Saturday, October 25, 2008

America’s worst market crashes: 2008 is number 9 but economy is much stronger than that

U.S. and global equity indices are low – the Dow closed at 8,379 on Friday, marking its lowest point in 5.5 years. What many do not know, is the recent crash – a high of 14,164 on 10/9/07 to a low on Friday 10/25/08 of 8,379 – marks a 41% drop over the year. And that is the ninth biggest crash since 1901 (click on chart to enlarge).
Although the crash has been significant, I do not believe that the U.S. economy is going to sink into a 43 month recession (the Great Depression). First, Congress, the current Administration, and the next Administration will do everything in their power to prevent a crash of the U.S. banking system and economy. The U.S. Treasury – backed by Congress and President Bush – have initiated recapitalization and spending efforts that are unmatched in U.S. history and slowly melting the ice in the credit markets. The next Administration – Obama or McCain – is certain to approve a second stimulus plan, designed (hopefully more intelligently than the rebate program) to jumpstart the U.S. economy. In this light alone, I cannot imagine a workable scenario where unemployment rises above 10%.

Second, the Fed is taking its own unprecedented measures to tackle the banking crisis. As it acquires an ever-growing stock of illiquid assets – it’s balance sheet has doubled over the last month – the banking system is breathing a very slight, but nevertheless positive, sigh of relief. There is so much liquidity in the banking system that the effective federal funds rate (the interest rate that banks pay when they loan to each other) is down to 0.93%, which is 0.57% below the Fed’s 1.5% target. That money will eventually flow through to consumers and businesses; however, loan growth will slow as is the usual case in a recession.

I know that I sound particularly sanguine about the future of the U.S. economy – especially against a backdrop of negative outlooks, but that is just what I believe about the foundation on which the U.S. economy is built. Our labor market is solid - adding jobs in sectors with high productivity, our current policy makers are credible – initiating expansionary measures when needed, foreigners continue to flock to our asset markets – the $US is off-the-charts strong, and inflation has remained stable over the last 20 years.

There’s a lot of spare capacity building in the U.S. economy – with more to come in the fourth quarter – and once the labor and housing markets stabilize, the economy will take off.

Rebecca Wilder

11 comments:

  1. I'm with you in the long run. There are so many positives to balance the negatives but few in the press talk about them. Had an interesting talk with my trust advisor - she once worked as a trader for Charles Schwab and thinks he would be a good person to bring in to help manage this mess. It might help to focus the American public on what they can do as well as what the government can do for them. Apparently, he is on the side of the investor. Thanks for you take - helpful as always! aj

    ReplyDelete
  2. I think you need to read Mish Shedlock's or Karl Denninger's blog. They seem to think differently then you. I think the 2nd great depression will occur. The biggest problem that American's have and cannot fix is debt. Bernanke and Paulson flooding the banks with liquidity and telling them to provide credit is what caused this debt problem. What makes you think more credit will solve the problem? American's need to learn to be frugal and save for the item they want to buy. Deflationary depression here we come!

    ReplyDelete
  3. You can't imagine unemployment going above 9 or 10%? Sweetie, it's already there. In March 2008, The Wall Street Journal online had dimwit US Labor Secretary Elaine Chao chirping on about how the unemployment rate was 5%, not even close to other recessions.

    At the same time, the CNN website published an article that if all part-time workers who cannot find full time work are counted, the unemployment rate is at 9%.

    That was in March 2008. Unemployment today is higher than 9%. Have you kept an eye on Elaine Chao during the past 8 years? She has never met the minimal monthly jobs creation target in the US, proof that the Bush Tax Cuts cannot possibly work to create jobs. The labor pool available in India and China are way too large. In the US, it takes the creation of 100K-130K new jobs created per month just to absorb new graduates into the workforce. Chao has rarely met the target and enjoys a complete media blackout.

    ReplyDelete
  4. It's 'Game Over' for the US economy:

    BEIJING, Oct 24 (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.

    The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.


    The US burns USD 2 billion per day just to stay afloat; but now the Chineese need them for their own country.

    ReplyDelete
  5. Love the technical data about unemployment. Coming up with a number that makes sense just doesn't happen. It is a guestimate at best. I know a place in the US that consistently runs in the 15-17% range and that is normal! It has happened so often in the past that when the dire predictions are all over the place, we are actually starting the turn at the bottom. Maybe this time there will be more time spent at the bottom but do not underestimate the power of the United States! We will survive and thrive again.

