Stock Market Redux

Wow, it has been a looooooong time since I spent an entire end-of-day commute listening to the financial news like the old days. Except back then it was Bloomberg 1130am in New York, the only option available for full-time financial coverage on the radio in my area. Nowadays, it's the live feed of CNBC -- on the sexy and versatile Sirius Satellite radio of course -- but the point is still the same -- even on the way in to work on Friday, there I was again willingly choosing to forego my usual a.m. platoon between Mike & Mike in the morning and Jason & the GM (both of whom I really like in that format btw) on Mad Dog Radio, in favor of CNBC, listening to people talk about the market, opine about what's next, and speculate all over the place about the key July jobs market data. It's amazing how much the stock market can just grip an entire city like always seems to happen, in New York City for I think obvious reasons moreso than any of the other major northeastern cities where I have lived.

I think pretty much everyone who pays attention to such things could tell by early this week that the market was sick. By Thursday it finally just boiled over with a 500+ point drop in the Dow, and it seems to me that a lot of things might have finally sunk in yesterday for the first time for a lot of people who actually pay a little bit of attention to economic and financial matters. For starters, it is becoming increasingly clear that growth not only will be, but already is truly anemic right now. Last week when the government released a paltry 1.3% growth number for the Q2 U.S. GDP reading -- not nearly sufficient to even really call meaningful "growth" in most economists' views -- the at least equally meaningful but less reported part of the story is that the Q1 GDP reading was revised way down to just 0.4% growth. For those of who you haven't followed GDP over time, take it from me: first-half of 2011 growth of 0.4% in Q1 and 1.3% in Q2 isn't close to satisfactory to the markets. I think it's fair to say that an economy at this state that isn't generating at least consistent 2% growth over time will be viewed generally by the market as downright sick, and that's exactly what people have finally been figuring out pretty much ever since those numbers were released last Friday.

As much as I have fought the urge to turn this blog into a financial blog, making this place a forum for political argument sounds even worse. That said, another thing that is just increasingly clear from the past couple of weeks in Washington, DC is that this country really has no leadership at all right now. The American people are literally starting to figure out this very week that President Obama has done nothing on the economic front but kick the can down the road for the past 2 1/2 years. First it was continued massive bailouts and payouts to Wall Street risk-takers to artificially keep them alive. Then it was the silly, huge stimulus plan that really began the acceleration to this whole debt-ceiling mess we've found ourselves in this year, a stimulus plan which amounted essentially to a bunch of printed money, "creating" short-term demand of hundreds of billions of dollars and flooding the system with money that had to be spent in our economy over the past couple of years. But such provisions hardly ever work over history to actually generate "real" demand -- rather, it is common knowledge that the end result of such programs is generally just a big hole when those funds are removed. Sound familiar here, now two years past the stimulus bill's passage? And don't even get me started on the Obama / Bernanke QE1, QE2 and likely QE3 plans, which amount to -- get ready for it -- essentially to a bunch of printed money, "creating" short-term demand of hundreds of billions of dollars of U.S. government obligations and flooding the system with "fake money". Sound familiar again?

Anyways, I'm not here today to debate whether you think this is the Obama administration's legacy thus far. What I'm saying is that yesterday was I think the day that the people of this country generally really did first begin to realize that what I just said is true about our can-kicking policy, and that now maybe is going to be the time where we actually take our medicine like good boys and girls. Even if you don't believe that yet, American finally started figuring it out yesterday. We have no leadership right now. Not the President -- who has consistently chosen short-term fake gains over longer-term initiatives to actually stimulate investment, create hiring, etc. and has stood playing his fiddle while unemployment has soared -- and not Congress with all the ridiculous infighting, political motivations, pork barreling even in times of national crisis, and total inability to effect much of anything, and let's not forget these are mostly all the same assholes who voted to bail out the Wall Street banks back in 2008 over the objection of the very people of America who these asshats are elected to serve.

