Re the chart: You appear to see a straight line that will continue in the same direction forever. I see a process that is in control and maybe possibly an outlier moment. I see the economy at one end of a range. A process that is in control has points on both sides of the process mean. Too many on one side or the other tells of problems. So far, I see normal activity, just a bit extreme. If true, then points on the other side of the process mean are coming soon. The process mean may change over time, but that is normal.

Re the Xmas rock: the news on TV this morning agrees with me.

You know, you’re right. I analyzed that chart. After the latest rally I think it moves the YTD over 1 notch into the -40/-30, leaving 1931 in the -50/-40 category. But 1931 was bracketed around 1929(-10/0) 1932 (-10/0) 1930 (-30/-20.) Hmm, wondering where we wind up if that repeated. Good thing we’re not under a ton of government and consumer debt like we were then! (oh wait. that’s now and not then.)

Speaking of statistics, in the whopping 150 years or so of market history, everyone tends to dismiss the 29-32 period as some outlier. Why? Yes, serious mistakes happened back then with regard to monetary supply, but I’m not convinced the current issues of the day are any less serious. The market still isn’t cheap by historical measures, and I see a lot of less to be optimistic about now then back then. At least back then our high schools math and science students were competitive with the rest of the world.

Where is the bad news going to come from? Let’s see, GDP decreasing by a significant amount (hasn’t happened in a very long time) leading to more bankruptcy, job losses, defaults, dropping home values, deflation, etc. Feel free to stick your head in the sand and dismiss this outright, but I don’t see in the current data makes people think this can’t happen.

As far as this Christmas season “rocking”, well, I’m short a lot of amazon.com because I disagree. I think we see a significant drop in spending (-5% to -10%) from last years numbers, with the entire consumer spending situation getting far worse in Q1 of 2009..

Guess time will tell.

“Now, Credit per GDP must contract 250% to get to a sustainable level, and that hasn’t even started yet! A New Deal now would take credit /GDP to what, 500%…?”

I’m looking at this from a political perspective as much as an economic one. Politicians are very much in the business of pushing off problems into the future; minimize pain now, worry about the costs later.

It may very well be true that “credit … must contract 250% to get to a sustainable level”. But who says that 2009 will be the year when we get to a sustainable level? The Fed and Treasury right now are moving heaven and earth in an effort to pump up yet another bubble. My bet is that they will succeed.

However, I also think it’s possible that in inflation-adjusted terms, the SPX in the year 2015 will be no higher than it was in 2000.

Just curious what it would take you to become bearish on the current situation? ….. what do you think it would take to have a poor holiday season?

reply:

There’s already enough people who are bearish on the current situation. They don’t need me. Roubini counts for at least 10 normal people, although he has been right for the most part. I don’t think he has a feel for consumers. He sees them as an abstract mass that acts in concert rather than an uncountable number of cockroaches that scurry in all directions. He has absolutely no people sense. He’s good on the big stuff, though.

BR published an amazing normal distribution of stock market returns since 1825. Learn some statistics so that you have an intuitive feel for what the numbers mean, as opposed to being able to put together an impressive and most likely totally useless equation. Really, a little SPC will carry you a long way. Anyway, this chart promotes huge optimism. (Plus, when the Chardonnay kicks in I just think everything is great.)

Where’s the next bad news going to come from? Commercial loans are the new fad to bleat about. But I suspect most aren’t securitized so terms can be adjusted as required. Most of the retailers who are distressed have sucked for a long time so this is normal for them to go out now. Credit cards are always in the news for one reason or another. Failure is a normal part of success.

This Xmas will probably rock, although not at the level when people were spending cash based on phantom asset values.

1) Let’s compare now to 1929. In 1929, according to Shiller, home values were at 73 (all inflation adjusted)…this time they peaked at 220 (I adjusted for inflation) and are now at 160. In 1929, housing “crashed” from 73 to 65, or 11%. Housing has already crashed 27% now, with another 37% off current levels to go in my estimation. We haven’t even felt the worse of it yet!

2) In 1929, total credit was at 170% of GDP (it spiked to 260%, after the crash, as government created all those programs and GDP tanked)…this time we are at 357% of GDP and climbing as of last data. By 1940, total credit had returned to a reasonable level. This tells me that the New Deal worked…it temporarily raised debt levels to prime the pump and when the Depression softened, they sopped up the excess debt.
Now, Credit per GDP must contract 250% to get to a sustainable level, and that hasn’t even started yet! A New Deal now would take credit /GDP to what, 500%??? I can’t say how this will play out…it is unprecedented, except maybe for the fall of the roman empire, and I have no stats for that period.

3) It would be well within its 100 year inflation adjusted uptrend for the Dow to hit 3500.

http://www.geocities.com/WallStreet/Exchange/9807/Charts/SP500/Dji200_0710.gif

If that analogy holds, we’re much closer to the end of this than the beginning, because it started in 2000, not 2008. That is a very big “if” of course. I’m not counting on it, more of a very interesting (and shockingly similar) comparison so far…

Japan in the 1990’s is more relevant to our economy now than the Great Depression. One of the differences, though, is that Japan was the world’s largest creditor (and probably still is), whereas we are the world’s largest debtor. Consequently, I see inflation in our future (perhaps 18 months from now).

KJ, the argument is that the govt did not inject enough liquidity from 1929 to 1932. In effect, we have sped up the calendar a couple years and are now at 1932 in comparison. Will the market head back down to Dow 7800 again? I think not, but only Steve Barry knows for sure.