Bear Market Rallies and Lessons of History 59 comments
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Many have tried to draw comparisons between the current market patterns and some notable past market experiences. None is better at doing this graphically than Doug Short (dshort.com). Here is his comparison of the current market (using the S&P 500) and two other famous (and catastrophic) bear markets.
Repeating History?
Doug's chart begs the question of whether his comparisons can be ignored. It can be argued that our financial system "solutions" are following too closely the Japanese model and that could lead us to another lost decade in the twenty-teens.
However, there are a number of differences. For one thing, we are early in the resolution of this financial crisis and can still do the right thing by forcing the most egregiously over levered behemoths to restructure into viable concerns. We also still have the possibility of forcing all the "too big to fail" to break up into a larger number of concerns "too small to destroy us". We have not passed the point of no return in this regard. We may still be able to reestablish some semblance of a financial free market. Look at what happened in the twenty years after AT&T was forced to break up. Would the information age and the internet have developed as quickly in a less competitive environment?
A second point of difference between the U.S. and Japan is demographic. Japan has a ratio of elderly to youth far larger than we have now or are projected to have in the twenty-first century.
As Simon Johnson pointed out (here), recovery...
"...remains fragile in the United States because of problems in our financial sector. While our situation today is quite different in key regards from that of Japan in the 1990s, the Japanese experience strongly suggests that fiscal stimulus is not an effective substitute for confronting financial sector problems (e.g., lack of capital, distorted incentives, skewed power structure) head on."
It is not impossible for the U.S. markets to have a second lost decade like Japan, but there are many ways that it can be avoided.
The second comparison Doug makes is to the 1929-49 U.S. market. There are so many differences in the economic system today from the 1930s that a close retracement should be unlikely.
However, an echo is possible in the form of a long protracted period of poor economic and stock market performance without going to utter collapse as in the early 1930s. We may have seen the market bottom for this generation on March 9 (or not), but, either way, the possibility that we don't see 14,100 on the Dow again for another 5-10 years is a real possibility.
Volatile Markets
From Chart of the Day comes this comparative chart. The current rally is outside the box defined by rallies in the market collapse from 1929 to 1932. It is both larger and longer. The only point that deep collapse bears can hang their hat on is the fact that the closest point on the graph is the initial counter trend rally of the super cycle bear market. They can proclaim that this is just the first of many counter trend rallies.
My personal opinion, mentioned previously, is that we will not repeat the 1929-32 debacle, but we are also not going to be off to the races into a new bull market. I give less than 50% probability to taking out the March 9 lows, but greater than 50% probability that we could give back half of the gain in this rally. That would give us low for the Dow in the vicinity of 8,300 to 8,500 within the next six months.
I base my estimate on two things plus a lot of "Kentucky windage":
- A 50% retracement of the rally from March 9 would put the Dow around 8,300.
- Using the S&P earnings estimates (here) and a target PE of 16, the low for the next 6 months for the S&P 500 would be about 850, which corresponds to Dow 8,000.
Of course, this is based on a muddle through recovery without the robust economic activity that would cause the S&P earnings estimates to be too low. On the other hand, the projection of the next cyclic low is too high if we double dip into a recession of any severity.
Hat tip to Options Girl for her question that lead me to include this discussion.
What Really Was Unique About the Crash of 1929-32?
A comment from Andrew Butter has caused me to realize that the presentation of the chart above as provided by Chart of the Day does not provide focus to the reader of what I saw when I first looked at it. Below I have posted a mark up of the chart.
The box that has been added contains four of the seven primary bull rallies that have occurred within a time span of 100 days from bottom to top in the last 110 years. (Actually, all bulls ran for 68 days or less; there never has been a primary bull that had a duration between 69 and 104 trading days.) The fifth point displayed (June 1930) gained less than the 20.0% threshold I define to constitute a primary rally.
The seven very short lived primary bull moves are listed below:
All of the daily Dow data from 1900 was analyzed in a series of articles last year. The data in the table above was taken from here.
A list of observations:
- Of the seven very short market moves up of 20% or more in the last 110 years, four occurred during the collapse from 1929 to 1932.
- Two more were among the first three rallies from the ultimate bottom in 1932.
- The rally in between the two "greenies" above was also short, lasting only 138 days.
- The seventh "shortie" occurred in a false rally on the way to the 10/9/2002 bottom following the 1/14/2000 top.
Since 1900, all very short primary rallies have occurred in markets that have still further to fall, or in rallies immediately following 100-year bottoms.
The Lesson
Whether or not the March 9 low is an intermediate low on the way to an ultimate bottom or constitutes the latest "100-year low", we have every reason to expect higher than normal volatility going forward. That is the lesson of history.
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This article has 59 comments:
2001 started the bubble-blowing process to try to stave off depression. If we look at the NDX chart, it looks much different than the SPX -- the technology markets describe the real American economy now more than any other index. Industrials? What are they?
It IS NOT possible to avoid the lost decade. The lost 2 decades are built in to the system:
1929-1947
1965-1983
2001-2019 all equal lost decades.
Go back further:
1893 – 1911
1857 – 1875
1821 – 1839
1785 – 1803
There is NOTHING we can do to avoid the Night part of the cycle. The best thing we could do would be to raise interest rates, confront our mistakes, face our bankruptcies, and unwind our debt, and prepare for the next season of expansion: 2019-2038.
We need to remember: 18 fat years followed by 18 lean years. Start lowering rates in 2018...slowly. Start raising rates in 2037...slowly. Use reason to fill up the balloon; and then empty out the balloon. Do NOT give power to bankers, because they will not follow this schedule, because they LOSE during the Night Cycle and will do anything to try to prevent it.
