Doug Short on the 1938 Comparison

I thought I would continue in the theme of historical analogues to the current market.  This seems like a good moment since we are in a slow patch: volume dropped late last week as the Labor Day weekend loomed, and is expected to continue light this week as it is a four-day week in the US.  (Typically four-day weeks have light trading and a slight upwards bias; note that typically the market is in an upwards bias 80% of the time.) Hence the technical indicators can mislead.  Friday was a mixed set of signals. Let's wait for a pick up of volume and clearer indications of whether this rally is truly over or has a ways to run.  

In US history this is the fourth Credit Bubble that seems destined to be followed by a Deflationary Depression.  The other three were 1837, 1873 and of course 1929.  We also have the 1989 Japan Bubble to consider.  The first chart is from Doug Short's great site and shows how the current market compares to 1929 and 1989 when you inflation-adjust the results.  The timing between 1929=2000 and 2009=1938 is intriguing.  It would suggest a lengthy down period but not a deeper drop than around Dow6K.  Since 1929 continued after 1938 to a lower low in 1942, this suggests the bottom would come sometime in 2013. 

Will it take a war to turn things? A similar bottom in timing was seen in Japan, but they also bottomed again 20 years after, and have not yet broken out; no war for them, only the Greenspan Indian Summer, which pulled their economy up amidst the global credit bubble.  For the US, even with the war, a good argument can be made that the Dow did not break out of the Depression Doldrums until 1949, or 20 years later.  This would peg our bottom at 2020.  Or after if we fall into the Japanese interminable funk.

Much of what I read tries to assess this crisis as if it were a "normal" albeit deeper recession.  In between the four depressions, we have had a lot of recessions and panics, but there is a fundamental difference between the setup to a recession and the setup to a depression:  a recession comes from excessive inventory and is triggered by tightening, whereas a depression comes from excess credit and is caused by loosening. I like to put it this way: 

• Before a recession, people borrow to buy forward, but are careful to stay within expected future earnings - they borrow against income.  When the recession comes, they can cut back and continue to cover their debt.  They ride it out.
• Before a depression, people borrow much more aggressively, and the bubble spurs them on - they borrow against asset appreciation.  In the '20s, it was against stocks; in the '00s, it was against houses.  When the bubble bursts and the assets drop in value, they are trapped  Their income is insufficient to carry the debt, and they get washed out.  

Which one sounds like today?  

Before the modern management of the economy that came with Keynesianism, recessions were relatively short - under a year.  After the Keynesian belief in managing an economy, recessions have lengthened, but not by much  The normal economy has enormous recuperative powers, especially if left alone.  Excess inventory is cleared out and the factories run again.  During the Great Moderation (1982-2007), we only had two recessions. Before that, we had them around the same frequency as prior to Keynesianism. (Thanks go to Milton Friedman for that, or Alan Greenspan.)

In contrast, after a credit bubble, the depression seems to last around 40 months. The 1837 one ended sometime in the early '40s; the 1873 one ended within four years.  The 1929 one bottomed in 1932. The troubling question is why we fell back down in 1938, and why has Japan never left theirs?  The major distinction between 1929/1989 and prior periods is the massive intervention of the governments to solve the problem.  Could it be stimulus extends the disaster rather than ends it?  We shall soon find out.  

Our current problem started in Dec 2007, and 40 months later would peg the end around 1Q 2011. We shall see if the massive interventions get us out early, or extends the disaster to the end of the next decade.  

One thing should be clear: we are not about to start a new bull market, even if this bear market rally extends for a number of months up towards the 62% retrace (over Dow11K and SP1200). Among many other reasons, consider this other chart from Doug Short. The recent bottom in March was not even close to a level that is a lasting bear market bottom. This chart uses the Shiller methodology to compare P/E ratios to E10, the moving average earnings over the past 10 years. Bear bottoms come with a single-digit P/E10, as low as 5 in 1921 and 1932. We touched 13 last March, not that close to a bottom indication, and have since bounced back up, approaching 20, a level which normally signals trouble ahead (overvalued). In 1938 we got down around 10, and in 1942 below 10. The lasting bottom in 1949 was at 9. This suggests the market can fall another 50% before we approach a lasting bottom.  

