Current Slump Likely Worst In 70 Years
Judging by today's mini-crash, it seems that the short-term rally might have been even more of a short-term phenomenon than I thought it would be. Given the heightened anxiety from market participants, short-term swings are more erratic and thus also more unpredictable than ever.
While the direction of the short term fluctuations of this highly erratic stock market is unclear, what is very clear is that the slump in the economy is getting a lot worse, which of course, implies that the medium term direction for stocks will be down. America has been in a recession since November last year, but until recently that recession was fairly mild. The trigger for today's sell-off was a barrage of dire economic news. I didn't find them particularly surprising as economic news for the latest month or so have been consistently very weak and as it should have been apparent that the latest turmoil would make these numbers even worse. But it appears that others was surprised by the negative tone of retail sales, business sales, empire state manufacturing index and the beige book.
Tomorrow's industrial production number will probably show a big decline too, judging by the 1% decline in hours worked in manufacturing in the employment report. And what is even more important is that the numbers in coming months will become worse. Although the decline in the price of oil will provide some relief, the sharp decline in asset values (which will continue over the coming year, as house prices remain at historically high levels and as stock prices remain far above levels seen in previous slumps) will force consumers to again start saving, meaning that consumer spending will have to fall. Meanwhile, the higher risk premium, the slumping profits and increased pessimism will cause business investments to continue to decline. And the highly overvalued dollar and the weaker foreign economies will cause exports to fall.
The combined effect of these factors is that the slump will intensify. This will probably make the current slump the worst since the 1930s, worse than both the 1973-75 and the 1981-82 slumps.
While the direction of the short term fluctuations of this highly erratic stock market is unclear, what is very clear is that the slump in the economy is getting a lot worse, which of course, implies that the medium term direction for stocks will be down. America has been in a recession since November last year, but until recently that recession was fairly mild. The trigger for today's sell-off was a barrage of dire economic news. I didn't find them particularly surprising as economic news for the latest month or so have been consistently very weak and as it should have been apparent that the latest turmoil would make these numbers even worse. But it appears that others was surprised by the negative tone of retail sales, business sales, empire state manufacturing index and the beige book.
Tomorrow's industrial production number will probably show a big decline too, judging by the 1% decline in hours worked in manufacturing in the employment report. And what is even more important is that the numbers in coming months will become worse. Although the decline in the price of oil will provide some relief, the sharp decline in asset values (which will continue over the coming year, as house prices remain at historically high levels and as stock prices remain far above levels seen in previous slumps) will force consumers to again start saving, meaning that consumer spending will have to fall. Meanwhile, the higher risk premium, the slumping profits and increased pessimism will cause business investments to continue to decline. And the highly overvalued dollar and the weaker foreign economies will cause exports to fall.
The combined effect of these factors is that the slump will intensify. This will probably make the current slump the worst since the 1930s, worse than both the 1973-75 and the 1981-82 slumps.
posted by stefankarlsson at 9:48 PM
3 Comments:
Personally, I'm not too concerned about the depth of the slump (on a personal level, I'm well prepared to just "sit it out" comfortably in the worst case scenario), I'm more concerned with the length of it.
What is your view on the potential length of the downturn, what sort of time horizon do you see as viable for when news turn from "bad" to "not really that bad anymore"? (I'm more concerned with Europe than the US).
My _guess_ (based on nothing but a gut feeling) is that the worst is yet to come, but negative growth should stop sometime towards the end of next year. But I might as well throw darts at a board for the accuracy of that..
Well, the U.S. will probably experience a long crisis. If the politicians had followed Jim Rogers' call (see the youtube in one of the preceding posts) for them to simply go to a bar and have a beer and leave the rest of us alone, then the slump would be deep, but short. But because they instead feel a compulsive need to "do something" (which typically means do something statist), the problems will not be solved but drawn out over a longer period of time. The current slump will certainly last into 2009 and probably even into 2010. After that there might be some temporary upswing, but because of the bad policies they implement now, that will probably only provide a temporary respite and the economy could soon fall into new downturns similar to Japan's protracted stagnation during the 1990s which was interrupted by short periods of strong growth.
Europe is overall in a stronger position than America as its imbalances have generally been much smaller. But because global markets are so strongly integrated these days (Every time U.S. stock markets fall you can be very sure Asian and European markets will fall-and often fall even more), Europe will be affected by the U.S. slump. Also, some European countries, most notably the U.K., Ireland, Spain and the Baltic countries have had imbalances similar to America's, something which will continue to create problems.
And there if of course a great risk that European politicians will feel a need to "do something [statist and counterproductive]", which would similarly prolong Europe's problems.
Stefan
Any ideas of Australia's prospects?
On the negative side, Australia has had a real estate boom too. However on the positive side there is longer experience of higher interest rates and the legacy of a decade or so of more genuine fiscal conservatives at the helm of the Australian federal government. This has given the recently elected Labor government a large federal budget surplus. So far Prime Minister Rudd's "stimulus measures" have come from raiding this legacy surplus.
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