Wednesday, November 19, 2008

Henceforth, I dub thee The Great Recession

On December 21, 2007, Diana Furchtgott-Roth, the former chief economist for the U.S. Department of Labor (2003-2005) wrote in The American: "On balance, it is not likely that the United States will experience a recession in 2008. Most economic forecasters expect growth to continue in the 2.5 percent range."

No one knows.

Today the Dow and the Transports both plunged through their October lows. According to
Dow Theory (see Nov. 12 post) things are now likely to get much worse for the stock market. The Dow closed down 427 points to 7997.28. The Transportation Index fell an ominous 8% to 3141.52.

I going to go out on a limb and say that this is no ordinary "recession". This is the beginning of The Great Recession. And we better hope it is nothing more.

I googled "the great recession" and hardly anything comes up. Google thinks I mean "the Great Depression". No one seems to think this recession is particularly "great". But, really, don't you find all this just a tad unusual?

There are plenty of web sites that want to call this another Great Depression.
Salon Magazine was among them back in the spring. But, John Mauldin, yet another economist I follow, finds such comparisons lacking.

In Mauldin's recent email newsletter, dated Monday, he wrote: "Sure, if U.S. unemployment is headed to 25%, as it did in the Great Depression, then stock prices might fall in half even from here, as they did by 1932. But this is important - even if stock prices were to fall further, it would not be because of earnings losses that would permanently impair the fundamental value of U.S. companies. Rather, if further losses emerge, it will be because of increases in risk premiums that will be associated with extremely high subsequent returns. Indeed, even though unemployment shot to 25% in 1932, the S&P 500 more than doubled in the year following the 1932 Depression low, and tripled off of that low within less than three years.

"Recent market conditions seem like they have no precedent only because so many investment professionals know only the data they've lived through. If one actually examines market data from the Great Depression, 1907, and other less extreme panics, one realizes how much the recent decline has already discounted potential economic negatives. At this point, further declines in stock prices simply increase the long-term returns that investors can expect over time."

Level-headed? Definitely. Reassuring? Ummm...Mauldin *is* going back 80 to 100 years to find comparisons.

Richard Russell is looking at two levels for support now for the Dow. 7490 which is arrived at by
the 50% Principle (also see Nov. 12 post) and, after that, the 2002 low of 7286.

That's another 500 to 800 points down from here. I'm not expecting it in the next couple of weeks. You figure there has to be some kind of minor rally, we are WAY oversold.

There are two guys where I work that are both into investing. They have both been drooling over the "great values" in some specifics stocks. They tell me this is a "fire sale", it is the time to get in. Buy. Warren Buffet's buying. Shouldn't I be buying?

No, I shouldn't. The reason is the value of individual stocks doesn't matter. It fails to point out what David Brooks noted in my October 24 post, the market isn't about just quantitative analysis. It is, at least equally but in times of crisis more so, about behavorial economics.

This is a major macro-economic situation. Don't you people understand the ENTIRE credit system of the WORLD is still frozen? Don't your realize the Treasury Department didn't do what it said it would with the $700 billion dollars authorized by congress? Don't you realize we still reside under the threat deflation? Don't you realize that after the housing crisis and the financial crisis and, now, the US automobile manufacturer crisis, that probably YET ANOTHER as yet undefined crisis awaits? Don't you realize the government can't bail everything out and offer stimulus packages and it make a damn bit of difference.

"You cannot manipulate or legislate your way out of the primary trend." - basic Dow Theory. And today the primary trend became crystal clear. No ifs ands or buts, this is a Bear Market and it will have its say and we will have a final capitulation. There will be no soft landing.

So, buy your "values" at a $3 or $4 a share and watch them become worth $1.50 or less in a few months. Maybe they'll come back. Maybe they won't. Maybe some other corporation will by the company in which you own $3 stock for 50 cents and you'll lose 83% on the deal. No one knows.

I'll stay heavy in cash. It ain't sexy, but with deflation and a primary downward market trend, I like the unfolding prospects and the ability to move should things stabilize and change.

The only meager hope for the market right now is that VIX (volatility index) remains extremely high at 74.26. That means WILD swings in the near future. The market might go up 500 points one day down 600 points the next. Somehow, over time (and it will now take many weeks if not months), volatility will return to something like "normal" and we could see some stability.

Until then this is either a roller coaster or a train wreck, depending on how you're leveraged.

I'm afraid that Obama's the dog that chased the car and finally caught it. Now what? The Dems inherit the Great Recession. Speeches and impressive press conferences are not the duct tape of the economic realm.

1 comment:

Anonymous said...

Thanks, I'm still learning here. A couple of responses.
I have heard that as a group, economists are wrong slightly more than half the time. Throw out their incredibly complicated econometric analyses, and flip a coin to beat them. I really believe that. Same thing with financial advisors as a group.
FDR flailed along for nine years before WWII solved the problems for the US economy.
Reagan did not solve the early 80's recession with a tax cut. He did it with spending, if he had anything at all to do with the later recovery.
I would rather inherit the economy in a valley of suffering. Obama will get the credit for the recovery, regardless of what the does.
History is the BIG spin.