Entering into THE GREATEST DEPRESSION

[wimpy77]

Toro, I am glad that you are an optimist. I want to be, but reality keeps on dragging me back to what I see happening.

There were four massive stock bubbles in the 20th Century: 1901, 1929, 1966, and 2000. During each of these bubble peaks, the S&P 500 neared or exceeded 25X on the great economics professor Robert Shiller's cyclically adjusted P/E ratio.* After the first three of these peaks, the S&P 500 PE did not bottom until it hit 5X-8X. We're still in the middle of the last one.

That means, The DOW could go well below 4000. If that happens, so many companies will be bankrupt that you will never see a V or U correction. What we will see is an L economic performance. That means DOWN and then Level at that poor rate of economic performance. That may last for ten years or longer.

You could very well be right, especially about the Dow going to 4000, but I am skeptical.

I look at Tobin's Q, which bottomed at 0.3 in 1921, 1932, 1949 and 1982. Today, we would get to 400 on the SP500 at that level.

This time is being compared to the 30s. I think that is incorrect, at least in terms of its economic severity. However, if the stocks market reacts like it did in the 30s, once it 0.3x, it rose 180% over the next year and 240% over the next 3.5. That would put the SP500 at 1120 a year after and 1360 within 4. That's why I'm buying stocks today.

The median PE on the SP500 is 9.9x.

so are you like the s&p guy they had on cnn? you think it will bottom around 620-650?

 

[BrianH]

As I see it now, we still have electricity, fuel, food, and for the most part, jobs. I do agree that we MAY be entering something far worse than the great depression, if it doesn't turn around. If the economy reached the proportions equal to that of the 1930's economy, our social, economic, and all around well-being as a nation would be worse than it was in the thirties. People, in the 30s, were used to "doing without" things that we DEPEND on for survival.

 

[Neubarth]

Declaring a depression is trickier then declaring a Recession.

By one definition, it's a downturn of three years or more with a 10 percent drop in economic output and unemployment above 10 percent. The current downturn doesn't qualify yet: 15 months old and 7.6 percent unemployment. But both unemployment and the 6.2 percent contraction for late last year could easily worsen.

Another definition says a depression is a sustained recession during which the populace has to dispose of tangible assets to pay for everyday living. For some families, that's happening now.

Morici says a depression is a recession that "does not self-correct" because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit.

Or maybe a depression is whatever corporate America says it is. Tony James, president of private equity firm Blackstone, called this downturn a depression during an earnings conference call last week.

The Great Depression retains the heavyweight crown. Unemployment peaked at more than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock market lost 90 percent of its value from boom to bust.

And while last year in the stock market was the worst since 1931, the Dow Jones industrials would have to fall about 5,000 more points to approach what happened in the Depression.

Few economists expect this downturn will be the sequel. But nobody knows for sure, and nobody can say when or whether the downturn may deepen from a recession to a depression.

In his prime-time address to Congress last week, President Barack Obama acknowledged "difficult and trying times" but sought to rally the nation with an upbeat vow that "we will rebuild, we will recover."

The next day, Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that the "recession is serious, financial conditions remain difficult." He held out a best-case hope that it might end later this year, with "full recovery" in two to three years.

Despite the tempered optimism, the economic outlook remains grim. Consumer confidence has fallen off the table, stocks are at 12-year lows, layoffs come by the tens of thousands, and credit remains tight.

The current downturn has many of the 1930s characteristics, including being primed by big stock market and real estate booms that turned to busts, said Allen Sinai, founder of Boston-area consulting firm Decision Economics.

Policymakers and economists note there are safeguards in place that weren't there in the 1930s: deposit insurance, unemployment insurance and an ability by the government to hurl trillions of dollars at the problem, even if it means printing money.

Before the 1930s, any serious economic downturn was called a depression. The term "recession" didn't come into common use until "depression" became burdened by memories of the 1930s, said Robert McElvaine, a history professor at Millsaps College in Jackson, Miss.

"When the economy collapsed again in 1937, they didn't want to call that a new depression, and that's when recession was first used," he said. "People also use 'downward blip.' Alan Greenspan once called it a 'sideways waffle.'"

Most postwar U.S. recessions have come after the Fed has increased interest rates to cool down rapid economic growth and inflation. Later, the Fed lowers rates and helps restart the economy, with the housing and auto sectors -- both sensitive to interest rates -- leading the way.