Things changed since the 2008 financial crisis. There is going to be less government spending. Much, much less, because these entities simply will have to suffer cuts of funding, many of the cuts massive. Hundreds of billions of dollars worth. Cities and states all across America are technically bankrupt, and we've all seen how close the U.S. federal government came to a possible debt default just within the past couple of days. And we're the most secure, stable government in the world -- just look at this mess over in Europe, where we've already had at least two near-sovereign defaults this year leading to last-minute bailouts, and Greece is looking increasingly like it's heading right back to the abyss once again in the true style of AIG. Those governments will be forced, like America will as well, eventually to enact higher taxation, to help balance out the tremendous loss of revenues the governments will receive due to the slowdown, which will also inevitably take a bite out of economic growth. And make no mistake, there will be a slowdown -- a global one -- as the governments of most of the developed nations in the world decrease government funding for programs, decrease government spending, increase austerity programs, raise taxes, and see their domestic economies shrink somewhat as a direct result, which is by definition a several-year process. The generation-long housing boom and all the little industries whose growth was spawned by it -- from building, to materials and heavy machinery, to retail, and on down the line all the way to the huge boom on Wall Street from all the derivatives and securitization -- also led to what was most likely "over-employment", in that it is entirely likely that some portion of the 17% true unemployment in this country right now are people who may be facing very long-term (or permanent) unemployment, because there probably will not anytime soon be the same number of people employed in America as there were in the midst of all that bubblage, say five years ago.

So like it or not, things changed back after the blowups in 2008. Only, in America -- and in Europe, to a lesser extent -- the Obama policy has been to pretend that these structural changes just didn't happen. Very weak domestic demand because the value of investments plummeted 60% and housing that people already couldn't afford suddenly dropped 30%? No problem -- we'll just print 2 trillion dollars and spend it on the American economy for the next two years. Yeah, that will likely weaken the dollar and cause inflation to rise. So yeah, people might be paying $4.00 for gasoline in a couple of years, and $12 to see a movie, and $4 for a gallon of milk. Then we'll just lower short-term interest rates to zero for a prolonged period, and we'll buy up hundreds of billions of Treasuries over the next couple of years to flood the system with even more printed money to replace all the money that isn't in the system because our economy is really weak. What will happen in two years when all the fake money has worked its way through the system, and we're left with that huge gaping hole caused by all those structural changes that still happened, whether our people like to admit or not?

My sense is that now we are about to find out.

I'm not about making financial predictions here on the blog, but I'm going to leave you with a chart that I think is very interesting in what it suggests we could be looking at here:



This is from Doug Short of advisorperspectives.com, and it is a comparison of the multi-year performance of three major indices after pretty much the three biggest market tops and longest bear markets in modern financial history -- the Great Depression, starting with the market crash of 1929, the Japanese Nikkei collapse, starting from its tumble from near 40,000 in the late 1980s and still going today, and the U.S. bear market that Short describes as starting back in 2000. These are inflation-adjusted ("real") charts though, not the nominal highs and performance of each index. It is each index's performance in percentage terms below the top, plotted on the horizontal axis over 22 years following the initial top of each cycle, in each case adjusted for inflation over those 22 years to produce a "real" graph that bakes in the varying effects of inflation over the three 22-year-periods in question.

What astounds me from that chart is just how similar all three of those graphs look. Not exact, mind you, but just downright similar. Like, they all took almost exactly three years after the top until they finally bottomed from the initial precipitous shock. Isn't it uncanny how closely all three indices made their bottoms, in all three cases it looks like between about 32 months and 35 months following the top of the market? And then after that 3-year top-to-bottom shock, all three of the indices rallied solidly -- albeit with a few ups and downs along the way -- for just about four years, or maybe closer to five years with the current market (in blue), once again in an uncannily similar pattern, don't you think? But then look what happened between years 6-9 (7-9 in the current market's case) -- another huge down period, in our case what we think of as the financial crisis, but look at the Great Depression grey line there, which saw the market lose another half of its total value over the ensuing three years after a ferocious four-year almost unstoppable rally following the big crash in 1929. And Japan in the red, once again losing about 40% of its value over those three years between 6 and 9 years following the market top.

Now, if you look at all three charts starting right around year 9 after the market top, you will see that all three put in very sharp bottoms, almost identically again right at that same point, within just months of each other it would seem. Crazy, huh? In the case of both the Nikkei and the Great Depression, it was an incredible 66% surge in the markets over just two years from years 9-11 that must have felt, I imagine, an awful lot like the past few years in the U.S., where we have undergone a ferocious rally to recover over 70% from the March 2009 bottoms by a month or two ago.

And then I look at what's next after years 10-11 following the stock market top like we are at now on the blue line, if those other two greatest bear markets of all time are any guide. And remember, this past week on the chart above only further confirms the consistency of the pattern so far.

Hmmmm.