Firstly, I think I am neither bull nor bear, having reduced my direct shares by 50% and leaving my super long in direct Aussie big caps (Can?t touch it for years anyway)
The call has been made for the "C wave, and the impending return of the 1929-1930's nightmare". All possible no doubt given current world uncertainty, but for some balance, I thought I might do some research and comparisons for reference
Firstly - P/E ratios
1929 We had a peak of just under 30 times earnings In 2007 we touched around 27 1932 low was mid 7's Today we are at about 11
We have only touched mid 7's twice, 1932 and the 70's oil shock. In both cases they were very brief periods before a bounce
In comparison that gives us a DOW of say 7500. To achieve pure percentage terms we would need to drop to 4100, so a further reduction in company earnings of 50% from what?s ALREADY been factored into the market
Why do I talk about P/E??
You seem to be making the start point of the retreat, the 2011 high, when in fact the direct comparison we are really moving into the period from 1932 thru the Second World War.
Why?
We had our massive dip in 07, and we had a 1932 style recovery before we now see ourselves in decline
PE's in that second period sat around an avg of 10 ish. (Low around 9) Given we have already had massive earnings downgrades factored into the market, isn?t it foreseeable that even if further downgrades were to occur, it sees somewhere in the 9000 range completely justifiable as a solid bottom??
Secondly
What caused the 1929 crash?
1. The market was totally overbought, with speculation rife (Not unlike 07) 2. Systemic failing in the banking sector (07) 3. Industrialisation had meant a massive ramp up in production causing huge over supply of inventories ( not this time) 4. Very weak agricultural sector 5. When the markets did fail there was also a closing of international trade boarders (Only ever seen again in the Asian crisis) With closing of trade boarders, there was also no capacity for bail outs, or coordinated strategies to recover 6. Far simpler economics, with far less options in the draw to drive stimulus
What is happening now?
1. Banking sector and private sector
The Good
With the collapse of the banking sector in the GFC, we had systemic change thrust upon the industry. There was Major change in regulation and better capitalisation.
The tightening in turn meant a massive contraction in Private/corporate debt.
As a result the banking sector is healthier, but more importantly the private sector has been forced to run leaner balance sheets. Private/corporate sector companies are in good shape.
The recent reporting season supported such a view
The Bad
Government took on the bad debt, but unlike the private sector, failed to tidy up their expenditure and balance sheets. Balance sheets strained, and it is only now they are having a close look at the bottom line. This is now compounded by the fact that many world governments are now not in majority, and are unable to ram thru the changes to fix the problem
In most cases, I believe when the govts decide to work together these matters will be resolved
The Ugly
European banks do not appear to have cleaned up as well as the rest of the Developed world. Additionally their govt's have probably performed the worst in budget measures.
The disunity in governments means they are now not only fighting internally, but within their EU base as well. No doubt it?s the elephant in the room, but G7 leaks seem to indicate some positive moves
Bloomberg -
"The G-7 officials are meeting for the first time since they promised ?coordinated action? Aug. 8 to calm financial markets. Geithner is also scheduled to hold sessions today with French Finance Minister Francois Baroin and European Central Bank President Jean-Claude Trichet. The G-7, alongside the IMF, is committed to working with them to decisively address the crisis in Europe,? Geithner said, referring to the International Monetary Fund. "
Thirdly
We did not have Asia in 1929. The emerging super powers and around 25% of world population need growth at 8% + just to justify their own domestic needs. They have huge amounts of cash and are in a position to acquire assets, stimulate economies, as they see fit. This is a massive key to our current position. Yes their offshore demand could slow, but their domestic demand will assist keeping the world cogs moving
So what am I getting at?
- 1929 was a traditional "over exuberance" complicated by closing of trade borders and little or no tools to manage the crisis. No organised bail outs etc.
Today we have already seen a massive reduction in assets values on the share market. This is purely based on fear of global events, rather than a systemic failing in the private/corporate sector. Balance sheets remain healthy, which gives room to work through the downturn (Unlike the GFC or 1929)
Public sector is now getting the message. ?Clean up you financials. This debt did not happen yesterday. Many have carried high debt to GDP ratios for many, many years. As such I think we will see a coordinated attempt to manage this crisis forward
i.e. The US will pass a bill. Probably not in its full form as presented, but there are signs of the Republicans wanting to play this time September 21-22 Wyoming will probably bring QE3 I feel the G7 will bring change to the EU, and from this one would suspect we may see more buy in from Germany. Asia will continue to manage the situation as they see fit. They have the cash and resources to do so
In other words if the political will happens, I believe the recovery will begin
This will take us into a very slow period of recovery that will take years, but I suspect the market has already pre empted the major shock. Yes we may see further declines into the 9000 range of the DOW, but one would think the overriding momentum that will come from co-ordinated action will in time see huge shocks/drops settle.
Summary
I can't see a DOW at 4000 or 7500 for that matter. 4000 represents a sell off the size of the GFC at the pre GFC high in percentage terms as great as 1929, but does not take into account P/E 7500 Represents a selloff of pre GFC highs to a P/E of 7.5. This is after the fact we have already had such a selloff in the GFC 9000 Represents a typical P/E ratio of the post 1932 recovery that went thru until wars end
More than 25% of world population is still in strong economic growth The US, England and many others like us and Switzerland are in positions which are quite manageable so long as politics doesn?t get in the way
The EU has the financial resources to recover; it just lacks the political will. I hope that this weekend G7 will see that view make a major shift. If this then leads to Greek debt rolling successfully at month end, and an overall package being developed, I think we are on our way.
US Stimulus will not only aid the US machine, but will fire up the Asian machine again
Finally
This all comes with a big caveat. Should governments fail to work together, and or tidy up their balance sheets from this point on, we are in big trouble. At this stage they still have the tools and capacity to resolve the situation. If left another few years they won't.
