Don’t Get Depressed, It’s Not 1929
I thought that I would start off the holiday week on a positive note by combining the best of two great articles that I came across this weekend, one from Barron's and the other from Newsweek.
Here are a few interesting statistics from a Barron's piece titled Does Extreme Stress Signal a Snapback. Outside of the stock market crash of 1929-1932, no downturn in the 20th century has exceeded 50%. As of Friday, the current bear market has cut 43% off of the Dow Jones Industrial Average since its peak in October 2007.
Not only are the major averages near where stocks have bottomed during any bear market outside of the Great Depression, but all of the bear markets since then have maid fairly rapid recoveries. It has taken an average of only twenty-two months to recoup the average bear-market loss (including dividends). Do I think that things will recover that quickly this time? Probably not, but these statistics indicate that the major indices may be approaching a bottom in the near future. Possibly as early as the beginning of 2009, after all of the tax-loss selling is complete.
Another bullish sign is the valuation of the stock market in relation to the U.S. Gross Domestic Product. The market peaked at an absurd level in 2000, the combined market cap of the markets was twice as valuable as GDP. It now sits at 59% of GDP, well below its historical average of 79%. Sure, one could argue that GDP will fall, so the 59% is misleading. Still, the point is that valuations are the most reasonable that they have been in years.
Now that I have established that the markets are near a bottom unless we are headed for a second Great Depression, I will share a link to an article that puts forth a very solid argument that we aren't: Don’t Get Depressed, It’s Not 1929.
According to the piece, while the origin of the current credit crisis and resulting recession is similar to the origin of the Great Depression, both started to get really bad when a financial crisis spread and lead to a reduction in consumer demand. They both have many important differences as well.
Take FDR's own description of the Great Depression from one of his famous fireside chats on March 12, 1933 for example, "By the afternoon of March 3, scarcely a bank in the country was open to do business," That year, approximately 4,000 commercial banks failed, causing depositors to take huge losses...this was pre-FDIC. Only 19 banks have failed during the current crisis and the people who had money in them got all, or at least a huge chunk of their money back.
Not only were banks in worse shape then, consumers were watching their money evaporate because the government was not guaranteeing their deposits like it is today. The consumer losses and resulting loss of confidence, caused the recession to last a staggering 43 months and unemployment to soar to 25 percent! Even the most bearish Wall Street analysts, like Goldman Sachs, only estimate that unemployment will rise to 9% in 2009. Sure that is bad, especially if you are one of the poor souls who is unfortunate enough to lose their job...but it is no where near the level of pain that was experienced in the Great Depression.
Above and beyond FDIC protection and the lack of bank failures, programs like Social Security didn't exist back then either. Older people who had their life savings wiped out by the markets were out of luck and on the soup lines. Today at least those people have some income (whether it ultimately proves sustainable is a debate for another article).
Also, regardless of what sort of problems they will cause down the road, today the Federal Reserve and Treasury are slashing interest rates and printing money like crazy. Bernanke is a student of the Great Depression and he will not repeat the mistakes that were made back then. This is the complete opposite of what happened during the Great Depression when a tight Federal Reserve and a rich Treasury secretary, Paul Mellon, saw the downturn as a force for good. Obama is quoted as saying that he will do whatever it takes to fight this economic downturn. Compare this to what Mellon said back then "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate," he said. "People will work harder, live more moral lives."
I leave you with this final quote from the article with the disclaimer that I voted for neither major candidate in the Presidential election: "A final difference: after the 1929 crash, the nation had to wait more than three years for a president who simply wasn't up to the job to leave the scene. This time, we've got to wait only a few more months."
I don't know what all of this intervention will do to the strength of the U.S. dollar in the future and I don't expect any rapid recovery, but but we are probably much closer to a bottom than many of the perma-bears think.