One Good Day in Perspective

Today was a good day in the markets.  For some perspective, take a look at this chart.  The markets are still tracking the course they set during the Great Depression.  Even if we start to see a rally, here’s some perspective from today’s Barron’s.

Recent volatility doesn’t even begin to compare to what it was like during the 1930s.

In fact, there were eight calendar months during the decade of the 1930s in which the Dow rose or fell by more than 20%. The month with the biggest Dow move was April 1933, when the Dow rose by 40.2%. In August 1932, furthermore, the Dow rose by 34.8%.

The biggest monthly losses during that decade were almost as big. The largest came in September 1931, when the Dow lost 30.7%.

A quick look at a Yahoo! chart of the Nikkei over the past 20+ years also shows up upswings followed by even bigger losses.

For the foreseeable future any time we see some upside from Mr. Market, the very tough question will continue to be, is this rally the real thing or a head fake?

Daily Dose: Nationalize the Too Big to Fail Firms?

I have not posted on this topic lately.  When I first started talking about it a couple of months ago it was not a daily news item.  But I’m no longer ahead of the curve here and can’t add too much to what you can read everywhere else.

But, be sure to read this post from Krugman.  The take-away message is that with the actions being taken by the government, the Japan Scenario is looking more and more likely.

The main issue is that we continue to refuse to nationalize the banks.  It turns out that the “stress test” isn’t very stressful at all. And, as Bernanke and Geithner have stated this week, we will continue to fund the banks, letting them burn through our cash, without requiring any real change on their part.

The Japan Scenario is better than Great Depression II but it is not as attractive as the Swedish Model (rapid bank nationalization and restructuring) in my opinion.

“Worse than Japan?”

That’s the title of this recent article in The Economist comparing our current financial crisis with recent similar crises in Japan, Sweden, and elsewhere.  It’s a good, in-depth article going over the bewildering complexity of the problems we are facing and comparing them to past historical precedents.

If you want the bottom-line, here’s the concluding statement:

Add all this together and the ease with which American policymakers dismiss Japan’s experience is probably misplaced. Japan’s outcome—a decade in which growth averaged 1% a year and gross government debt rose by 80 percentage points of GDP—was not one to be proud of. But given the magnitude of today’s mess, it may soon seem not that bad after all.

The “D-Process”

Barron’s has an interview with Ray Dalio, founder of Bridgewater Associates, a global money manager.  “He counts among his clients world governments and central banks, as well as pension funds and endowments.”  According to the article, he called the crisis in the spring of 2007 and his hedge funds had positive returns last year in excess of 8%.

Dalio says we are now in a depression, or “D-process” to emphasize the lengthy and unusual nature of what we are about to go through.  If you don’t have a Barron’s subscription, keep reading for the highlights of a sobering interview.

Conversation with Ed Easterling

While being employed by a major Wall Street firm has been extremely difficult over the past year – no, I did not receive a bonus or any TARP funds last year – it does have some advantages.  Along with having access to a huge range of investment vehicles, I get to talk to some really interesting people.

One of those people is Ed Easterling who was being dragged around by a mutual fund company (yes, in exchange, I will take a look at their funds, but only use them if I truly see value there).  I got to spend 2 hours with Ed discussing his book, his outlook, and otherwise peppering him with questions.

You probably have not heard of Ed, but he is an interesting guy and you should read the rest of this post.

Daily Dose: Nationalize the Too Big to Fail Banks?

I have not posted on this topic for a few days as nothing of substance has been reported.  Today, however, Bloomberg has a good update on the continuing debate within the Obama Administration on what to do.

The good news is that the importance of the matter is clear.  Bloomberg quotes Obama saying, “You’ve got a banking system that is close to a meltdown, and we’ve got to figure out how to intelligently get credit flowing again”.

New Baseline from The Baseline Scanario

“Testimony to the Senate Budget Committee hearing on The Global Economy: Outlook, Risks, and the Implications for Policy, January 29, 2009.  Submitted by Simon Johnson, Ronald Kurtz Professor of Entrepreneurship, MIT Sloan School of Management; Senior Fellow, Peterson Institute for International Economics; and co-founder of http://BaselineScenario.com (a widely cited source for daily policy analysis on the global crisis.)”

Keep reading for Johnson’s 9-point summary, but the really quick summary is: Global Japan Scenario!  “There will be some episodes of incipient recovery, as there were in Japan during the 1990s, but this will prove very hard to sustain.”  (Follow the link above for the whole 12-pages of Senate testimony.  Also, look at past entries under the Japan Scenario category for background.)

Jeremy Grantham’s January Letter

Never one to pull a punch, Grantham’s latest quarterly letter is out and titled Obama and the Teflon Men, and Other Short Stories (Part 1).  (I’m not sure about who can register to get access to this.) This is going to be a long post, but one very much worth reading if you like to think about the big picture and investment trends.  If you want the quick bottom line: 2009 and even 2010 could easily see new lows in the stock markets but we will avert a new Great Depression.  The 7-year outlook for stocks looks good with traditional average annual returns over that time frame.

Krugman on Deflation

Another angle on the deflation threat from this year’s Nobel laureate.  Could we see deflation rates of -3.5%?  Why do I keep so focused on this theme?  Becasue deflation is one of the primary tipping points between a nasty recession and worse.  It’s deflation that has made the Japanese recovery a 20+ year and counting experience.

Paradox of Thrift

If we are not at the beginning of GDII, and I certainly hope not, then we may still be facing a very long recovery period.  As stated in today’s WSJ, in an article discussing strategies being taken at home:

…families hope their new found frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decades long buying spree, are finally saving more and spending less — just as the economy needs their dollars the most.

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation’s standard of living. But in a recession, increased saving — or its flip side, decreased spending — can exacerbate the economy’s woes. It’s what economists call the “paradox of thrift.”

This is goes back to Krugman’s point: if families cannot stimulate the economy via spending, if tax cuts will not (the Bush rebate stimulus last June did nothing to stimulate spending, it increased saving), if loosened monetary policy will not lead to increased lending, then we need governmental spending, and quickly.  The WSJ article continues,

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century.

“The idea that the American family will quickly spend us out of this recession is a fantasy. It won’t happen,” said Elizabeth Warren, a professor of law at Harvard University who last month was named chair of the Congressional oversight panel tasked with overseeing the distribution of the government’s Troubled Asset Relief Program funds.

Along with prolonging the recovery, this increased savings will add to deflationary pressures which, as discussed in prior posts, also prolong recovery, creating a vicious cycle that are extremely difficult to break.  Japan still has not recovered from it’s initial deflationary period in the early 1990s.