Party Like It's 1931? 17 comments
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The CS Monitor's New Economy blog had an interesting post over the weekend. I'm not sure past comparisons offer much value today, but when no one knows the future of the market, all they can do is look backwards.
I am in mostly cash right now, even in my retirement funds. I may miss a rally, but real property and cash seem safer than stocks right now. Also, I don't have to keep my cash in low-yielding American dollars. I recently bought the Mexican peso (FXM) and will be looking to buy the Australian dollar (FXA) as well.
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thats when the comparison should begin. the economy and market had growth and recovery until another recession hit after 1937.
I also have cashed out (all but 5%) this week. The comparisons to the 1930s hopefully will be mitigated by learning from those mistakes. However, we are already exhibiting some signs of protectionism. But the 2 bigger issues for me are cap & trade, which China and India are not expected to comply with putting us at a competitive disadvantage. To gauge the level of impact, utilities estimate 40% increase in everyone's electric bill. That includes residential and manufacturing. So who's gonna build a plant here???
The second issue is this. . .
ftalphaville.ft.com/bl.../
We are swimming in debt. And since this chart includes all debt, creating massive debt at govt level to counteract more responsible spending/saving by consumers is a net wash. By the linked chart, we need to take out 150% GDP in debt to get to a historically normal level. That's $22,000,000,000,000. That's a lotta frigging zeroes. Last month Banana Republic Ben manufacured $1T out of thin air. Is he gonna do this every month? Face it, we overspent for too long. No matter how much cheerleading CNBC does, facts are stubborn things. The last (and only) time we did this, sustainable growth didn't happen again until the debt was worked down to a manageable level. That was over 10 years later. No hurry to buy stocks, no matter the pump monkeys at Government Sachs and CNBC.
So, for now, my strategy is to keep cashing in gains from the recent rally, progressively trimming back on the stocks purchased at much lower levels over the past few months to keep the dollar value of my stock portfolio constant. At each increment of the rally, I trim back selectively on stocks that have risen faster than appears sustainable. If I am correct, I'll be able to purchase more stocks at better prices at some point within the next twelve months, and if I am wrong, at least I'll have made some trading profits that exceed many years' worth of future dividends I've foregone on the stocks I've sold.
They could go to the exact same place. The fundamental process underlying this economic event might not have anything to do with monetary policy. (Blasphemy!)
While comparisons between today and the 1930's are indeed riddled with critical differences, we also suspect that 'bottle-rocket' rallies like this one fly about as well as a grand piano when the steam goes out of them!
In the current macro-economy we do not only not know, in most cases, value but risks as well. Unless one can determine value they should sit this one out. Patience is virtue. If you miss one market another will come along and you can only take advantage of the opportunity if you have the investable assets to do so.
"Beat By A Penny" is the favorite game and market dynamics and
earnings "beating expectations" have been the prime drivers behind this rally.
The mkt "rubber band" has certainly snapped back from an extreme stretching. But the most important component of this "Market Magic" has been utterly ignored by the MSM.
Misdirection.
Pay no heed to what's really going on, just keep your eye on the shiny seductive rally.
What is truly going on is that S&P earnings will be down YOY about 37%. After a mark down from about $90 to $50, what will say
$40 or less do for "The Market".
No bull market has ever started from an S&P Price Earnings multiple in the teens.
Repeat this to yourselves.
With rising stock prices and falling earnings, the Price Earnings Ratio on the S&P is going to get a big boost well into high over bought territory.
In about 1920 the S&P PE was about 5.
On Black Tuesday in 1929 it was 30.
In Spring of 1930 it went back down to about 7.
Then in the forties and fifties it hit sub ten again.
Through most of the late 70's and mid 80's it STAYED BELOW
10 with the high hitting about 12 and the low about 7.
Prior to the year 2000, the highest high the S&P PE ever hit was before the 1929 crash at which time it got to 30.
In 2000 the PE hit about 44, the highest over valuation in history by nearly 47%!
And today the PE is about 15. (And this is before factoring in the fallen earnings for the first quarter... beat by a penny, indeed)
So using the simple wisdom of what people have always done over and over and over again as a guide, the preponderance of evidence is indisputable that PE's must go much lower before a
true bottom in equities is found.
Unless, of course, "its different this time."
On May 03 02:20 PM Happydaze wrote:
> There is a lot of "magic talk" in the financial news these days.
>
>
> "Beat By A Penny" is the favorite game and market dynamics and <br/>earnings
> "beating expectations" have been the prime drivers behind this rally.
