CAN WE EXPECT A 30-40% CORRECTION?
This morning, David Rosenberg discussed the possibility of a 30-40% correction in the equity markets. Rosenberg thinks we could go as low as 850 on the S&P:
“There have only been two other times when the stock market ran parabolically up from a low in barely over a year, as was the case this time around (+80% from March 2009 to April 2010): the 112% surge from June 1, 1932 to September 7, 1932; and the 116% runup from March 2, 1933 to July 18, 1933. In the first case, we had a 40% correction and in the second, the correction was 34%. So, we are talking here about the prospect of a pretty hefty reversal in the S&P 500 that could very easily take the index down to as low as 850, if the history of these types of givebacks is any indication.”
I don’t disagree with the potential of a 30-40% correction, however, I do disagree with his extrapolation from the Great Depression. This is not the Great Depression despite what many would have you believe. Most importantly, however, the U.S. economy of today is VASTLY different from the U.S. economy of the 1930′s so equity market performance can be expected to be different as well. These two data points might as well come from the equity market in Mars as far as I am concerned.
It is another Great Depression just slightly different, you don’t see it because 1 out of 8 Americans and 1 out of 4 children are on food stamps and 20% of income is from gov’t transfers! These are not signs of a mere recession.
There are more similarities than differences between today and the 1930′s, the severity is being masked by gov’t programs.
And this is far from being over, as they said during the Great Depression “When we thought is was all over, it was really just beginning.”
Guess yesterday was all short covering. The overnight gao is just about gone. Very poor showing by the bulls today.
Piss poor is more like it….
The problem I see with markets around the world is anytime there’s some trouble and a real sell-off begins (stocks, bonds, govvies, even commodities) then central banks race to the rescue. But each time this proves less and less effective — witness the EU’s $1 Trillion “bailout” of the European banks (I mean sovereigns). I think what’s happened is trust has been destroyed. So now nobody knows what “fair” is and for all I know the S&P at 200 or even 2000 is fair. Our “President” claimed to want transparency: how about we let fair value emerge? Works in my business.
Well, people are beginning to realize that monetary policy fails. That’s why the ECB’s $1t bluff was called. It does nothing to rectify the problem in the private sector or in the state govts.
TPC,
What about Mid-October 1987 and late November 1987?
Better comparison. I’m just saying that the comps to the 30′s are a little ridiculous. It’s apples and oranges.
i’ve sorta thought that Japan was a decent comparison. but why is the Great Depression so ridiculous of a comparison? it was a debt driven deflation with an unwind in globalization. (my question is not rhetorical)
I agree, but the point I was trying to make is not necessarily that the comparison is being done based on fundamentals (which, IMO, are not that divergent if you think about it – just the handling of them is vastly different), but simply a comparison of a historical cyclical tendency of the market’s reaction to a crash. I think it’s psychology whereby the market hits bottom, institutions rush in at the lows, the market cranks up as John Q Public sits wondering if he’s missing the show….after a relatively short time period, he decides to come in – way to late – and gets dumped on by the institutions that first jumped in. Wash rinse and repeat throughout civilization’s existence
The way I see, a good comparison might be Fibonacci. You can see the same Fibonacci sequences when analyzing the branching of trees and the ancestry of bees. This is not to say that Bees and Trees are related (though it does rhyme), just that both appear to exhibit this naturally occurring sequence. And though I am quite skeptical of the practice, I have applied Fibonacci retracements in a few trading scenarios with very modest success (I never play these trades with lots of money, but I do use it for potential target prices). Again, trading, bees, and trees may have little in common (beside all falling under the realm of biology) and yet these patterns arise similarly throughout.
Correlation doesn’t imply causation, but can still be profitable
Great comments banker.
I could really bore everyone with my variations on chaos theory and whatnot, but I will spare you
Mark Twain famously said: “History does not repeat itself, but it does rhyme.”
This is so true. I just think as an investor we need to view each instance as its own event and adapt accordingly. There will always be market crashes. There will always be a business cycle. But just because the market crashed in 1930 after a 100% rally does not mean that is the environment we’re in today….
I’d say it is more like apples versus apple pie. Same sort of thing only today it is cooked rather than fresh.
“Most importantly, however, the U.S. economy of today is VASTLY different from the U.S. economy of the 1930’s so equity market performance can be expected to be different as well.”
Famous last words to some extent. Markets/economies are always different when decades are involved however people are the same. Differences in behavior get measured by centuries. That said If a certain fear grips the markets the outcome will always be the same despite any so called life support systems built into the cake.
I believe it is the constancy of human nature that lends itself to the chartable similarities between most bubbles over the last 500 years. If, and is no longer a big if, we recently suffered through a series of bubbles starting with the tech bubble in 2000 the outcome is fixed–years of meandering in the desert, 12-16 at a minimum, with Japan being a worse case example, 20 and counting. For these reasons I also use analog overlays for all previous bubbles.
I very much agree, but the point I am trying to make here is that I think it’s unfair to take ONE or TWO data points and come to sweeping conclusions. That’s all. It’s kind of a semantic point so my apologies….