Also, we (consumers, businesses and governments) need to SAVE MONEY during the fat years, so we can survive during the lean years. This means to re-think our extravagances during the fate years, remembering always that they WILL NOT last for ever. Let's try being sober for a change, and see where that gets us as a nation.
As suggested each of the thee periods cited for the big moves of your first graph had different economic/financial circumstances, different demographics and different policy responses.
What makes all three similar is that they depict the way that human beings are prone to blowing up unsustainable bubbles and then having to deal with the nasty consequences which inevitably follow.
The bubbles shown are the three biggest - as we know there have been several smaller ones along the way as well.
The current conventional wisdom is that we are a lot smarter today, in terms of our knowledge of financial economics than we were in the 30's or the Japan of the 90's but if one buys into that premise we then have to ask - how did we manage to create the two mega bubbles of 2000 and 2006/7 in such close juxtaposition?
This is the added dimension that makes the current situation most unlike the previous two - we had a rolling bubble which first broke in 2000 was never fully resolved which lead to an even more stupendous bubble of 2006/7 and which the current cheerleaders claim has been virtually done and dusted within a year.
We have either become so much smarter in dealing with such crises ,or so much fatigued by them that, like the frogs who fail to realize that the water is boiling because they were being systematically and incrementally roasted, we simply cannot appreciate the enormity of our current predicaments.
I'm thinking we did not have the Fed funding rallies in global bonds and global stocks in 1929, like we've had since 2001. It would be nice to see a comparison of Fed injection for both periods (total/gdp) so we could get a sense of just how much the Inflationists of this period have distorted the natural processes of the markets.
"The dot Com boom was the consequence of a technological revolution."
There are always good reasons to be cited both at the time, and in hindsight for the bubbles - the immediate precipitating factors are not really the issue - it is the bubble like mania which then flourishes as a result of whatever "cause" historians ultimately want to base their story on.
The 2006/7 bubble was not precipitated by "sub-prime" - rather by many years of building overly complex financial instruments that was ready and able to take all of the sub-prime borrowers and stick them in the financial sausage machine.
> I am inclined to think that trying to start this bear market from
> 2001 is a bit of red-herring. The dot Com boom was the consequence of a technological revolution.
Tech revolutions come all the time. dot.com bubble was not Caused by tech; tech was an excuse. Bubbles stem from mas psychology, which, when the time comes will always find SOMething to attach itself to.
To give a concrete example, phone tech in the last four years has arguably done more for the economy than all the "tech revolution" in 2000-2001. And while the purveyors of these new phones have benefited, some handsomely, the rise has been Nothing like the pell-mell race to buy nothing that characterized 2001.
As for Mr. Lounsbury's article . . . "Lessons"? "HISTORY"!? Careful, sir - the bulls will think you are swearing at them.
The market bottom of 6600 will not be seen for years (if at all). The reason it bottomed because job loses started to drop as of the Feb 09 job report. As long as job losses become less negative then start growing the market will go up. If job loses start to get deeper in the next 12 months (doubtful) I can see us dropping back to 7500-8000 on the Dow but not farther. This is not 1929 and we are NOT Japan.
Get over it.
On Nov 01 04:38 AM Clive Corcoran wrote:
> Dave W
>
> "The dot Com boom was the consequence of a technological revolution."
>
>
> There are always good reasons to be cited both at the time, and in
> hindsight for the bubbles - the immediate precipitating factors are
> not really the issue - it is the bubble like mania which then flourishes
> as a result of whatever "cause" historians ultimately want to base
> their story on.
>
> The 2006/7 bubble was not precipitated by "sub-prime" - rather by
> many years of building overly complex financial instruments that
> was ready and able to take all of the sub-prime borrowers and stick
> them in the financial sausage machine.
We have a system that prices assets in proportion to the value of the dollar rather than the other way around. Electronic communication is intensive and there are sensor signaling devices to trigger moves in a flash. The finance system is stalking the state apparatus and blaming it for the moves it essentially mandated. If Louie the XIV was around today he'd declare "I am the Market" insted of I am the state.
Speculations on spirals and cycles, meanwhile, are always best in retrospect and frankly they don't account for anything but the "surge" itself. These profit surges run on anticipation of catching the float on the escalating rise and becomes a feeding frenzy to jump on board. To top all this it seems that the emotive tides of market chatter moves whole segments with as much misinformation and vested slanting as it does with serious research like John provides. But In fact, some of the better information still gets manipulated on these markets for some advantage simply by reinforcing the positive or negative wind driven by speculations and now adays big hedge fund decisions up or down. Finally it should be pointed out that any data graphed after 1971 was off the gold standard; and frankly it was shifted to a Price based orientation on a floating currency.
Theoretically, if the proportionate currency to assets can be eased into an alignment and stabalized, we would have our fiat economy in tune. That is until big momma & poppa finance decide to flip the balance to provoke more profit driven speculation drives. Frenzy and panic is all that prevails when they start selling bears at the wall street fair.
All in all, the real history we might rely on is the actual people and there mode of operations. Its not the history of the bubbles but the history of the people that is viable. I
this Bullmarket is alive and kicking.....We were waiting for this pullback beginning october..which it did but only to Dow 9500....the following rally was suspicious to begin with...and here we are ...looks like this time we'll have the real pullback from the summerrally...expect this week to have a little relive rally ...another selloff next week ...low most likely at or around dow 9400....than fasten your seatbelts gentleman.....best six month of the year coming ....Dow 11600 should be peak ......after that we should have our real correction ( wave 6 ) ......looking forward reading all the doomsayers comments already ......
- first, the velocity of change is very high now. Information goes around the globe in seconds.
- secondly, the global economy is so interconnected. Demand for iron in China effects stock pricing in Brazil.