In the meantime massive stimulus is rolling over. The grand experiment is ending. Welcome to the petri dish!

Comments

[Nero]

Look at what the cat drug-in:

www.LogicChip.com

[Viper]

Nero,

That's some crazy stuff; guess that explains the run-up in gold?

[Harrington]

Viper

How many websites are you selling?

[Forkoholic Serge]

COT report changes
http://www.reuters.com/article/ousivMolt/idUSTRE58362420090904

Pushed by the Obama administration to shed more light on the opaque dealings of speculators blamed for high commodity prices, the CFTC chose to break out four new categories for 22 commodities in the weekly report: Producer/Merchant/Processor/User; swap dealers; managed money and other reportables.

[Rick]

Forkoholic Serge

Are you long or short? What's Price target and stops?

[Rick]

or are you mumbo-jumbo, and afraid of a schmuck like you criticizing your prediction?

[Viper]

Only a fool would ignore what PM's are doing right now. This is just the beginning, IMHO.

[Upstart]

Massive stimulus is rolling over? They say the spending stimulus has hardly begun. They're holding back for election year, right?

[Nero]

Granger over at LogicChip.com says gold breaks it's all-time high ($1,033) tomorrow AM (9/9/09). He's says it's a lock.

[Granger]

My data says Gold closes above $1,033 tomorrow (9/9/09).

www.LogicChip.com

Do your own due diligence before making a trade.

[Viper]

You would be wise to follow the words of Granger very closely...he is the best trader in the world.

www.LogicChip.com

[Nero]

www.MarketBreeze.com is back up. An article that gets released WORLDWIDE at 7:00am EST tomorrow is up for preview for three more hours.

It ties down why Gold is going to spike over the next six weeks...he's predicting a triple!

www.MarketBreeze.com

[Guy Masterson]

I got a guy right here named Granger who says when the weather's here a horse named Paul Revere can do. Can do. This guy says the horse can do.

[rick's mama]

Rick=50/50=idiot=1000 other identies he is hiding behind

[rick's mama or Forkoholic Serge]

rick's mama or Forkoholic Serge

Are you long or short? What's Price target and stops?

or are you mumbo-jumbo, and afraid of a schmuck like you criticizing your prediction?

[Forkoholic Serge Don't be an idiot. Since you got no talent, you got to smooth people.]

Forkoholic Serge

Don't be an idiot.

You got subscription to sell. Since you got no talent, you got to smooth people.

whatever you are doing does hurt you, not me.

[Inan]

Oh i not think these markets dow drop before next tues if sooner

[MHD]

Well, Neely's call of a top not too long ago has more company. Bob P. call of a bottom in the dollar was blown away today, and Yelnick's call for a top at 1039 is in serious trouble as 62% was retraced at 1021. It seems the markets just don't care about a disaster of holiday sales or option arms, or any of the disasters yet to happen, but that certainly are going too!
I'm beginning to think the only thing that could derail this bull train is a warning something was really wrong. The start of the big slide occured when trouble with Lehman Brothers made the headlines. Unless something comes out that smells really bad, this market will continue to sucker people in!

[rick's mama]

I must apologize to everyone for my bastard son.

Rick=50/50=idiot=Inan=Cocklessroach=1000 other identies he is hiding behind was unfortunately dropped several times when he was a baby.

Then, every day on the way to school and back, he was beaten by every neighborhood bully, slapped by every girl, and bitten by every dog. All for being a spineless geld.

Please don't pay any attention to his ill-mannered ways. The internet is the only place he feels safe enough to play out his aggressionsfor all that was done to him. It's the only place where he can act out being a tough guy.

Please have pity on him. He didn't do well in school because of all the beatings as you can see from his limited writing skills and poor gramatical prowess.

