The Depression 2008 vs. the Depression 1929

The first Great Depression started with the October crash of 1929, but the market didn’t hit bottom until 1932. So far in 2008, the market hasn’t crashed; however, this year, similarly, will mark the end of an economic up-cycle, and that’s putting it mildly. The Dow is down 46%, falling unrelentingly from the peak of 14,165 in October 2007 to Friday’s close of 8,046 (and that was up 494 from the previous session). This is a greater percentage loss than on October 24, 1929. In addition, the rate of decline of the Dow 2008 has accelerated (see chart below).

Last week, Nouriel Roubini, professor of economics at NYU’s business school and advisor to central banks and governments, in making a case for stag-deflation said, “. . . we are in a severe recession. . .” Early to point out the housing crash, he is in good company with George Soros and Paul Volker, both of whom predict that this depression will be worse than the previous one (see G20 Meeting a Non-Event Depression Full Speed Ahead, November 16, 2008).

The 2008 Dow looks a lot worse than the Dow during any of the previous major correction. Its fall-off is far more precipitous then even the crash of 1929.

Here’s a time-compressed picture courtesy of dshort.com comparing the four worst corrections.


According to this chart, we’ve got several years and another 40% drop to go before reaching bottom.

Here’s some more perspective. Last Friday, the market was up 494 points. I think CNBC was calling the bottom in … again. Here’s a chart of the day’s performance.


No wonder they were so excited; and it happened so fast. We’ve been getting last-hour-of-the-trading-day action the way we had been getting financial-Armageddon news over weekends. Friday was a good day, but how does it fit into the overall trend? Let’s put Friday’s move into trailing-12-month perspective.

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I’m Convinced You Say; Now What?

We are already in hard times and it’s going to get tougher. Start preparing as you would for a natural disaster or war. Dispassionately, make a list of priorities based on what you need—not what you want or what the neighbors have—those things you can’t do without.
You need food and shelter. Unless you live and work in a city or town you probably need a car, but maybe not. If you lost your current residence, where would you go? The answer is not “I don’t know.” The answer is I will move in with my family, with friends, live in an RV, my car, whatever. Explore what’s available in your community. Have a plan.

A lot of people have already lost jobs, more than a million, as a matter of fact. If you lose your job, how long can you stay in your current home . . . make your car payment . . . pay your credit cards? Will you be able to make COBRA payments? Start figuring out what you would do if you lost your livelihood.

If you still have savings, how much will you spend before enough is enough? The answer is not “until my savings are depleted.” It’s the same with credit cards. If you don’t have much cash, make sure you have some credit available.

Frugal is in.

mg dungan

Fed Implode-o-Meter Update

At the end of October (see Fed Implode-o-Meter October 31), it looked like the Fed had spent about $3.8 trillion in the year to date. Not even three weeks later, that figure is now up to $4.28 trillion. According to CNBC, “To put it in perspective that’s . . . more than what was spent on WW II.” Funny choice of comparison; the Iraq war, the longest-running conflict in the history of the US, has also cost more and the final tab won’t be in for years. Anyway . . .

So, where’s all the money going? Here’s a list (hat tip to CNBC) of what has been made public:

Federal Reserve
(TAF) Term Auction Facility.................................................................$900.0bn
Discount Window Lending
Commercial Banks.................................................................................... $99.2bn
Investment Banks.......................................................................................$56.7bn
Loans to buy ABCP.....................................................................................$76.5bn
AIG .............................................................................................................$112.5bn
Bear Stearns .................................................................................................$29.5bn
(TSLF) Term Securities Lending Facility...............................................$225.0bn
Swap Lines..................................................................................................$613.0bn
(MMIFF) Money Market Investor Funding Facility...........................$540.0bn
Commercial Paper Funding Facility.......................................................$257.0bn
(TARP) Treasury Asset Relief Program...............................................$700.0bn
Other:
Automakers.................................................................................................$25.0bn
(FHA) Federal Housing Administration 300.0bn
Fannie Mae/Freddie Mac........................................................................$350.0bn
Total.................................................................................$4,284.5bn