- third, there has never been more capital more poorly allocated in the history of the world. Much more money chasing interest rates than being put to productive use (creating jobs in meaningful industries, for example).
On Nov 01 11:05 AM sam131 wrote:
> We have a couple days of selling...and all the doom sayers are all
> over the place ....
> this Bullmarket is alive and kicking.....We were waiting for this
> pullback beginning october..which it did but only to Dow 9500....the
> following rally was suspicious to begin with...and here we are ...looks
> like this time we'll have the real pullback from the summerrally...expect
> this week to have a little relive rally ...another selloff next week
> ...low most likely at or around dow 9400....than fasten your seatbelts
> gentleman.....best six month of the year coming ....Dow 11600 should
> be peak ......after that we should have our real correction ( wave
> 6 ) ......looking forward reading all the doomsayers comments already
> ......
www.clevelandfed.org/r...
It's hard to say if that alone was responsible for the strong recovery following, or whether or not 10 years of bloodletting also had something to do with it. But, I think for the sake of accurate comparison, perhaps Japan from 2001 to present would be a more illustrative example to see what we may experience in the future.
If that is the case, we may be in for a relatively healthy recovery.
An argument could be made that the difference between 1929 and 2000 was the Fed. Following the top in 1929 the Fed actually tightened monetary policy (to squeeze the excesses out of the markets) and following the 2000 top the Fed loosened monetary policy (to reinflate the markets and stimulate growth). That would be consistent with calling 2000 the supercycle top, with the subsequent rally into 2007 an artifact of stimulus that could not be supported by fundamentals.
As far as relationships between the 1920s and the 1990s, the dramatic stock market moves to bubble tops are the two most outstanding such moves in our history. Clive said there have been other bubbles along the way, but these are the two that stand out, particularly with respect to stocks. The credit bubble of the 1920s collapsed with the stock market, whereas the credit bubble of the 1980s and 1990s was extended with unprecedented liquidity courtesy of the Fed.
You might say that the collapse from 1929 was concerted, whereas the collapse from 2000 was a rolling, extended collapse. It remains to be seen which form of collapse does the most long term damage.
going back to 1913 and then ten year increments starting 1920 there are 6 periods with top marginal rates ranging from 70-90% (ave 78%) average 10 yr market return approx 60%
5 periods with top marginal rates ranging from less then 10%-40% (ave 26%) average 10yr market return approx 243%
So there is a correlation between income tax rates and market returns, sure there is plenty of info missing but the point is tax rates do matter on how well we do as a country as well as individuals.
While we would not get anywhere close to returning to the ave top marginal rates this go around, when you add all the other stealthly taxes on the table and then add in the fragile condition of our economy there would be no material difference.
On Nov 01 11:11 AM enigmaman wrote:
> Opinions, charts, historical facts are the basis for making what
> many profess to be educated informed market projections but in reality
> its just a guess, if the pros knew what they want others to believe
> they know then 75% of them would be matching the performance of the
> S&P instead of the opposite being true. They will twist and bend
> into whatever show is needed to convince investors to invest because
> its their livelihood. I love looking and reading all the technical
> information but Ive yet to see any chart that plots tax policy as
> it relates to the economy. IMO what I see is the USA patient suffering
> from economic pneumonia and the Doctor Admin prescribing an eight
> hundred pound tax & spend gorilla sit on the patients chest,
> 24/7/365 for the foreseeable future. Sorry I dont to know anything
> else to know the Doctor will kill the patient.
On Nov 01 11:11 AM enigmaman wrote:
> Opinions, charts, historical facts are the basis for making what
> many profess to be educated informed market projections but in reality
> its just a guess, if the pros knew what they want others to believe
> they know then 75% of them would be matching the performance of the
> S&P instead of the opposite being true. They will twist and bend
> into whatever show is needed to convince investors to invest because
> its their livelihood. I love looking and reading all the technical
> information but Ive yet to see any chart that plots tax policy as
> it relates to the economy. IMO what I see is the USA patient suffering
> from economic pneumonia and the Doctor Admin prescribing an eight
> hundred pound tax & spend gorilla sit on the patients chest,
> 24/7/365 for the foreseeable future. Sorry I dont to know anything
> else to know the Doctor will kill the patient.
trades .90 to NIPA corporate profits.....these are extreme valuations.....
we do need a selloff ....% of stocks above their 50 M.A. is 35% we need a
selloff below 30% to set up for a further move up....we still have an
enormous amount of cash getting .2%
The experience of Japan over the past 20 years is evoked by both sides in this argument; the interventionists as evidence that stimulus must be provided at decisive levels and coupled with vigorous restructuring of inefficient and ineffective financial and industrial enterprises, on the one hand, and the anti-interventionists, on the other, as evidence that necessary economic reform (and therefore the real end of the recession) can only occur if the recession is allowed to do its work of constructive destruction (which artificial stimulus measures only delayed or impeded). In other words, both sides acknowledge that Japan’s economy stalled in near deflation for a protracted period and that the efforts of its government and central bank failed to end that state of affairs but the interventionists see the Japan’s error to have been to have done too little while the anti-interventionists see the error to have been to have intervened against market forces at all.
The effectiveness or otherwise of intervention at various stages in the US between 1929 and 1941 are another focus for this debate a sidebar of which is speculation (arguably of marginal utility) whether the US today is at 1930 or 1937 by comparison with the stages of the Great Depression. Interestingly, the same debate about the efficacy of intervention was in full throat in the 1929 -41 period (the anti-interventionists then prevailing in the early stages and the interventionists later – the interventionists prevaling so far this time).
The next two or three quarters may be decisive in showing whether intervention has worked as planned. It is doubtful, however, whether this debate will be finally settled to the satisfaction of all (the devil always being in the details).
