This Situation is More Like 1982 Than 1932

The consensus among investors is beginning to come around to my view that this situation is similar to 1982, not 1932. 1982 was a severe recession induced to cure the economy of systematic inflation and it was a double dip recession that began in late 1979. I don't mean to diminish the destruction that has taken place in the financial system from excessive leverage, speculation and a real estate bubble. What is different is the Federal Reserve’s and the Federal Government’s response to it. In the 30s it was believed that the free market would right itself and people just needed to pull themselves up by their own bootstraps. They then went on to raise taxes, increase tariff’s on imported goods, allowed the money supply to contract and

We came very close to this type of situation again through our blind belief in the “free market” and non serious total lack of regulation of financial institutions. Our problem now is the credit market is still frozen and confidence has been shattered. I think over time those wounds will heal, trust will begin again and the economy will begin to stabilize. The reason I'm bullish on stocks when most aren't is because I think that the Dow at 9000 and the S&P 500 are 10% undervalued to the situation we're in. In other words, it has more than priced in the known negatives.

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Disclosure: Author holds long positions in EMR, ITW, SNA, TNB, PH, JWN, PENN, ASCA, PWR, ADSK, PNK, SMG

Comments

[socrateazz:]

Hmm Interesting... The reason I think this problem is more like 1932 is what seems to be causing it outside of the actual finacial markets. The 1982 problem seemed to be the result of too much money chasing too few goods. The 1932 problem and the current one seems to be not enough money in the hands of those needing and wanting goods. I think that is an opposite problem even if it appears the same in some respect

Jan 13 07:40 AM

[User 143167:]

The Fed Fund rate and mortgage rate in 1982 was 20%. When an economy can stablize at such high interest rates, it provided a huge room for the economy to move forward. But currently? The economy can't even get on its feet with ZIRP. 1982? Not even close.
I will be more confident if the economy can improve without the FED cutting rates.

Jan 13 08:59 AM

[Conan the B...:]

Totally disagree, no relation whatsover to current economic conditions. Unless your basis is related just to the Unemployment aspect.

Of course, it has priced in the Known Negatives, what hasn't it priced in?

At the Bottom in 1982, the DOW was selling at Book Value. The Valuations you speak of are relative to Bull Market conditions.

Prior to 1982, S&P earnings were considered to be very expensive when they hit 15. Nowadays forecasters are not satisfied with making projections for the following year, they make forecasts for the next 3 yrs. But the very next quarter surprises them.

I have seen recent forecasts for the S&P of $50-55. If $50 comes to pass, is the present value inexpensive?

What is the fair value of the S&P with projected earning of $50?

Jan 13 09:51 AM

[prudentinve...:]

Perhaps the current problem is more like "too many goods and services on offer, but not enough people who need or want them"


On Jan 13 07:40 AM socrateazz wrote:

> Hmm Interesting... The reason I think this problem is more like 1932
> is what seems to be causing it outside of the actual finacial markets.
> The 1982 problem seemed to be the result of too much money chasing
> too few goods. The 1932 problem and the current one seems to be not
> enough money in the hands of those needing and wanting goods. I think
> that is an opposite problem even if it appears the same in some respect

Jan 13 10:34 AM

[prudentinve...:]

Mark Thomas,

Please explain to us how do you conclude that at Dow 9000 (which corresponds to S&P about 925) the market is 10% undervalued.

This implies fair value of S&P = 1020. With an E of 42, this corresponds to a P/E of 24, hardly most investors' idea of fair value.

Jan 13 10:42 AM

[OldLimey:]

If this is 1982 again, then today's central bankers and governments are surely - how should I put it? - overreacting a tad. No, I remember 1982 and it wasn't like this at all. Why the constant urge to squeeze the present into some ill-fitting historical pigeon-hole? Learn from the past, sure, but stop obsessing about it.

Jan 13 11:41 AM

[carey_jim:]

Markets and economies are too complicated to make simple comparisons.

This economy is like 1982 in some ways and like 1932 in others but unlike both in important ways.

We can't predict the future, fortunately, and will have to wait and see what happens.

In the meantime, sit back and enjoy the show, and be happy that you live in interesting times.

Jan 13 12:26 PM

[Jason Rines...:]

I fully agree PaulTaut on still very bloated earnings forecast. April earnings releases will be telling.

I would say this is a W shaped event with the most severe portion over. Also, can't really forecast how much impact reinflation attempt will offset GDP through commodities such as oil and trickle down effects later on the second part of the W.

The cause is very similar to 1930's in my opinion. The recession of the early twenties and the subsequent vastly increased leverage afterwards leading to the 1929 crash is also comparative. I believe the results of current stimulus and the safety net we have now vs. then has mitigated some of the negative results of this downturn but it's tough to quantify.


On Jan 13 09:51 AM paultaut wrote:

> Totally disagree, no relation whatsover to current economic conditions.
> Unless your basis is related just to the Unemployment aspect. <br/>
>
> Of course, it has priced in the Known Negatives, what hasn't it priced
> in?
>
> At the Bottom in 1982, the DOW was selling at Book Value. The Valuations
> you speak of are relative to Bull Market conditions.
>
> Prior to 1982, S&amp;P earnings were considered to be very expensive
> when they hit 15. Nowadays forecasters are not satisfied with making
> projections for the following year, they make forecasts for the next
> 3 yrs. But the very next quarter surprises them.
>
> I have seen recent forecasts for the S&amp;P of $50-55. If $50 comes
> to pass, is the present value inexpensive?
>
> What is the fair value of the S&amp;P with projected earning of $50?

Jan 13 04:00 PM

[Gedankonomist:]

Blind faith in a free market? What free market?

The FED fulfills one of the 10 planks in Karl Marx's Communist Manifesto, and we have a "free market?"

Jan 13 06:10 PM

[CJJ:]

Free markets are a myth. There are 6 billion people in the world. There are hundreds or thousands of markets. Get off the notion of some noble ability that there will ever be some free markets and pure capitalism or that there ever was.
Markets move to a mean slowly and usually after a horrible dislocation because markets have a large human factor. If you have trust in the market it doesn't matter what holes there are in the background things will be all good. When trust disapears and the holes are turned into gaping black holes then all of a sudden everything is crap and always have been. Its absurd people think if markets were just run like this or run like that everything would be just peachy.
Everyone can see the greed, the corruption. Its never going away. You can't police and apply accountability to 6 billion people. Its impossible.

Money/wealth is only what people perceive it to be. Most people here are only concerned on how to improve their money/wealth position confined to the system we currently play in when the real concern should be on how to further PEOPLE.

Jan 13 07:05 PM

[Bruce Pile:]

One other key difference - in 1982, there was no massive debt bubble in the process of collapsing. In fact, this was just before all this artificial growth fueled by debt creation began in the mid '80s. Both in 1932 and now, we have the debt bubble unwind, although the frenetic fiat money creation this time will probably create severe inflation at some point.

We are probably going to settle back into the kind of debt-stable stock market we had from 1966 to 1982 - a secular bear market where the major averages didn't even keep up with inflation. Here you wanted to own the stuff that hurt if it fell on your foot. Then the long cycle switched and you wanted to own paper assets that don't hurt your foot when they fall, but they sure hurt everything else.

Jan 13 08:04 PM