    ReplyDelete
  6. Janie,

    I'm sure we will survive and thrive again....sometime after the year 2020. This is how long this depression will keep us down. This will be worse than the 1929 great depression by far. Get ready for 80% down on the dow and 10 years of no growth and bear stock market that will bottom in 2013. I'll be there buying in 2013 when we bottom at 3200 on the dow! 3200 on the Dow is best case scenario. Worse case scenario we drop to the early 1980's at Dow 1200.

    ReplyDelete
  7. "a high of 14,164 on 10/9/07 to a low on Friday 10/25/08 of 8,379 – marks a 69% drop over the year"

    I don't think the fall has equaled -69%.


    8379 - 14164 = -5785

    -5785/14164 = -40.8%

    Either way its still ugly.

    ReplyDelete
  8. You all made a couple of comments that I will highlight and attempt to respond to, but most of you all are anonymous commentors, so I will simply list it below.

    First, thank you all for reading. I see that I am on the tail end of the distribution according to your thoughts.

    “I think you need to read Mish Shedlock's or Karl Denninger's blog. They seem to think differently then you.”

    RW: According to Mish’s websit (which I do frequent and respect) http://globaleconomicanalysis.blogspot.com/2008/10/jobs-losses-mount-as-recession-deepens.html: “I expect the reported unemployment numbers to rise to 7.5% to 8% in 2009 and keep rising into 2010.”

    I do not think that 10% is too far from his views.

    “At the same time, the CNN website published an article that if all part-time workers who cannot find full time work are counted, the unemployment rate is at 9%.”

    Yes, the BLS has several different - and not usually reported – measures of the unemployment rate. The one that you refer to, U6 http://www.bls.gov/news.release/empsit.t12.htm, is actually at 11%. But this is always high, where it was at 8% in September 2007 – a time when the headline unemployment rate was 4.7%. My point is, one can always find some different measure of unemployment, but what I refer to in my post is the headline rate of unemployment (currently 6.1%).

    Hi Fajensen, you said “The US burns USD 2 billion per day just to stay afloat; but now the Chineese need them for their own country.”

    I suppose that a rebalancing of the US-China current account imbalance is inevitable, but when is it going to happen? The U.S. current account has been negative since 1991, and in some sense, one can say that it has been an exploitation on the part of US consumers and policy makers, but the Federal Reserve Bank has not intervened in credit markets since 2000 when it supported the euro http://www.newyorkfed.org/markets/quar_reports.html (I suspect that they have intervened lately with all of the currency swaps, but there is no announcement yet). Emerging markets have intentionally pushed down the value of the USD to raise export revenues for years, and there’s plenty of theories to suggest why current account imbalances have not rebalanced. But the Chinese are stuck between a rock and a hard place – with a significant portion of their $1.9 trillion reserve portfolio heavily weighted in USD, so a sharp rebalance of the current account would hurt more than it would help, and I don’t see that happening anytime soon. Emerging markets are addicted to $US.

    And anonymous, you said, “I don't think the fall has equaled -69%.”

    You are totally correct. I had an error in my excel formula – thanks for picking that up!

    Rebecca

    ReplyDelete

  9. I suppose that a rebalancing of the US-China current account imbalance is inevitable, but when is it going to happen?


    Rebecca, it is happening 'now'. Once something goes exponential, like USD/YEN(/EUR) it is over ;-)

    *If* the Chinese (and other holders of USD-denominated paper) were smart, they would take advantage of the present USD rise on the unwinding of "short USD / long anything" trades and dump USD into the raise - or, even better - spend the USD to buy commodities.

    ... but since they are probably *not* smart, they will be mightily chuffed with their own cleverness in holding on to such a rapidly appreciating currency in these bad times. They will, I.M.O., hold past the point when the unwinding is complete and the USD drop into a black hole because all the buyers have left. Then they will sell too.

    ReplyDelete
  10. Hi fajensen,

    I don't think that the current account is rebalancing - surely exports from Japan may (likely) fall, but not from China.

    You said, "*If* the Chinese (and other holders of USD-denominated paper) were smart, they would take advantage of the present USD rise on the unwinding of "short USD / long anything" trades and dump USD into the raise - or, even better - spend the USD to buy commodities."

    I totally agree, but they won't. They are too risk averse.

    Thanks for the comments and reading!

    R

    ReplyDelete
  11. We American need to stop purchasing tainted/defective Chinaese produce. China is responsible for the high unemployment in the US. By American Made product.

    ReplyDelete