On Nov 01 12:02 PM John Lounsbury wrote:
> Clive and Dave (actually, all commenters) - - -
>
> An argument could be made that the difference between 1929 and 2000
> was the Fed. Following the top in 1929 the Fed actually tightened
> monetary policy (to squeeze the excesses out of the markets) and
> following the 2000 top the Fed loosened monetary policy (to reinflate
> the markets and stimulate growth). That would be consistent with
> calling 2000 the supercycle top, with the subsequent rally into 2007
> an artifact of stimulus that could not be supported by fundamentals.
>
>
> As far as relationships between the 1920s and the 1990s, the dramatic
> stock market moves to bubble tops are the two most outstanding such
> moves in our history. Clive said there have been other bubbles along
> the way, but these are the two that stand out, particularly with
> respect to stocks. The credit bubble of the 1920s collapsed with
> the stock market, whereas the credit bubble of the 1980s and 1990s
> was extended with unprecedented liquidity courtesy of the Fed.<br/>
>
> You might say that the collapse from 1929 was concerted, whereas
> the collapse from 2000 was a rolling, extended collapse. It remains
> to be seen which form of collapse does the most long term damage.
You make some good points. Inferred from your comment is the importance of GDP growth (or lack thereof) in the next four quarters in affecting how the market moves.
Bob Adamson - - -
Good comment, especially the last sentence:
It is doubtful, however, whether this debate will be finally settled to the satisfaction of all (the devil always being in the details).
A major problem in establishing cause and effect in macroeconomics is the lack of a control. In scientific experimentation the effect of variables are isolated by keeping all variables but the one examined constant. In testing populations, two groups are examined. One group has a variable exercised and the other does not (the control group).
These types of experimental control are seldom available in macroeconomic research.
enigmaman - - -
Good comment about taxes and growth. I have looked at the type of data you have summarized but have not (yet) come up with anything to publish. The reason comes back to the point I made in my comment to Bob Adamson. The best I can hope for is to be able to incorporate those observations with some interrelated observations to try to counteract the lack of experimental control.
The same problem arises when trying to correlate GDP and stock market performance with presidential terms. How much of the performance in one presidential term is related to what was done one or two terms prior? I have collected lots of nice data, but don't know what it means.
First, the intermediate term technicals are still solid. None of the longer term moving averages have crossed path towards the downside (as was in late 07-early 08) which is an indica of an impending bear market.
freestockcharts.co...
Second, I don't think the US economy has as much to do with S&P 500 companies as in the past. Most of the multinationals are more and more relying on global growth. The emerging economies of the BRIC's and other mini-BRIC's will more than make up for the weakness in the US.
Third, the decline of the US dollar is a huge tail wind for the S&P 500 (increasing export, repatriation of foreign profits) which I believe will keep earnings healthy.
Fourth, I don't think the S&P 500 is over-valued (I think it is fairly valued) at a forward P/E of ~18 - 20. While this may seem high you have to consider this in terms of the low interest rate environment we are in.
Fifth, the Fed will keep interest rates low until unemployment falls below ~8%. This is unlikely to happen in 2010. By being bearish you are fighting the Fed which I don't think is a wise strategy unless it is for tactical / short term reasons.
I feel that many of you have fallen into the trap of pessimism which invariably follows a traumatic event. A year ago we were in the middle of a full blown financial panic and no doubt the recovery since then seems like a mirage. But I think it is real. Just my personal opinion for whatever it is worth.
Investors also need to be mindful that whilst interest rates are currently low a serious Dollar crisis could soon change all of that.
As for the trap of pessimism, it is surely that which Obama and Co. have been trying to pay their way out of, rather unsuccessfully it would appear.
But at least you are honest enough to acknowledge that the US is no position to play the roll of the locomotive either to the World Economy or indeed its own.
On Nov 01 02:05 PM E Nuff Sed wrote:
> I respectfully disagree with the pessimistic view point.
>
> First, the intermediate term technicals are still solid. None of
> the longer term moving averages have crossed path towards the downside
> (as was in late 07-early 08) which is an indica of an impending bear
> market.
> www.freestockcharts.co...
>
> Second, I don't think the US economy has as much to do with S&P
> 500 companies as in the past. Most of the multinationals are more
> and more relying on global growth. The emerging economies of the
> BRIC's and other mini-BRIC's will more than make up for the weakness
> in the US.
>
> Third, the decline of the US dollar is a huge tail wind for the S&P
> 500 (increasing export, repatriation of foreign profits) which I
> believe will keep earnings healthy.
>
> Fourth, I don't think the S&P 500 is over-valued (I think it
> is fairly valued) at a forward P/E of ~18 - 20. While this may seem
> high you have to consider this in terms of the low interest rate
> environment we are in.
>
> Fifth, the Fed will keep interest rates low until unemployment falls
> below ~8%. This is unlikely to happen in 2010. By being bearish
> you are fighting the Fed which I don't think is a wise strategy unless
> it is for tactical / short term reasons.
>
> I feel that many of you have fallen into the trap of pessimism which
> invariably follows a traumatic event. A year ago we were in the
> middle of a full blown financial panic and no doubt the recovery
> since then seems like a mirage. But I think it is real. Just my
> personal opinion for whatever it is worth.
Acknowledging the mess that exists is not "pessimism." It is "realism."
The sooner we face up to our problems, the sooner we can solve them.
An excellent article as ususal. Not sure why you confined the comparison in your chart to only now vs. 1930, but that is OK, as there are plenty of comparisons out there with multiple recesssions.
