Prechter likes to say that during bear markets science gives way to magic and uplifting films give way to horror. Then I read tonight's EWT and realized I don't need to go to the movies to read a really scary script. In his latest he lays out the unbelievable destruction of world trade that is underway. Baltic Dry Index (ocean shipping rates) down 96%. Exports from the Asian Tigers down 27% in Japan, 30% in Korea, and 42% in Taiwan. Toyota dropping production in Japan (!!) by half. Japan output in Nov dropped 8% from October (which annualized is 96%). P/E ratios in the S&P at 22 are down more than 55% but are still much higher than at market bottoms (7 in 1932, 5 in 1982) - and the P will be chasing a falling E next two years. Little wonder his downside targets for the S&P are much lower than anyone expects, so low he has paused in printing them. And who else expects oil to soon be back to its wave 4 level at $10/bbl?
I received a fair amount of email asking, with the new President and all the hopefulness, where is the Obama Hope Rally? Didn't FDR just dispel fear with his inauguration speech ("The only thing we have to fear is fear itself!") in 1933? Well, he took over after four years of a 35% drop in GDP, many times larger than anything we experienced since 1950, and much of the excess from the 1925-1929 bubble had already been worked out of the system. Interesting, the message board at Club EWI got a similar question - their answer is here.
A more timely question is how fast will the feelings of hope fade? If you have watched the news, you probably saw how Iceland has already defaulted - shades of Austria in 1931 being the harbinger of a series of country defaults. The EWT also suggests that England may be soon to follow, for the first time since the Middle Ages, due to owning $4.4T of foreign liabilities and virtually no offsetting foreign reserves. Now we have this shocking story from The Times Online: Riots in Iceland, Latvia and Bulgaria. They tried to shut the parliment in Iceland. The Times opines that we may be entering a period of unrest as early as this March. Although Americans seem to feel that Europeans are looking over at our debt binge and laughing at our profligacy, the joke is really on them: European banks were even deeper into the credit bubble than US banks, and the turmoil seems to be about to rock Europe before we feel it here. Do they expect Obama to bail out their banks?
Yelnick, great post as usual. Thanks for taking the time to post more often during these interesting market times.
"Due to owning $4.4B of foreign liabilities..." Shouldn't that be $4.4T?
Posted by: Fred | Friday, January 23, 2009 at 10:00 AM
Fred. yes! Gotta get my head around T being the new B. Soon it will be Q.
Posted by: yelnick | Friday, January 23, 2009 at 11:00 AM
I second that... excellent post. Your site keeps getting better (it's long been a hidden gem) and I know your readership is growing (several colleagues of mine have commented positively).
Posted by: rc | Saturday, January 24, 2009 at 09:59 AM
The declines in Non-OPEC oil are accelerating. Heck one of the main reasons for the UK's trouble is declining production from the North Sea- $10 oil would certainly mean 6 billion people are just sitting at home watching the paint dry. Funny thing is the hourly chart in crude is actually starting to look impulsive to me.
Posted by: johnnyironboard | Saturday, January 24, 2009 at 07:22 PM