Tuesday, March 03, 2009

Is This 1929-1932 All Over Again?

19 & 21 October 2008, 6 March 2009

Mark Lundeen is graphing the 1929 and 2007 bear markets in terms of the performance of the Dow Jones Industrial Average. I advise my readers to follow his work. (The following chart is up-to-date as of March 6, 2009.)

The question everyone is asking: Are we now in a recession or a depression?

Answer: Too early to tell.

Evidence in terms of the Dow?

So far, we can't distinguish the 2007 bear market from the 1929 bear market. We are neck and neck in terms of declines.

How are US corporate earnings doing?

According to John Mauldin, despite its declines, the S&P 500 remains in heady (bubble) territory with its forward price-to-earnings ratio still at a 20.2:1 level. How can this be, following such deep declines in the average? Well, the price has fallen, but so of course have the earnings. Can corporate earnings fall further still? They certainly can, and probably will.

Warren Buffett is buying at current levels.

He is likely to get a bounce, but even the great Buffett has been wrong at times. If we are replaying 1929, we are not yet halfway to the bottom. Mr. Buffett is also exposed to financial risk due to his entry into the volatile insurance market several years ago. That is a different - and riskier - game than operating Dairy Queen.

However, based on a geopolitical analysis, and assuming it can all be fixed for $1 to $2 trillion, George Friedman of Stratfor is calling for a recession, not a depression.

Of course, the fix could end up costing more than $1 to $2 trillion.... If the $596 trillion dollar global derivatives market implodes, it could cost a lot more then $1-2 trillion to fix this mess.

In 1929-1932, the GDP of the United States fell by 50%

Ben Bernanke and Hank Paulson are working against that outcome by "reflating" the banks (and desirably the economy, if the banks can use the funds to loan, and if anyone will risk borrowing in this environment). This will result in a certain rising long-term outcome for gold, whether the eventual outcome is inflation (most likely) or deflation (if we follow a Japanese course).

Why does no one know?

Bank financial accounting is a black hole. There are so many financial sticks and levers to play with, no one anywhere knows the real financial condition of the banks. Is that a bad sign? Probably.

Is this 1929-1932 all over again?

In some ways, this time is better. The 2008 recession is only just beginning (if one disregards John Williams' true inflation and GDP numbers). The financial dislocations are occurring in the context of a much larger, more diversified, more resilient and far more open world economy.

On the other hand, the series of bubbles that spawned the 2007-2008 market crash have been far larger, and the extent of recent financial speculation and excess has been far greater, than anything imagined in 1929. The current United States financial picture, particularly in the arena of debt accumulation, is actually far uglier than the situation preceding the great depression.

The United States has undertaken an experiment in debt accumulation that is a "first" in world history. We are thus walking down a road that has never previously been trodden. That is, no economy this large has ever accumulated this much debt. On its own, the US economy is clearly in a tailspin from which recovery cannot be generated by internal means. So, if we make it out of this one alive, it will probably be thanks to the diversified global economy.

So, is this 1929-1932 all over again?

Due to the resilient global economy, this time could be better.

On the other hand, due to the United States' speculative debt bubble, unprecedented in world history, this time could also be worse (something that no one has had to think about for several generations).

We'll just have to wait and see.

Make no assumptions.

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