Would suggest you look at some of John Hussman's articles on his weekly market archive. Hussman has some excellent research analysts which also contribute factually based articles and commentary as well. There are several articles on Hussman's site that compare, present scatter charts, etc of this recession/market pricing to all previous recessions/market declines. If one recalls the data correctly, the current recession/market decline/recovery rally is very very much an outlier and quite far away from virtually any comparisons to any previous recessions/declines/re... Thus, based upon the comparisons and the evidence he presents, one has to conclude that the odds of at least one or more pretty severe downward corrections are very high. And as always, once a trend, either up or down really gets going, it usually overshoots in the trend direction. The point being that SP 850 or DOW 8000 might very well be realist downside fair values, but the overshoot could still take they quite a bit lower.
In any event, if you have not seen any of John Hussman's commentary and analysis, you might well find some of it quite useful. BTW, we have zero investments in any Hussman funds, we just appreciate the factual analysis and commentary he provides free to the investing public.
This should be a link to his commentary archive:
www.hussmanfunds.com/w...
You made some very good points and did not deserve any thumbs down. It is true that low interest rates and low inflation support higher PE ratios. I had a feature article published in 1996 (AAII Journal) that analyzed that very point. Dave Wrixon made a very good reply regarding the forward looking nature of the market that might have a more negative effect in the future (with respect to interest rates and inflation). No one mentioned it, but continued deflation is not, in general good for supporting higher PE ratios. You might say a little bit of medicine is a good thing but an overdose can kill you.
untrusting - - -
I frequently read John Hussman. I am guilty of not quoting him and giving links often enough.
> The dot Com boom was the consequence
> of a technological revolution. Was such a revolution a major factor
> in the previous cycles used for comparison?
Yes. During the Roaring 20's it was radio.
On Nov 01 01:17 PM John Lounsbury wrote:
> bbro - - -
>
> You make some good points. Inferred from your comment is the importance
> of GDP growth (or lack thereof) in the next four quarters in affecting
> how the market moves.
>
> Bob Adamson - - -
>
> Good comment, especially the last sentence:
>
> It is doubtful, however, whether this debate will be finally settled
> to the satisfaction of all (the devil always being in the details).
>
>
> A major problem in establishing cause and effect in macroeconomics
> is the lack of a control. In scientific experimentation the effect
> of variables are isolated by keeping all variables but the one examined
> constant. In testing populations, two groups are examined. One group
> has a variable exercised and the other does not (the control group).
>
>
> These types of experimental control are seldom available in macroeconomic
> research.
>
> enigmaman - - -
>
> Good comment about taxes and growth. I have looked at the type of
> data you have summarized but have not (yet) come up with anything
> to publish. The reason comes back to the point I made in my comment
> to Bob Adamson. The best I can hope for is to be able to incorporate
> those observations with some interrelated observations to try to
> counteract the lack of experimental control.
>
> The same problem arises when trying to correlate GDP and stock market
> performance with presidential terms. How much of the performance
> in one presidential term is related to what was done one or two terms
> prior? I have collected lots of nice data, but don't know what it
> means.
tinyurl.com/y97866v
Regarding recovery, I am not wearing rose colored glasses. The damage done by this bear can take 5 - 10 years to repair before we begin another secular bull. However there will be many money making opportunities as long as you dance without too much baggage and make a quick exit when the technicals turn bearish.
Note: The greater the depth of a cyclical bear market the longer it takes to recover. This analysis backs up this observation.
www.scribd.com/doc/180...
Not sure where you are getting the 8% unemployment figure (although I agree it sounds approximately correct).
I think the pessimism is explained by a large number of libertarians and gold bugs on SA.
The Fed WILL inflate us out of this mess, use deflation as cover, and have the Chinese pay for it. They have essentially stated the first point, and the latter two logically follow.
On Nov 01 02:05 PM E Nuff Sed wrote:
> I respectfully disagree with the pessimistic view point.
>
> First, the intermediate term technicals are still solid. None of
> the longer term moving averages have crossed path towards the downside
> (as was in late 07-early 08) which is an indica of an impending bear
> market.
> www.freestockcharts.co...
>
> Second, I don't think the US economy has as much to do with S&P
> 500 companies as in the past. Most of the multinationals are more
> and more relying on global growth. The emerging economies of the
> BRIC's and other mini-BRIC's will more than make up for the weakness
> in the US.
>
> Third, the decline of the US dollar is a huge tail wind for the S&P
> 500 (increasing export, repatriation of foreign profits) which I
> believe will keep earnings healthy.
>
> Fourth, I don't think the S&P 500 is over-valued (I think it
> is fairly valued) at a forward P/E of ~18 - 20. While this may seem
> high you have to consider this in terms of the low interest rate
> environment we are in.
>
> Fifth, the Fed will keep interest rates low until unemployment falls
> below ~8%. This is unlikely to happen in 2010. By being bearish
> you are fighting the Fed which I don't think is a wise strategy unless
> it is for tactical / short term reasons.
>
> I feel that many of you have fallen into the trap of pessimism which
> invariably follows a traumatic event. A year ago we were in the
> middle of a full blown financial panic and no doubt the recovery
> since then seems like a mirage. But I think it is real. Just my
> personal opinion for whatever it is worth.
What we are seeing at the moment are a few players controlling the market through lost positions, as well as the sound of hedge funds being slaughtered.
Introduction This was written in 2001 and the full spectrum was spelled out from derivitives to subprime. The entire crisis was completely spelled out by an honest actuary doing his job.
