Chris Lau - Seeking Alpha

Saturday, November 15, 2008

It is "The Great "De-leveraging" ... not "The Great Depression"

The media loves to compare current market conditions to the Great Depression that took place some 80 years ago. As I had written previously, it is the great deleveraging that is still going on that has created an immense level of uncertainty, taken money out of the stock market, and significantly lowered the valuation of homes globally.

Many unknowns still exist, which means I am unable to concisely provide a downside or upside target to the stock market based on fundamentals.

1) It is unknown how much hedge funds need to unwind their positions to meet investor redemption
2) It is not known if housing prices have leveled off, thus stabilizing the paper mortgage losses inflicted on banks

Here are some scary facts about the Great Depression:
  • The stock market crashed in October 1929. By 1932 the stock market was at 20% of their value in 1929.
  • 11,000/25,000 banks were insolvent
  • Unemployment was 25-30% of workforce
  • The great depression was global (it included Europe)
  • No government intervention was made for the markets prior to this event
  • After the Great Depression, government action, whether in the form of taxation, industrial regulation, public works, social insurance, social-welfare services, or deficit spending, came to assume a principal role in ensuring economic stability in most industrial nations with market economies.

Things are different because the wealth of nations is different:
  • Rich middle-east nations hold global wealth (due to wealth earned from high oil prices)
  • Asia (Japan and China) is cash rich
The U.S. accounted for a large percentage of world consumption. Now that it is shrinking, the other nations are suffering as well. The economic downturn is therefore still early part of the game.

The Solution

Government policy will be key to steering world economies out of the slump. This is unfortunate for investors, because policies take time to develop, implement and to work its way through the market.

Still Positive For Markets

Volatility has declined to 66.31 from its peak at 89.53 in October. Markets rallied this week even after touching the magic Oct 10, 2008 low. Expect markets to test this low again. We will revisit the indexes if this low is breached. On the positive side, the chances are just as good that resistance levels will also be tested.