The Telegraph UK quotes Paul Volcker, former chairman of the US Federal Reserve and short-list candidate for Treasury Secretary, as saying, “. . . it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months. I don't think anybody thinks we're going to get through this recession in a hurry. The economic slump has begun to metastasize after a shocking collapse in output over the past two months . . . normal monetary policy is not able to get money flowing. The trouble is that even with all this [government] protection, the market is not moving.” Further, "What this crisis reveals is a broken financial system like no other in my lifetime," the 81 year old Volker told a conference at Lombard Street Research in London. Normal monetary policy can't restart economic activity because credit is contracting at a faster pace than new money is coming into the system. Fractional reserve lending can’t work unless banks lend.

Through all of this, the Fed is still taking as collateral illiquid, mark-to-model assets, presumably at notional value, from the banks. In return, the banks receive brand-new treasuries that, in principle, could be lent out. At this point, most, or probably all, of the Fed’s general collateral is comprised of toxic waste. Currently, the Fed does not even have enough reserves to cover dollars in circulation.

Good thing we’re only talking about Monopoly money. If it were real money we’d be in big trouble.

There are a number of grass-roots efforts trying to put an end to the Fed’s out-of-control borrowing. One of them, End the Fed.us is having a meet-up on November 22 in 39 cities. Mish of Global Economic Trend Analysis is putting together another email, fax, and phone-call campaign to stop further auto company bailouts. Chances are slim that the brakes will be put on before the end of the year. However, with a new administration coming in, 2009 could be another story.

mg

G20 Meeting a Non-Event, Depression Full Speed Ahead (1)

I’m afraid many of the New World Order conspiracy theories will have to be laid to rest after this weekend’s G20 meeting. Worldwide coordination of anything other than a rate cut here and there will never fly. Not even the power of the dark side is sufficient to get substantive agreement among the G20. So, what came out of this weekend’s meeting? Pretty much nothing. But, you ask, no new world currency, no new North American currency, no revaluation of the price of gold, no renegotiation of trade agreements, no dropping the US$ as the world’s reserve currency? Nope, nothing. However, based on their recent track record, this was probably the best outcome.

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Telling It Like It Is
Last week I said the economy was going through a period of deflation. That was just a trial balloon and an attempt at being PC. We’re entering into a depression. Things are a lot worse than underwater mortgages and SUVs losing trade-in value.

“The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself,” former Goldman Sachs chairman John Whitehead, 86, said at the Reuters Global Finance Summit on Wednesday. "I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." When you’re 86 years old and Social Security and Medicare’s got your back, why mince words.

Here’s what another senior citizen, George Soros, has to say, “Our greatest economic depression is ahead of us.”

One more retiree, Warren Buffet, in September said, "This is an economic Pearl Harbor. There's no plan B for this . . . we were at the brink of something that would have made anything that happened in financial history pale.” (Pale by comparison . . . finish your sentences Warren). Former Fed chairman Paul Volker, a downright New Age positive thinker by the standards of this group, says, “There’s a 75% chance of financial collapse within the next five years.”

From academia: “The United States is bankrupt. Our economic situation is worse than Brazil, worse than Argentina, worse than any nation in the world,” according to Professor Laurence Kotlikoff of Boston University. I never heard of this guy before, but he’s got a way with words. And from government service: "When we look back 10 years from now, we will see 2008 as a fundamental financial rupture,” says Peer Steinbruck, Financial Minister of Germany.

Associated Press on Friday reported that the mayors of Philadelphia, Atlanta, San Jose, and Phoenix are requesting bailouts. They'll have to get in line behind the entire state of California, NYC, Chicago, Detroit, and LA.

There are a few bright spots, though; gun sales are one of them. The FBI reports that gun sales increased 13% in October and had a huge 49% spike in the first six days following the election. Hurry and get yours before supplies run out.

It’s time to prepare for hard times. There are a number of lists of “100 Things that Disappear First.” Google one that addresses your lifestyle and climate. Many of these items, like manual can openers, make good stocking stuffers. By the way, no Gift Cards this year. Gift cards are not yet guaranteed by the FDIC. If the store goes out of business, that’s the end of the gift card. Same thing with product maintenance contracts.

mg

Everything is Deflating, Not Just House Prices

There is considerable discussion as to whether we are in, or entering into, a period of inflation or deflation. It’s important to know which one it is and why, to be able to plan effectively.