This time is different: As Senate Banking Committee Chairman Chris Dodd, D-Conn., said, "Our housing and auto sectors are leading us not out of recession, but into it."

What's more, the Fed no longer has the ability to kick-start recovery by lowering interest rates. The central bank has already effectively lowered the short-term rates it controls to zero.

And there are no guarantees the massive economic stimulus package and series of bank bailouts will stave off a nightmare recession, or worse.

"It is certainly plausible that the kinds of policy measures that have been good enough to tame the business cycle are no longer adequate in a fast-moving, highly leveraged, highly networked economy," said Anirvan Banerji of the Economic Cycle Research Institute.


The D-word: Will recession become something worse?: Financial News - Yahoo! Finance

 

[wimpy77]

in some people's mind this is a depression. i think at this point its subjective.

 

[Toro]

so are you like the s&p guy they had on cnn? you think it will bottom around 620-650?

I have no idea.

What I do know is that buying stocks when they are as cheap as they are now has historically been a very good time to buy 10 years out. Maybe not 10 days or 10 weeks or 10 months, but a multiple below 10 for your average stock is an enormous bargain.

 

[sparky]

Nuebarth,
would it be an imposition to ask you for a laymans explanation here, V, U. L....?

Think of charts.

V Market goes down and then comes right up. (Sort of like what happened after 9/11)
U Market goes down, slows, hits a rolling bottom and slowly heads back up and then shoots up.
L Market goes down and then does not rise. It just goes off on a plateau. Japan did this in the 1990's. The bottom part of the L went on for eight or nine years with little improvement in the economy.

neat!, they should have one that looks like a sine wave though, bubble/burst/bubble/burst/bubble/burst....

 

[Terry]

I have a question maybe someone could answer. The 9 or 10 major banking institutions that got the first bail out...does anyone know how much stock was bought and sold before the bailout and after?

I'm thinking that bailout money was to secure the market and not money to lend or bad loans.

 

[Terry]

another question. After 911 I heard of an investigation going on about finding out who placed the large PUT Option that the market will go down the day before 911. I haven't heard a word about that since it was first reported. Anyone else hear of any answers?

 

[manu1959]

google it......lots of ideas....

 

[Terry]

google it......lots of ideas....

I just did...LOL The majority say that it wasn't anything out of the ordinary. *shrugs* I just never followed it, heard it mentioned on the news a day or so after 911 and I just remembered it now.

 

[Neubarth]

As best I can figure, the DOW will level off at 3000. If we do not come out of this malaise, it could go lower.

 

[Zoomie1980]

I just don't agree with you on this, Neubarth.

I do think that we may have entered a depression, if you define it as a 10% contraction in economic activity. But the Greatest Depression? Greater than the 1930s? Greater than 1867-73? I don't think so.

Unemployment is going to 10%-12%, but I doubt we'll get anywhere near what happened in the 30s.

We have a long way yet to even get to the early 80's recession. That 6.2% drop in GDP still couldn't beat that 6.5% drop in late 1982... And unemployment then topped at just under 12% with 11% inflation to boot..... Gotta ways to go to even get to those levels yet.

However, the housing, autos and financial sectors are in full blown DEPRESSION. Whether they drag everything to that level is yet to be seen. We have such a large service economy now, I doubt it will.

 

[manu1959]

I just don't agree with you on this, Neubarth.

I do think that we may have entered a depression, if you define it as a 10% contraction in economic activity. But the Greatest Depression? Greater than the 1930s? Greater than 1867-73? I don't think so.

Unemployment is going to 10%-12%, but I doubt we'll get anywhere near what happened in the 30s.

We have a long way yet to even get to the early 80's recession. That 6.2% drop in GDP still couldn't beat that 6.5% drop in late 1982... And unemployment then topped at just under 12% with 11% inflation to boot..... Gotta ways to go to even get to those levels yet.

However, the housing, autos and financial sectors are in full blown DEPRESSION. Whether they drag everything to that level is yet to be seen. We have such a large service economy now, I doubt it will.

that was brutal......we have outsourced most of the labor and become a service and consumer country......so we shall see.....the service sectors tied to construction, auto aero and military are going to take it bad.....

i recall some said that the government should just retoll the military right now rather than throw a bunch of money at stupid shit....