How Low Can We Go?
filed in market - general on Oct 10, 2008
There is no right answer, since we have no idea ahead of time, but looking at the biggest S&P 500 declines over the last 35 years can shed some light on what would be typical for a deep decline. Some pretty interesting similarities here. I will update this chart as times goes on.
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October 10th, 2008 on 6:17 pm
To give a really good idea of how long we can go, why not include the great depression where stocks dropped 89% peak to trough. Since there are so many events that have not happened since the great depression it seems it would be the best comparison point.
While we are on the topic of the great depression, I would add this to your previous post on waiting out market declines. From the 1929 peak, the dow jones didn’t regain that peak until 1954. So “waiting it out”, int that case meant no capital gains for 25 years!
In general I have to say that your previous post was deceptive in that you cherry picked the market trough and then picked out the market top. If you had chosen as a 5 year period october 2004 to today you would have vastly different results.
October 11th, 2008 on 9:43 pm
On an unrelated topic, isn’t it beautiful that the CEO of Chesapeake Energy was forced to sell “substantially all” of his stock because of margin calls? His stock was worth more than $1.5 billion at the end of August… These arrogant greedy CEOs deserve to go down with their leverage.
I am also reading about some poorly structured swap contracts (hedges of 2009 production) with knock-outs that are not far from being hit. Unbelievable!
October 13th, 2008 on 7:09 am
I don’t think the Great Depression would be the best comparable period unless one thinks we are truly headed for a depression. If you look at what happened back in the 20’s and 30’s, there is little reason to use that as a comparison. Unemployment, for instance, peaked at 25% back then. If we get there, we’re in serious trouble. Predicting a depression and a Dow drop to 2,000, while not impossible, seems irresponsible to me, personally.
October 13th, 2008 on 1:23 pm
I never predicted a depression, I just used one as a comparsion so that people can undertstand the range of possible values. As I said before, the government intervention right now, is unprecedented since the great depression. Your argument is basically that you don’t think there is going to be a depression because you don’t want there to be a depression. That is irresponsible if you ask me.
Professor Shiller (from the shiller home price index) has some good data on relative PE ratio’s over the past century. That would also be a good comparison if you are looking for “how long can we go”. To summarize the results, at friday’s close we were at a level that was fairly average over the past century. Just type irrational exuberance into google and you will find his site.
October 13th, 2008 on 1:42 pm
What about the Great Depression is remotely comparable to what is going on now in the U.S. economy? Lack of government intervention was one of the causes of the depression. Hoover thought the government should stay out of the market’s business. The reason why the government is flooding the markets with cash is to avoid what happened in the depression (money supply dropped by 30% so business grinded to a halt).
During the Depression we had 25% unemployment, wages down 40%, money supply down by 30%, and GDP down by 30% in a few years’ time.
Does that really sound like what is going to happen today?
You are right that a depression is the bottom end of the range of possibilities, but when you are looking for good comparisons you have to consider the facts of the current situation versus past recessions.
October 13th, 2008 on 8:17 pm
Chad,
Since Bernanke is so familiar with the past depression, no I wouldn’t expect things to happen exactly the way they did then. The money supply is not going to drop 30%. It is not like the EXACT set of conditions that created the depression are needed for another one.
The fact of the matter is the US government hasn’t gone out and bough equity in functioning US banks since the great depression. Actually I am not even sure if they did that then. US debt as a % of GDP is now much higher than the depression so if we do hit a serious slump there will be limited options to stimulate things. While the technical definition of unemployment is 6.1%, if you used the same metrics as the 30’s it would be closer to 14% so we are already part of the way there.
I think my fundamental argument and worry is the debt. American debt (including federal,state,municipal, corporate, domestic) is over 300% of GDP. This is completely unprecedented, even after world war 2. I simply do not see how the US can get out of this without massive negative effects on their economy.
October 14th, 2008 on 5:38 am
I agree with you on the debt, and because of our unlimited printing press, the dollar is toast.