be added to the debt in the next 10 years according to the CBO. (By the way this post is not a bash on Obama, it is not meant to be political at all.) On top of this it is rumored that we will institute national healthcare. And we have the social security and medicare deficits looming on the horizon.
To sum it up, the US faces a debt of a size that has never been dreamed of in the world's history. I believe that this debt load will become a problem much sooner than most would ever think. I believe that the writing is on the wall that foreigners are already beginning the march OUT of US debt. I also believe this will cause the next major downturn in our economy and the next leg of the bear market.
As the appetite for our debt decreases interest rates rise. Rising rates are what made the Great Depression worse. This time the rates will be caused not directly by a non-accomodative Fed, but indirectly through an accomodative Fed and through astronomically high debt levels.
Can you imagine what would happen to our fragile economy if 30 yr rates went back up to 7-8%? What about 8-10%?
Despite Bernanke's announcement of QE several weeks ago rates are already back OVER where they wer prior. Seen here:
http://stockcharts.com/h-sc/ui
It has been reported that China wants to diversify out of dollars. They are currently buying commodities and diversifying into other currencies. IMHO this is the beginning. It will continue as investors flee long term US debt for shorter term debt and commodities.
So this is my fundamental case for the next bear leg which may begin as early as this fall. Technically the case is already in the charts. Just look at what happened post 1929. We are tracing that same pattern.
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It should be a bash on Obama, Pelossi, Frank, Dodd and all of the other idiots running the country. I am not saying Bush # 2 did a great job, he didn't, but raising taxes now or in 2010 is the worst possible idea. Robin-hooding will not be good for the markets. Solwold you do bring up some very valid points as why to be bearish longer term. I go back and forth.
ReplyDeleteThanks. The nice thing about this long term view is that it can always change. The main factor that would defeat my arguement would be inflation. Inflation would cause the stock prices to remain elevated, however on a real basis they'd be down.
ReplyDeleteInflation is one of the things I track in my credit market index, because oddly enough we want inflation and especially right now. It would be the ultimate datapoint in belief that we are working out of this mess. Longer term you want controlled inflation and not hyper-inflation. Your points on the deficit and lack of faith in the dollar/US are items that could make controlled inflation move to uncontrolled inflation, while better than deflation, is still not a good environment. Then we would want to be long and strong inflation hedges like real assets, commodities and real estate.
ReplyDeleteright. Do understand that Bernanke's view of inflation is measured through higher prices. His models showed price inflation in 2008 (mainly due to energy) although 2008 was one of the most DEFLATIONARY years our country has ever had. The Fed model for valuing homes is terrible. Also they do not take into account available credit.
ReplyDeleteThe fact is that Americans lost tremendoud purchasing power in 2008 and it cost us a recession. Bernanke's models showed us having no deflation. That is a flawed model.
Anyway the point is that Bernanke is striving NOW for PRICE INFLATION. Imagine prices rising, but not purchasing power! Gas at $5 per gallon, grceries up $5-$10 per week. But wages heading down and unemployment heading up! That would kill the "green shoots" that they see.
The fact of the matter is that most of American's purchasing power is not coming back soon or maybe ever. The days of a 100% cash out refi are over. Equities, although higher than March, are still WAY below 2007 high. Home values are levelling at best and show no sign of increasing back to where they were in '07. This purchasing power is gone. Plus the fact that the Boomers begin retiring and enter the stingy phase of life.
It could be a rocky period for these "green shoots".