He has been a loser all his life and has lost 99% of all his money by making bad trades.

He has been ashamed of who he is all his life as you can see by his compulsive schizophrenic assumption of different personalities.

If you find my poor downtrodden boy please alert Bellevue Hospital as they want him back

[Forkoholic Serge, Why rick is an idiot? because he said you are not a better trader or adviser?]

Forkoholic Serge

Why rick is an idiot?
because rick said you are not a better trader or adviser?

why don't show readers you are worth than a dumb copy cat.

long or short? price target and stop.

[Forkoholic Serge, how do you possibly know that? are you imagining just like when you write forkoholic whatever books?]

>He didn't do well in school

i know pig cannot see diamond, and dumb person like you cannot tell. contrarily my education is within top 1%. something you cannot imagine.

>He has been a loser all his life and has lost 99% of all his money by making bad trades.

how do you possibly know that?
are you imagining just like when you write forkoholic whatever books? I do not read your dumb subscription, and kept me making money.

dumb person like you do not know

[Forkoholic Serge, NO REFUND - DUE TO THE NATURE OF OUR PUBLICATION WE CANNOT OFFER ANY REFUND]

Forkoholic Serge or sergey znutin

Looking for single VC investor with $2M? good luck. dumb shit.

NO REFUND - DUE TO THE NATURE OF OUR PUBLICATION WE CANNOT OFFER ANY REFUND

tell your investor no refund as well!

No refund!!

[Forkoholic Serge, $10 barrel crude oil? You hell made money for yourself! Dumb shit]

August 2009 prediction (or copycat).

$10 barrel crude oil?

oil is above $70!

You hell made money for yourself! Dumb shit

[rick's (dumitry's) mama]

>contrarily my education is within top 1%. something you cannot imagine.

Again please excuse by poor demented boy. His real name is Dumbitry by the way.

As you can see his grammar and absent writing skills really give his meager education away, but please be kind as his IQ is barely over 80 and people of suck low IQ tend to have an unduly high opinion of themselves, again I apologize for Dumitry

[who's rick anyway??]

June 2009 prediction.. wrong again.

Fractal confirm Prechter's Dow 400 target.
Apple at $7 again.

Dumb shit.

August 2009 prediction (or copycat).

$10 barrel crude oil?

oil is above $70!

You hell made money for yourself! Dumb shit

[Forkoholic Serge. drink too much Vodka?]

Forkoholic Serge,

drink too much Vodka?

have you ever predict anything correctly?

wave 5 down the countdown has begun - 4 months ago

http://forkholic.disquis.com/wave_5_down_the_countdown_has_begun

$SPY H&S players all dead? Not so sure? http://bit.ly/HnSnotDEAD (HT Serge Forkoholic)
-wrong again

June 2009 prediction.. wrong again.

Fractal confirm Prechter's Dow 400 target.
Apple at $7 again.

Dumb shit.

August 2009 prediction (or copycat).

$10 barrel crude oil?

oil is above $70!

You hell made money for yourself! Dumb shit

[Forkoholic Serge...Never Predict Correctly? Dumb Shit]

Forkoholic Serge of Elliott...wrote:
Are you ready for the crash?
Some similarities with 1987
http://forkoholic.spaces.live.com
June 27
http://caldaroew.spaces.live.com/blog/cns!D2CB8C5EBA2ADE86!46465.trak
Weblogs that reference this entry

wave 5 down the countdown has begun
4 months ago

http://forkholic.disquis.com/wave_5_down_the_countdown_has_begun

$SPY H&S players all dead? Not so sure? http://bit.ly/HnSnotDEAD (HT Serge Forkoholic)
-wrong again

June 2009 prediction.. wrong again.

Fractal confirm Prechter's Dow 400 target.
Apple at $7 again.

Dumb shit.

August 2009 prediction (or copycat).

$10 barrel crude oil?

oil is above $70!

You hell made money for yourself! Dumb shit