I have some time so I thought I may as well continue this discussion and show where all the numbers come from.
Before I start, you may have seen that I did not post on either Thursday nor Friday after the melee on this post. I had conviction in my own thinking and sold down all of my stock and I would urge you to do the same with a better entry point at some time in the future.
OK let's start the ball rolling...
Just a little different way of looking at the data. One of the constant comments is that stock plunges like this are buying opportunities because markets always come back. Obviously, the people saying this are not including the Japanese stock market in their sample. The Nikkei 225 is now almost back to where it was in 1981 and has never made any attempt to regain its 1989 peak.
Yes, I know there were massive differences in valuations at the peaks, but the S&P 500 valuation at the 2000 peak was also completely outside the range of historic experience.
While we are in the middle of a crises and everyone's comments are centered on it, one of the more interesting things no one is talking about is how this plunge demonstrates that the shift from defined benefit pension plans to defined contribution plans was a major pay cut for middle class Australians. It shifted the market risks from the corporate balance sheet to the individual.
This week’s market action should eliminate any remaining doubt that we are in a bear market of historic proportions. How historic? There have been some pretty famous bear markets over the last century, and I’ve plotted a few of them on the chart below. Using the peak of the market as the base (at a level of 100), the Dow Jones Industrial Average’s performance since the October 2007 peak can be put into perspective.
Just over one year from the peak, the S&P and DOW are down around 41%. That’s even more killer than the Nikkei’s drop 52 weeks from its peak in 1989 (37%), and even the Dow’s collapse in 1929-1930 (36%). If the Dow closes down even further, then we might have a bigger bear market on our hands than even the legendary fin-de-siecle-Japan Nikkei and pre-Depression Dow collapses. But on the bright side, we haven’t hit Nasdaq 2000-2001 territory – the tech bourse dumped by 58% over the course of the year after its peak.
What happens next is anyone’s guess. On the positive side, the other three bear markets we have looked at tended to have seen the majority of damage done over the first 52 weeks, but I think the Dow’s going to slide by a lot more and it took 35 years for the Dow to recover from its 1929-1930 crash. And the Nikkei, which peaked above 38,000 in 1989, has yet to recover, and is in fact still down over 80% from that point.
Nikkei Monthly Chart
The period from 1990 to 2000 has often been called "Japan's Lost Decade". It's now just a year away from becoming two lost decades. And except for one brief point in 2003, The Japanese stock market is lower than it has been at any time in the last 25 years dating all the way back to 1983.
In 1990 the Nikkei peaked at 38,900. It is sitting at 8,438 as I type. After 19 years of ups and downs including one big rally of 140%, the Nikkei is down a whopping 78%!
Think That Can't Happen Here?
If you think that can't happen here, then consider this chart of the S&P 500 over the same period
Someone buying the S&P 500 in 2000 is down 40% nine years later. Buy and hold dollar cost averaging has been an absolute disaster. You would be behind on nearly every addition no matter when you started.
Note the blue circle in the above chart is roughly 15 years ago. That represents one and a half "lost decades" in time. I circled that zone because it just happens to coincide with an S&P 500 Elliot Wave Count of the decline we are in.
S&P 500 Crash Count
Possible Pattern
If we do get to the 450-600 target area, do not expect to see the stock market blasting to new highs for as long as two decades, just as happened in Japan. Indeed, from the current look of things, Japan can still be decades away from new highs.
If this scenario seems farfetched, please consider a few fundamentals.
S&P 500 Fundamentals
- The period from 2003 to 2008 was the biggest credit bubble in history, not just in the US but worldwide. It is unrealistic to expect the bust to be anything other than the biggest credit bust in history.
- Unemployment is 6.1% and rising. My unemployment target is 8% for 2009 and continuing higher into 2010.Think what rising unemployment will do to foreclosures, defaults on credit cards, bankruptcies, commercial real estate, and corporate earnings.
- Banks and brokerages made immense profits being leveraged 30-1 to 50-1. However, brokerages are now under control of the Fed. Leverage is still unwinding and will be lowered to 10-1 or possibly lower. Reduced leveraged means less risk, but also reduced lower profit opportunity.
- Boomers are heading into retirement, and a portion of their retirement plan (rising home prices) has been wiped out. Another portion of boomer retirement plans are being wiped out in the stock market crash.
- As a result of the above, those boomers will be doing less spending and more savings. Don't expect retail sales or store profits to come soaring back anytime soon. Peak Credit has been reached and a secular shift to frugality and risk aversion has begun.
- Stock markets returning from extreme conditions do not just drop to the trendline, they overshoot it.
- Children who have seen their parents wiped out in bankruptcy or foreclosed on are going to have a completely different attitude towards debt than their reckless parents did. Expect to see more frugality from parents and their children alike.
- It is impossible to predict the future of course, but fundamentally as well as technically there is every reason to believe lower lows are coming, and the rebound off those lows will be anemic compared to past recoveries. Those looking for an L shaped recession are likely looking the right direction.
From the Dow perspective it could drop another few thousand points yet. 7,000 would put it about half-price from the peak. Crazy? Think of it this way: the Dow is now closer to 7,000 than it is to 10,000. And if we go Dow 1929-style, with a 70% drop two years (104 weeks) from the peak, we’re talking about Dow 5,000.
More than one third (41%) of US workers are cutting back on utilities, nearly half have reduced food purchases (48.5%) and a large percentage are buying less clothing.
The national survey of US workers, conducted May 12-14, 2008, also found that younger workers (between the ages of 18 to 29) are being hit the hardest by the economy and are the most desperate about their economic future. More than one third (34.3%) of young American workers say their financial situation has caused them to “feel hopelessness or despair about their economic future.” That compares with 28.8% of workers age 30 to 49, 23.5% of workers 50-64 and 17.9% of workers 65 or older.
Nearly a third (31.4%) of workers report being occasionally kept awake at night because they worry they will not meet housing payments, credit cards, or other personal expenses, 36.8% of whom were between the ages of 18 and 29.
And nearly one fourth (23.4%) of US workers say their financial situation has distracted them on the job, with the most distracted being young workers, age 18 to 29 (36.8%). US workers are hurting on multiple fronts, and their pain is growing, this illustrates exactly how damaging the current state of the US economy is to its workers.
Mt favorite though is the The Baltic Dry Index which is an index covering dry bulk shipping rates and managed by the Baltic Exchange in London. According to Baltic Exchange (c/- Wikipedia), the index provides:
“ …an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain. ” —The Baltic Exchange, in BalticExchange.Com
Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. However, since the demand for shipping varies with the amount of cargo that is being traded in the market (supply and demand) and the supply of ships is much less elastic than the demand for them, the index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as cement, coal, iron ore, and grain.
Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as a good economic indicator of future economic growth and production, termed a leading economic indicator because it predicts future economic activity.
So if the above is correct and shipping rates have fallen from $240K/tonne to $20K/tonne HOW ARE CHINA GOING TO ACHIEVE A 9% GROWTH?
I believe we are seeing an economic power shift to China, I could provide this analysis but will leave for another day.