Basic outline:
Background to Development of Basel Capital Accord
Overview of the Basel Capital Accord (BCA)
Problems with the new BCA from Public Interest Perspective
Trends in Bank Supervision (esp. Gramm-Leach-Blily)
Global Financial Consolidation and "Too-Big-to-Fail" Risks
Addressing Causes of Financial Crises
Credit Creation for Low/Middle Income Groups and Predatory Lending
Non-Bank Financial Institutions
Need for Public Input
In another really well researched and comprehensive work:
webofdebt.com from Ellen Hodgson Brown, J.D. provides original research work on the money system. You never see this in the mechanical workings of the big market machinery, but on p.143-144 of Hodgson Brown's work she lays out a rationale as to why the currency was contracted in 1929 with a resulting liquidity freeze. It is too detailed to explain here but suffice it to say that at that time the gold standard was very much involved in the dramatic decline, since a run on gold assets depleted the reserves that the currency was built upon, further shrinking the money supply. This is, obviously a distinctively inverse relationship to the situation today. The high profile and desireability of gold however, is none the less in the air.
In fact though, to add to the distinction it might be noted that the U.S. was attempting to manage down the highly "inflated dollar" at the time and the moves were quite deliberate with some inside wealth being informed prior to the strong actions being taken.
What is at least as fascinating is that Hodgson Brown goes on to note
that the "big Banks" and the "Big Money" made out made out very well when they came back into the market and bought up the distress priced stock and buying up companies for pennies on the dollar; along with mortgages from family homes and farms that were delivered to the hands of bankers and the financial elite.
In this regard I would say that the mechanism and the operational arrangements of the economic capital has been interpolated in the contemporary setting. However, these meta-trends in manipulation and intentionality fall between the micro and the macro frameworks of textbook economics because they are intertwined. What is striking in Hodgson Brown's assessment of the consequences was that just as today, the International Bankers and big money made out while everyone else paid the price. Perhaps this parasitic drain was what prolonged the suffering until the war effort came along to level it. Her most intriguing Line: "It was dramatic evidence of the dangers of delegating the power to control money supply to a single autocratic hand of an autonomous agency."
So it is possible to propose that there were so many actual oipposite contingencies between 1929 and today that, in fact they were only united by one common ailment.
excess power in too few hands pulling the strings for too few against the interests of so very many whom were led to the fleecing by believing the machine was simply an impartial market.
Ellen Hodgson Brown;
THE WEB OF DEBT: The Shocking Truth About our Money System and How We Can Break Free. 2008 Millennium Press, Baton Rouge, Louisiana. USA 800 891 0390
On Nov 01 10:10 AM drewriders wrote:
> People need to stop looking at these stupid charts looking for some
> sort of pattern. The reason that markets go down is simple. JOBS.
>
>
> The market bottom of 6600 will not be seen for years (if at all).
> The reason it bottomed because job loses started to drop as of the
> Feb 09 job report. As long as job losses become less negative then
> start growing the market will go up. If job loses start to get deeper
> in the next 12 months (doubtful) I can see us dropping back to 7500-8000
> on the Dow but not farther. This is not 1929 and we are NOT Japan.
>
>
> Get over it.
If the recovery is choppy, then forward P-Es of 18-20 might not be that realistic. More important, the forward estimates will probably fall short.
A legitimate recovery or ultra-low interest rates are possible over the short to intermediate term, but not both.
On Nov 01 02:05 PM E Nuff Sed wrote:
> I respectfully disagree with the pessimistic view point.
>
> First, the intermediate term technicals are still solid. None of
> the longer term moving averages have crossed path towards the downside
> (as was in late 07-early 08) which is an indica of an impending bear
> market.
> www.freestockcharts.co...
>
> Second, I don't think the US economy has as much to do with S&P
> 500 companies as in the past. Most of the multinationals are more
> and more relying on global growth. The emerging economies of the
> BRIC's and other mini-BRIC's will more than make up for the weakness
> in the US.
>
> Third, the decline of the US dollar is a huge tail wind for the S&P
> 500 (increasing export, repatriation of foreign profits) which I
> believe will keep earnings healthy.
>
> Fourth, I don't think the S&P 500 is over-valued (I think it
> is fairly valued) at a forward P/E of ~18 - 20. While this may seem
> high you have to consider this in terms of the low interest rate
> environment we are in.
>
> Fifth, the Fed will keep interest rates low until unemployment falls
> below ~8%. This is unlikely to happen in 2010. By being bearish you
> are fighting the Fed which I don't think is a wise strategy unless
> it is for tactical / short term reasons.
>
> I feel that many of you have fallen into the trap of pessimism which
> invariably follows a traumatic event. A year ago we were in the middle
> of a full blown financial panic and no doubt the recovery since then
> seems like a mirage. But I think it is real. Just my personal opinion
> for whatever it is worth.
Are you not at all concerned about continued problems with overleveraged consumers? Those who did not overextend themselves in 2006-2007 are enjoying very cheap credit, but a significant percentage of the population continues to drown in debt. This is why mortgage delinquencies have continued to increase in August and September rather than improving with the overall recovery,
Hopefully, you are right and I am being pessimistic to worry about this, but I have a hard time seeing an easy and comfortable solution.
On Nov 01 02:05 PM E Nuff Sed wrote:
> I respectfully disagree with the pessimistic view point.
>
> First, the intermediate term technicals are still solid. None of
> the longer term moving averages have crossed path towards the downside
> (as was in late 07-early 08) which is an indica of an impending bear
> market.
> www.freestockcharts.co...
>
> Second, I don't think the US economy has as much to do with S&P
> 500 companies as in the past. Most of the multinationals are more
> and more relying on global growth. The emerging economies of the
> BRIC's and other mini-BRIC's will more than make up for the weakness
> in the US.
>
> Third, the decline of the US dollar is a huge tail wind for the S&P
> 500 (increasing export, repatriation of foreign profits) which I
> believe will keep earnings healthy.
>
> Fourth, I don't think the S&P 500 is over-valued (I think it
> is fairly valued) at a forward P/E of ~18 - 20. While this may seem
> high you have to consider this in terms of the low interest rate
> environment we are in.