>
>
> The mkt "rubber band" has certainly snapped back from an extreme
> stretching. But the most important component of this "Market Magic"
> has been utterly ignored by the MSM.
>
> Misdirection.
>
> Pay no heed to what's really going on, just keep your eye on the
> shiny seductive rally.
>
> What is truly going on is that S&P earnings will be down YOY
> about 37%. After a mark down from about $90 to $50, what will say
>
> $40 or less do for "The Market".
>
> No bull market has ever started from an S&P Price Earnings multiple
> in the teens.
>
> Repeat this to yourselves.
>
> With rising stock prices and falling earnings, the Price Earnings
> Ratio on the S&P is going to get a big boost well into high over
> bought territory.
>
> In about 1920 the S&P PE was about 5.
> On Black Tuesday in 1929 it was 30.
> In Spring of 1930 it went back down to about 7.
> Then in the forties and fifties it hit sub ten again.
>
> Through most of the late 70's and mid 80's it STAYED BELOW
> 10 with the high hitting about 12 and the low about 7.
>
> Prior to the year 2000, the highest high the S&P PE ever hit
> was before the 1929 crash at which time it got to 30.
>
> In 2000 the PE hit about 44, the highest over valuation in history
> by nearly 47%!
>
> And today the PE is about 15. (And this is before factoring in the
> fallen earnings for the first quarter... beat by a penny, indeed)
>
>
> So using the simple wisdom of what people have always done over and
> over and over again as a guide, the preponderance of evidence is
> indisputable that PE's must go much lower before a
> true bottom in equities is found.
>
> Unless, of course, "its different this time."
On May 03 09:06 AM basehitz wrote:
> Mexico has serious problems. If you have backup for why that's safer,
> I'd like to know your reasoning. I agree with Australia as natural
> resourse play. Same for Canada, and their banking system is relatively
> healthy.
>
> I also have cashed out (all but 5%) this week. The comparisons to
> the 1930s hopefully will be mitigated by learning from those mistakes.
> However, we are already exhibiting some signs of protectionism. But
> the 2 bigger issues for me are cap & trade, which China and India
> are not expected to comply with putting us at a competitive disadvantage.
> To gauge the level of impact, utilities estimate 40% increase in
> everyone's electric bill. That includes residential and manufacturing.
> So who's gonna build a plant here???
>
> The second issue is this. . .
> ftalphaville.ft.com/bl.../
>
>
> We are swimming in debt. And since this chart includes all debt,
> creating massive debt at govt level to counteract more responsible
> spending/saving by consumers is a net wash. By the linked chart,
> we need to take out 150% GDP in debt to get to a historically normal
> level. That's $22,000,000,000,000. That's a lotta frigging zeroes.
> Last month Banana Republic Ben manufacured $1T out of thin air. Is
> he gonna do this every month? Face it, we overspent for too long.
> No matter how much cheerleading CNBC does, facts are stubborn things.
> The last (and only) time we did this, sustainable growth didn't happen
> again until the debt was worked down to a manageable level. That
> was over 10 years later. No hurry to buy stocks, no matter the pump
> monkeys at Government Sachs and CNBC.
On May 03 08:32 AM bart2009 wrote:
> comparisons are bad when the facts of two periods are entirely different.
> after the 29 crash the gov let the economy and banking system collapse
> untill 1933 when the first new deal stimilus came in.
> thats when the comparison should begin. the economy and market had
> growth and recovery until another recession hit after 1937.
I have cash at the ready, but thinking that I'll buy at the next dip, which I'm thinking is due once certain data becomes known such as stress test data, GM fate, next wave of ARM resets, latest unemployment data showing continuing weakness, etc etc etc. There are just so many potential sources of bad news!
Still have some invested to take advange of days like today, but way less than I did Friday.....
> comparisons are bad when the facts of two periods are entirely different.
> after the 29 crash the gov let the economy and banking system collapse
> untill 1933 when the first new deal stimilus came in.
> thats when the comparison should begin. the economy and market had
> growth and recovery until another recession hit after 1937.
I saw this great quote the other day from someone who was around in 1931 and was involved in the stock market. He said that they did everything they could but simply couldn't do enough.
Keep in mind that the DJIA went up 50% in early 1930 and then had several more nice rallies as it dropped to an eventual deline of nearly 90%.
In fact, the 1930's are the most obvious period from the last century for comparison. I base that on many wise old owls who I follow.