It’s deflation, and we’re already in it.

The simplest working definition of inflation and deflation is an expansion of the supply of money and credit in the case of inflation. Deflation is the opposite, a contraction of money and credit. Despite recent price surges in food and oil, prices are declining across the board, and even those two headline-inflation items are down from recent highs. An interesting explanation of how this happens is on Mises.org: If the price of a good goes up (in the absence of an increase in the money supply), consumption must be reduced on some other good. This sounds more like common sense than economic theory, especially after the recent run up in gasoline prices.

The rule of thumb in deflationary environments is cash is king. This is no time for major purchases or unnecessary expenditures. Why buy today when the price will be lower tomorrow?


Stock Markets
Here’s what’s been happening in the Dow for the trailing 12 months.

(Picture on http://blownmortgage.com/ scroll down to 11 13 08)

This performance has had dire consequences throughout the economy. As one example, at the beginning of October, retirement plans had lost as much as $2 trillion — or about 20% — over a15 month period, according to Congress's top budget analyst .“The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers' savings, forcing people to hold off on major purchases and consider delaying their retirement,” said Peter Orszag, the head of the Congressional Budget Office. Savings across the board, even Harvard’s endowment, have taken a hit.

The US markets haven’t been the worst performers. “World equity markets lost an estimated $5.79 trillion during October, the biggest monthly loss ever,” according to Standard & Poor's Index Services. “The October loss eclipsed the previous record, which was set just one month earlier, when 52 global equity markets lost a combined $4 trillion. Through the first 10 months of 2008, world markets have lost about $16.22 trillion.”

Commercial Real Estate
Due to store closings and company bankruptcies, losses in commercial real estate are mounting. On Tuesday, General Growth Properties, one of the largest mall operators in the country, announced that it is near bankruptcy. Its stock closed at 35¢ today. Its only hope now is to become a bank holding company.

(Picture http://blownmortgage.com/ on scroll down to 11 13 08)

Residential Real Estate
Residential real estate losses are unrelenting and the magnitude of losses is staggering.
Here’s the latest from Case-Shiller.

(Picture on http://blownmortgage.com/ scroll down to 11 13 08)

The Deficit
OK, here’s something that’s up, the national debt, which reached $10.6 trillion the other day. The increase year over year since 2005 isn’t all that much.

(Picture on http://blownmortgage.com/ scroll down to 11 13 08)

However, if you look at the increase over a several-decade period, it looks like this.

(Picture on http://blownmortgage.com/ scroll down to 11 13 08)

Unemployment
CNNMoney.com reports that “The government reported more grim news about the economy, saying employers cut 240,000 jobs in October, bringing the year's total job losses to nearly 1.2 million. According to the Labor Department's monthly jobs report, the unemployment rate rose to 6.5% from 6.1% in September and higher than economists' forecast of 6.3%. It was the highest unemployment rate since March 1994.

These figures notoriously underreport unemployment, but the trend is clear.

I hope everyone has a few bucks in the house, at the very least enough for groceries and gas.

mg

Confiscation of Your Retirement Account

This meme—government confiscation of retirement accounts— is rapidly gaining credence. On November 4, Carolina Journal Online reported that Democrats have been meeting to discuss transferring currently-voluntary private retirement accounts to eventually-mandatory government administered retirement accounts that would produce a guaranteed rate of return. Further, the now tax-advantaged plans would lose tax incentives and deductibility.

On the surface, this doesn’t look very appealing. However, there are two ways to look at this plan: 1) protection of retirement accounts to the tune of a guaranteed 3% per annum; or 2) confiscation of retirement accounts to the tune of loss of control and, effectively, loss of ownership.

As currently being discussed, the plan would entail transferring private retirement plans, such as IRAs and 401ks that are invested in stocks and bonds, into government retirement accounts (GRAs). These new accounts would be invested in newly-created government bonds yielding 3%, adjusted for inflation.