>
> Fifth, the Fed will keep interest rates low until unemployment falls
> below ~8%. This is unlikely to happen in 2010. By being bearish you
> are fighting the Fed which I don't think is a wise strategy unless
> it is for tactical / short term reasons.
>
> I feel that many of you have fallen into the trap of pessimism which
> invariably follows a traumatic event. A year ago we were in the middle
> of a full blown financial panic and no doubt the recovery since then
> seems like a mirage. But I think it is real. Just my personal opinion
> for whatever it is worth.
Half the World would like nothing better than to see the US fail, however painful that might be in the short-term.
Anyway, the presumption that US banks are too big to fail will probably prove to be wrong.
On Nov 01 10:42 PM Ada wrote:
> If the institutions can be too big to fail, would it be also true
> that the USA is "too big to fail"? Would the rest of the world rather
> pay (by buying money losing treasury bills) the USA not to go into
> another economic melt down than seeing it dragging the rest of the
> world further into the abyss? How helpful this support could be
> and how long it could last are the questions.
On Nov 01 04:55 PM Alan von Altendorf wrote:
> Dave Wrixon wrote:
It was the automotive industry evolution
Commercial air travel, trains and transportation
Fast Food, restaurants, leisure, hotels and GAMBLING
Music, film and theatre industry.
Drugs, mafia, ponzi schemes, insider trading and crooks (we still have these now)
And most importantly the consumer indulging in the above and spending more than earning
That was the cause of the roaring 20’s bubble!!
On Nov 02 03:30 AM Dave Wrixon wrote:
> Don't recall Radio ever having been cited as the cause of Stock Market
> crash. Do you have any evidence on that one? I don't think we had
> commercial radio in the UK until the 1960s, but I am sure you would
> have been ahead of us.
planbeconomics.com.../
As for the market rally or intermediate run, undoubtedly the situation we have today is markedly different than the past. Never had we had so much government interventionism and low interest rates for so long. Although we may not be demographically the same as Japan, Japan at least had a trade surplus and lots of excess cash to waste. That is something the US can't claim for decades making our situation equally if not worse than Japan's lost decade recession.
Let us not tease ourselves into believing that somehow we are better than we actually are.
1) the supposed lost dceade was because stocks were grossly overvalued many top companies at Pes between 40-70
2)march 2009 is the start of a bull market ,which is partially driven because equity prices are too low
3) there are no altrenatives for those who want money markets with little risk
4) Pe of the overall market is hard to forcast but the financials are operating with a great spread in borrowing cheap from the fed,that is the real reason banks arent lending
why should they?
Here is some info. I only saw data referenced in the Nicholas article. New concept to me, so no comment, I just found it interesting.....
"..... by 1928 the market had become a bubble—that is, the prices paid by investors exceeded any reasonable expectation of future earnings. Speculation was particularly rampant in high technology and utilities stocks such as the Radio Corporation of America, RKO (Radio‐Keith‐Orpheum), Westinghouse, United Aircraft, and Commonwealth and Southern. Securities affiliates of banks and brokers encouraged speculation by letting investors buy stocks on credit....."
The Oxford Companion to United States History, 2001, Paul S. Boyer
"Investors, their equity leveraged with bank and broker loans, crowded into stocks of exciting "new technologies", such as the radio and mass electrification."
The Bursting Asset Bubbles - Wall Street, October 1929
Sam Vaknin, Ph.D.
Counterpoint - "This article examines the stock market's changing valuation of corporate patentable assets between 1910 and 1939. It shows that the value of knowledge capital increased significantly during the 1920s compared to the 1910s.......[however] high technology firms did not earn significant excess returns over low technology firms for most of the 1930s."
American Economic Review, September 2008 by Tom Nicholas
On Nov 02 03:30 AM Dave Wrixon wrote:
> Don't recall Radio ever having been cited as the cause of Stock Market
> crash. Do you have any evidence on that one? I don't think we had
> commercial radio in the UK until the 1960s, but I am sure you would
> have been ahead of us.
I agree with your final sentence, and will add that there's no need for the recovery to be legitimate. In that sense, we may see both ultra low rates and a recovery of some sort.
On Nov 02 02:31 AM Mark Alexander wrote:
> It will be very difficult for the Fed to hold interest rates low
> if the recovery takes hold, because a bloated monetary base and low
> interest rates will spark inflation (potentially severe unless monetary
> policy is tightened). This would push forward PE valuations below
> 18-20.
> A legitimate recovery or ultra-low interest rates are possible over
> the short to intermediate term, but not both.
>
> On Nov 01 02:05 PM E Nuff Sed wrote:
By a recovery of sorts, I assume you mean that we bounce along in a not very fun but not terrible path of low growth. If so, I agree with you, but this means that we might not hit the forward earnings estimates, and investors may want better than an 18-20 forward P-E.
On Nov 02 03:20 PM Ricard wrote:
> The way I read the Fed, this is exactly what they want (inflation
> in the short-medium term). Every time you hear them say 'must fight
> the deflationary death spiral' I translate it to 'must stoke inflation
> to get rid of toxicity in the system'. China and Japan will pay for
> it.
>
> I agree with your final sentence, and will add that there's no need
> for the recovery to be legitimate. In that sense, we may see both
> ultra low rates and a recovery of some sort.
'You made some very good points and did not deserve any thumbs down. It is true that low interest rates and low inflation support higher PE ratios'
On Nov 01 04:16 PM John Lounsbury wrote:
> E Nuff Said - - -
>
> You made some very good points and did not deserve any thumbs down.
