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
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