Further, the current tax-advantaged, voluntary plan would become a mandatory savings of 5% of wages with no tax deduction for either the employee or employer. These accounts would be administered by the Social Security Administration. Actually, the money would not be invested in government bonds, per se, but would earn “pension credits.” The wage earner would continue to pay into Social Security and Medicare. To make this more palatable, the transfer price might be calculated at market prices pre the recent cliff dive, assuming that it would be put into effect this year.

But wait a minute, there’s another way to look at this proposal. In her report, Ghilarducci said that “GRAs would guarantee a fixed 3% annual rate of return (vs. the volatility of returns in the capital markets, which have devastated savings this year). In place of tax breaks workers now receive for contributions and thus, effectively, a lower tax rate, workers would receive a $600 annual contribution from the government, inflation-adjusted. For low-income workers whose annual contributions are less than $600, the government would deposit whatever amount it would take to equal the minimum $600 for all participants. Lauding GRAs as a way to effectively increase retirement savings, Ghilarducci wrote that “savings incentives are unequal for rich and poor families because tax deferrals provide a much larger carrot to wealthy families than to middle-class families — and none whatsoever for families too poor to owe taxes.”

For more information, see: US Congress Committee on Education and Labor hearing on October 7, 2008 “Saving Retirement in the Face of America’s Credit Crises: Short Term and Long Term Solutions” testimony of Economics Professor Teresa Ghilarducci on “The Impact of the Financial Crisis on Workers’ Retirement Security.”

This proposal is similar to Argentina’s recently announced plan and we don’t hear any crying down there. Rock throwing and other expressions of civil unrest, but not crying; and a stock market crash; and money escaping the country; and, what else, oh yeah, increased likelihood of sovereign default.

Buck up, Americans, this is what you can do for your country.

mg

Election Fun is over, Back to Economic Reality

Economies worldwide are in recession and it’s getting worse. The momentum on the downside is too strong and the losses too pervasive to expect bailouts or interest-rate cuts to have more than a temporary effect. At best, government can slow down the rate of decline or perhaps delay a crash, but at great future cost.

In the US, what started out as a housing problem in a few states has now become a full-fledged recession, with a majority of states (30) now in or dangerously close (19) to recession. The single exception is Alaska, according to Moody’s Economy.com.

Just in case you thought there might be a way out by moving to a state where prospects are better, it won’t work this time. Mark Zandi, chief economist at Economy.com told ABC News recently. "One of the unique features of this downturn is how broad-based it is regionally."

Jobs
According to ADP’s National Employment Report released November 5, “Nonfarm private employment decreased by 157,000 jobs from September to October 2008, on a seasonally adjusted basis.” Keep in mind that the economy must create 150,000 jobs per month to absorb new entrants in the workforce. Friday’s official figures are expected to show unemployment at 6.1%.
October’s employment loss was driven by the goods-producing sector, which lost 126,000 jobs, declining for the 23rd consecutive month. The manufacturing sector was down another 85,000 jobs. These losses were compounded by a loss of service-related jobs, which fell by 31,000, the first loss in the service-providing sector since November 2002, according to ADP.
The estimated change in employment from August to September 2008 was revised down to a decrease of 26,000 from a decrease of 8,000. Not only is that quite the revision, but it’s an indication of what to expect when October’s figures are revised.

Service Sector
The Institute for Supply Management, a trade group of purchasing executives, said today its service-sector index suffered a sharper-than-expected drop to 44.4 in October from 50.2 in September. Consensus was 47.5; a reading below 50 signals contraction.

Auto Industry
GM, Chrysler and Ford—near bankruptcy due to a combination of poor management, slowing global growth and problems in credit markets—are looking for a government bailout.

However, problems aren’t confined to the US. Toyota sharply cut its profit forecast today, warning the global auto industry faces an "unprecedented" crisis. Other auto companies that have issued recent profit warnings are BMW, Nissan and Honda.

Construction
In October, construction employment dropped 45,000 jobs. This was its 23rd consecutive monthly decline, and brings the total loss of construction jobs to 455,000, off the peak in August 2006.