> It is true that low interest rates and low inflation support higher
> PE ratios. I had a feature article published in 1996 (AAII Journal)
> that analyzed that very point. Dave Wrixon made a very good reply
> regarding the forward looking nature of the market that might have
> a more negative effect in the future (with respect to interest rates
> and inflation). No one mentioned it, but continued deflation is not,
> in general good for supporting higher PE ratios. You might say a
> little bit of medicine is a good thing but an overdose can kill you.
>
>
> untrusting - - -
>
> I frequently read John Hussman. I am guilty of not quoting him and
> giving links often enough.
The Fed and the rest of our political apparatus will have the political capital to stoke inflation, because they are not dependent upon China or Japan for votes. Politicians have every reason to see inflation infect housing prices with the 'fever' and get our D/E ratios back under control. That will probably win them votes if nothing else.
Higher inflation does not necessarily have to lead to high rates unless the Fed is determined to end it. Given the unprecedented amounts of 'accommodation' that has come out of Bernanke, I'd say that at most he will 'tap the breaks' even in the face of high single digit inflation.
I wish I knew more about the inflationary pressures during Volcker's term (was there a credit bubble accompanying sky-high oil prices?), but I think the situation this time around is slightly different. We have every reason to let inflation run amok until we are good and ready to end it. What's great about this time is that we don't need to pay for it, so more than likely it will continue for longer than it otherwise would, just like how the long end of the yield curve stayed artificially low under Greenspan's 'conundrum'. Both would be contingent upon externalities (China and Japan), except this time around they will work for us, and not against us.
The only drawback would be that general price levels would increase, and we would be materially poorer relative to other countries. That is a small price to pay to recover from insolvency, IMHO.
On Nov 02 04:30 PM Mark Alexander wrote:
> The Fed does appear intent on stoking inflation to a degree – a goal
> it can achieve so long as it has the political capital – but this
> weakens the case for a forward P-E for the market of 18-20.. If
> you believe a strong recovery will take hold, then corporate profits
> could grow rapidly, but this seems unlikely because inflation will
> bring higher interest rates which will hurt real estate (which will
> hurt the economy).
>
> By a recovery of sorts, I assume you mean that we bounce along in
> a not very fun but not terrible path of low growth. If so, I agree
> with you, but this means that we might not hit the forward earnings
> estimates, and investors may want better than an 18-20 forward P-E.
>
>
> On Nov 02 03:20 PM Ricard wrote:
On Nov 02 10:19 PM Ricard wrote:
> I believe a mild to tepid recovery will take hold, with higher than
> average inflationary pressure (mild to moderate stagflation). <br/>
>
> The Fed and the rest of our political apparatus will have the political
> capital to stoke inflation, because they are not dependent upon China
> or Japan for votes. Politicians have every reason to see inflation
> infect housing prices with the 'fever' and get our D/E ratios back
> under control. That will probably win them votes if nothing else.
>
>
> Higher inflation does not necessarily have to lead to high rates
> unless the Fed is determined to end it. Given the unprecedented amounts
> of 'accommodation' that has come out of Bernanke, I'd say that at
> most he will 'tap the breaks' even in the face of high single digit
> inflation.
>
> I wish I knew more about the inflationary pressures during Volcker's
> term (was there a credit bubble accompanying sky-high oil prices?),
> but I think the situation this time around is slightly different.
> We have every reason to let inflation run amok until we are good
> and ready to end it. What's great about this time is that we don't
> need to pay for it, so more than likely it will continue for longer
> than it otherwise would, just like how the long end of the yield
> curve stayed artificially low under Greenspan's 'conundrum'. Both
> would be contingent upon externalities (China and Japan), except
> this time around they will work for us, and not against us.
>
> The only drawback would be that general price levels would increase,
> and we would be materially poorer relative to other countries. That
> is a small price to pay to recover from insolvency, IMHO.
>
> On Nov 02 04:30 PM Mark Alexander wrote:
On Nov 01 11:47 AM fjd10595 wrote:
> You have to be kidding. We still have time to impliment proper policies?
> We don't have the political will for that. It means imparting pain
> to the public. The public doesn't want pain, it would rather enjoy
> whatever it can now, and pass the bill for the largess to the future,
> to our children. Politicians cater to that view, and lean on career
> public servants who are supposed to be insulated from public opinion
> to enforce what the public wants, or to enforce what their contributors
> want, i.e. the big banks. No, sadly there will be no change until
> there is "blood in the streets." The public would rather watch reality
> TV shows than to understand the grave issues facing the nation, and
> facing future generations.
research.stlouisfed.or...
Banks are basically getting funds at 0% and buying treasuries at 4% and pocketing the spread. They are just not lending to main street.
low lending -> low credit -> low demand -> low inflation.
The shadow banking system has completely disappeared (latest is CIT).
On Nov 02 10:41 PM Mark Alexander wrote:
> Everything you say is entirely plausible except for the possibility
> of keeping rates down in the face of inflation. This is impossible
> given the explosion of the Fed's balance sheet. An inflationary
> spark could easily turn hyperinflationary. Bernanke knows this (and
> has even made comments to this effect). The Fed will either need
> to raise rates or sell securities, probably both. The net effect
> is the same. If we see meaningful inflation, nterest rates will
> need to go up.
>
> On Nov 02 10:19 PM Ricard wrote:
On Nov 02 11:30 PM E Nuff Sed wrote:
> I do not think inflation more than 2 -3% is likely in the next 2
> years because of the precarious state of the banks. They are not
> releasing capital into the street. Velocity of money is only now
> flattening out of a deep decline.
>
> research.stlouisfed.or...
>
> Banks are basically getting funds at 0% and buying treasuries at
> 4% and pocketing the spread. They are just not lending to main street.
>
>
> low lending -> low credit -> low demand -> low inflation.
>
> The shadow banking system has completely disappeared (latest is CIT).