EV38 (99.81)

Depression is just another word to scare the masses into selling into a bear market bubble

October 02, 2009 – Comments (2)

Depression by a rough definition accepted by most people is a 10% decline in GDP. The 1929 crash, decreased GDP by about 33%. Now here’s a nifty little chart I found, listing GDP by year by country: http://www.swivel.com/data_sets/spreadsheet/1004018 You can download the information into a spreadsheet which is what I did, and compared GDP of the World and the States to the year end value of the DOW from 1992 through 2007:   

Year           World                 US             DOW   DOW as a % of World     DOW as a % of US

1992        24,820.9              7,302.2      3,301.11            13.3%                          45.2%

1993        25,261.6              7,497.3       3,754.09           14.9%                           50.1%

1994        26,096.6              7,803.0      3,834.44             14.7%                         49.1%

1995        26,815.0              7,972.8      5,117.12               19.1%                       64.2%

1996        27,801.0              8,328.9      6,448.27                23.2%                     77.4%

1997        28,829.1             8,703.5      7,908.25               27.4%                        90.9%

1998        29,536.0              9,066.9     9,181.43                31.1%                       101.3%

1999        30,409.8              9,417.1   11,497.12                37.8%                       122.1%

2000        31,751.8              9,817.0    10,787.99               34.0%                        109.9%

2001        32,231.8              9,890.7    10,021.57                31.1%                      101.3%

2002        32,799.5           10,048.8       8,341.63               25.4%                        83.0%

2003        33,664.7           10,320.6     10,453.92               31.1%                      101.3%

2004        35,048.8           10,755.7     10,783.01               30.8%                        100.3%

2005        36,329.5           11,134.8     10,717.50               29.5%                           96.3%

2006        37,754.8           11,544.0     12,463.15               33.0%                        108.0%

2007        39,109.8           11,925.0     13,264.82              33.9%                         111.2% 

The percentages of course would be very small, so I compared the DOW as a percent of GDP measured in billions. What you’ll notice is a consistent growth in the percentage mainly due an increase in the demand of stocks – the internet making trading more accessible, people getting wealthier so they have money to put into stocks, globalisation which opens access to the stock market to billions of people and of course, an ever-increasing money supply that has to go somewhere. These long-term trends are not changing soon so a sustained DOW as a % of US GDP at a mid-90’s level of 50% or so seems just about impossible. 

As we all know, the DOW touched year end 1996 levels in March. Many people believe we can see these levels again within a year, spouting off words like depression. Let’s apply this. Less cut 10% of 2007 YE GDP for the US to come up with $10733.5B. Using a DOW of 6500 we come up with a % of 60.5%, a number we haven’t seen since 1995, when the internet was barely useable.

Obviously the DOW tanking wasn’t solely based on rational economic thought but a lot of involuntary liquidating took place through deleveraging while a lot of voluntary liquidating took place as a flight to “safety” of the USD which of course is not considered that safe to anyone anymore other than a blue collared American patriot that hasn’t read an economics article in his life.

Let’s assume a number of 100% which has been pretty typical over the past 10 years. If we apply that to this depressed GDP number we’ll see a DOW of 10,734, a good 23% off the highs. Now to be fair using an average DOW % during a bear market is not right so I’ll use 2002’s number as a proxy to get to 80%. 80% of 10,734 is 8,587. A fair bit lower than where we are now and I number I could see once this current bull run is complete, but still nowhere near 6,500 or 5,000 or whatever number extreme bears are calling for.  

To get to 1996 levels on the stock market, we should be getting to 1996 levels of GDP. That’s a 30% decline from 2007 levels, putting it just about as bad as the 1929 depression. I don’t know how many people hold such an extreme view, but for that to happen a major world catastrophe needs to be on the way. Something like a major global storm, a meteorite crash, the downfall of capitalism etc. But if any of those things do happen, what good will FAZ be to anyone anyway? Under those sets of circumstances you’re better of stockpiling food, supplies and gold bars and hiding in a bomb shelter like a Y2K conspiracy nut. I think a few people on CAPS would want one member of the community to go ahead and do that instead of frequently posting blogs on here as a sort of coping mechanism. How well timed that we have the movie 2012 coming out. I can’t wait to see what kind of conspiracies 2024 will bring us.