Consumer Sentiment
Rising unemployment, increases on food and fuel prices and falling property values have brought an end to the longest expansion in spending on record. In October, the Index of Consumer Sentiment was 57.6, a record 12.7 points below September’s 70.3 and 23.3 points below last October’s 80.9.

This month’s result was the largest monthly decline in consumer confidence in the history of the surveys. By mid-2008, consumer confidence had already declined more than in any prior recession and the steep October loss indicates that accelerated cutbacks in spending can be expected during the months ahead, according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers.

Start formulating Plan B, if you haven’t already.
mg

It's Official: The Crisis is Worldwide

Where is the last place on earth you’d expect a bailout would be needed . . . due to a real--estate bubble bursting . . . and banks failing . . . and stock markets crashing . . . and that has derivatives counterparty losses? It’s the Gulf countries (GCC) in the Middle East and, in particular Kuwait. **ya coulda knocked me over with a feather**

Bloomberg reports that “Abdullah Hajeri led a march on the Emir's palace in Kuwait last week, demanding that the oil-rich nation's ruler stop stocks from plunging. Adnan Mohammed Saleh said he wants more government protection from the global financial crisis.” “Every day the market is crashing,'' said Saleh, a 42-year- old trader, staring dumbfounded at the Dubai Stock Exchange's ticker. “ **the government is responsible for stock market prices . . . where did we hear that one before?**

Things a little better at the pump lately? Well, one man’s gain is another man’s cliff dive. The region's rulers are under pressure as crude prices have fallen 50% from a record $147.27 in July. Stock indexes in Dubai and Saudi Arabia have fallen a similar amount. **you mean they didn’t save those windfall profits for a rainy day? Oh, that’s right, it doesn’t rain there**

Bernanke-Style Bailout
Last week Kuwait became the third Gulf state to “prop up” its banks. Its central bank created a $19 billion facility to help banks make loans. Saudi Arabia, the world's largest oil exporter, put $2.7 billion into a government-run bank in Riyadh to provide no-fee loans to low-income citizens.
And a Bank Run
The bank bailout came after losses on currency derivatives at Gulf Bank KSC, Kuwait’s second-largest lender by assets. This resulted in a surge in customer withdrawals from the bank. In response, the UAE announced a FDIC-style guarantee of deposits of all local lenders and large foreign banks. **moral hazard anyone?**

More Derivatives’ Losses
Citibank’s Middle East economist Mushtaq Khan explains that Gulf Bank took a bet that the euro would continue to strengthen against the dollar. When the dollar unexpectedly and rapidly rose against the euro, the bank faced a problem with its counterparty commitments that ultimately required central bank intervention. ** this is the sort of thing should be swept under the rug; that’s what we do**

More Evidence that Decoupling is a Myth
All capital markets in the Gulf Cooperation Council (GCC), which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, have declined and interest rates have increased since Lehman Brothers’ bankruptcy on Sept. 15.

Of the Gulf States, Dubai likely will be hardest hit by a global economic slowdown. Dubai has borrowed heavily to finance its transformation from a Persian Gulf trading post to a financial and tourist hub. Foreign investors are gone and there has been a sharp decline in tourism, both of which this land-of-the-most-expensive-hotel-rooms-in-the-world relies on.

According to Moody’s, “government-controlled companies owe at least $47 billion, more than Dubai's GNP. They will continue to accumulate debt faster than the economy grows.” **as the economy grows? . . . what if it doesn’t grow?**

Real Estate Bust
“Dubai property prices will likely remain unchanged through 2010 after quadrupling in the past five years”, Colliers CRE Plc said. According to Nouriel Roubini, “There is a liquidity and credit crunch and now oil prices have fallen to $70 from $140. I see the risk of a real-estate bust throughout the Gulf, but specifically in Dubai. There's a huge amount of excess capacity being built.''

The Middle East's largest publicly-traded real-estate developer Dubai-based Emaar Properties PJSC is down more than 26% just since Sept. 15. Investors have lost confidence in Emaar’s ability to finance projects by borrowing through local and international banks.

Will Dubai turn into an Inland Empire-style ghost town? We’ll see.

mg