Sunday, June 14, 2009

What If It's "Slowing", Not "Quickening"?

What if it is not "quickening", as many people say on TV, on the stock message boards, on chats?

What if it is "slowing" instead? Instead of the current stock market being the equivalent of 1938 because things happen much faster now with all the information technology advance and tighter coupling of nations in the world...,

What if we are going even slower than in 1920's and 30's?

The financial firms continue to deleverage. Indicators that I see on the market indices, especially that of Dow Jones Industrial Average, are flat-lining. Dow ended last week modestly up, but it had amazing 5 consecutive days of ending the day almost exactly where it had started.

Bankers are not lending because they are afraid they won't get the money back; business (especially small to mid size business) is not investing because they don't see future economic growth potential; and individuals are stuck in their underwater houses and unable to move to a better place even if they want to. Everything is stuck. Mobility is lost. Money multiplier is below 1. Not even the fractional reserve banking is working.

Add to these the huge debts that the government is quite willing to incur and increasing tax burden that it is willing to inflict on the productive segment of the economy. Soon there will be nothing left that can breathe in and out, not to mention move a finger.

Let's suppose we are indeed slowing.

1929's stock market top on the closing basis was on September 3, 1929, and Dow Jones Industrial Average was 381.17. A short-term low came on November 13, with Dow at 198.69. That represents 48% correction of the index, and it took 2 months.

The Dow's most recent market top was in the week of October 9, 2007, and Dow was at 14,164.53. A short-term low came on November 20, 2008, with Dow at 7,552.29. That represents 47% correction, and it took 13 months.

For 1929 crash, the bottom came July 9, 1932, with Dow at 41.22, 89% correction from the 1929 top and it took 2 years and 10 months, or 34 months.

If Dow is going to ultimately correct as much as the crash of 1929 did, at the current pace it will take 221 months, or close to 19 years till it hits the ultimate bottom.

(2 months : 13 months = 34 months : x)
(2x = 13 times 34)
(x = 221)

Unfortunately, there's a precedent. Japan's Nikkei. From December 1989's top, it corrected 81% and hit the bottom just recently, in February 2009. (I am sure they hope that was the bottom.)

Japan's problem has also been financial deleveraging after the real estate bubble. (Sound familiar?) Active intervention by the government and the central bank (again, sound familiar?) did nothing but add to the deficit (we will see about this one, but don't hold your breath).


ZM files said...

Interesting. This will give the rising economies of Africa and Asia a fair chance in the competition. The only option for the Western Economies seems to be a major war...wag the dog.

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