Don’t let it happen again! Just kidding, just kidding.
TPC,
I totally disagree, this is the Great Depression all over again. And people have a lot more than 2 data points to work with. By economic terms a depression is a drop of 10% or more in GDP. Karl Denninger has a graph showing that GDP without government excess spending for 2009 was -10%. Economic cycles are called cycles because they are repetitive. Basic common sense tels even non-economists that the GDP had to be negative by ~7% at a minimum last year. Shadowstats shows that our actual unemployment for the year was 20%. Now we know that the unemployed are receiving unemployment checks for about 50% of their normal pay. That means that that sector’s overall spending had to be down ~10%, and since consumer spending currently composes 70% of GDP that would calculate to a loss of 7% on GDP. The government can’t keep spending at this pace to continue to make up that difference. Reinhart and Rogoff’s encyclopedic coverage of the last 800 years of financial history has shown that the breakpoint for any economy occurs when the debt/GDP reaches 100%. After that all economies studied have massively failed. We will not be different this time!
It’s not even close. GD unemployment was 25%, GDP fell 30%, industrial production fell 60%, equity prices fell 90%.
We’re nowhere near any of those levels.
AND 9000 banks failed – this time around, I dont even think we’ve hit 200….
Yep, like I said in my comment above, the comparison is definitely apples versus apple pie because those official government numbers are most certainly well cooked. You see, when you make apple pie these days you take the apples and remove their core, then you cut up the rest into pieces, sweeten it with high fructose corn syrup, spice it up with some cinnamon, completely surround it with a flaky dough crust, then bake it. I just don’t see anything in that analogy that breaks down in comparison with today’s economy. It is certainly much different than a whole fresh apple.
..all sounded great until the ‘high fructose corn syrup’ then you lost me so now I disagree.
Rosie has been bearish since the move from March 2009. Don’t listen to him for investing.
This is the greater depression.
Can you imagine how bad this depression would be if the FED couldn’t print money like Bernanke is currently doing and will continue to do?
Back in the 1930′s the FED was held to the gold standard. Today it’s all fiat, printing press worthless script.
You’re right though, it’s not the same as the depression of the 30′s.
TODAY IS FAR WORSE. Take off your rose-colored Obama glasses and look again komrad.
You guys do know that the govt spent a boatload of money back then right? Most argue that it wasn’t until the uber war spending of WW2 that we actually got out of the Great Depression. The budget deficit was enormous and “catastrophic” back then….
Not that spending is the cure, but you guys and your gold standard just don’t have an accurate portrayal of history….
Today is nothing like the Great Depression.
Hmmmmm…… I guess we are only 1/2 way through this cycle? Idk if anyone notices that bubbles are happening more frequently and much more severe than in the past….. Run up the digits on the computer or print the same ink on a $1 or $100 and it doesnt matter, just use it to wallpaper the holes in the wall. Back in the 30s we didnt have, as Warren Buffet stated, weapons of financial destruction – OTC derivatives. Before the FASB changed their accounting rules which preceeded this massive rally, the BIS (bank of international settlements) the central banks of central banks – OTC derivatives counted to the total of $1.3 quadrillion dollars. Yes that is not an exaggeration! There is no way to paper over that massive hole. When the ponzi scheme fails, as in 2008, and in the “flash crash, and what is being done in the Eurozone – there will be a total destruction of the fiat currency systems. Now that we are all intertwined globally – it will be a massive global crash. The handwriting is on the wall, and those prophets were laughed at then and now. Just hold hard assets and use your play money to buy solid companies that are rich in cash and BE OUT OF DEBT! Dont be a slave to the money lender! As cycles go, we are just beginning to maybe 1/2 through – so it is not right for anyone to say this is NOT the Great Depression or it is – it may turn out to be a beautiful renaissance OR it will be the GREATER DEPRESSION – but hyperinflationary. Again the handwritting is on the wall for everyone with decernment to see.
TPC,
I agree that this is not the Great Depression, thankfully. But I might add that I do not believe it is the economic backdrop that creates the 100% rallies and 50% corrections. Those extreme moves are due to human behavior; hope and fear, not economics.
Considering that the behavior of the crowd has not changed over the years, the potential for similar swings in stock prices is real.
You have posted a number of times a chart of Japan in the 1990′s. Have you measured those % market swings during what looked like a decade long flat period? They are 50%, 60% and 140% rallies followed by 30%, 40% and 60% declines. Japan too is Not suffering from an equavelant of the Great Depression.
I believe a decline into the 900-950 range would be very normal. The question is; will the market give us a multi-week relief rally first?
Is there going to be a mini crash? I don’t know, but so far it is not looking too good. We are due a bounce, but if SPX cannot break the resistance around 1080 this week then we do have weekly and monthly sell signals. And that is not good; then we could easily see a mini crash. Next MAJOR support on SPX is a little below 900 and it could easily drop there in a week.
etf-gold-stocks.com
I sure don’t ‘know’ but I see it like Tim defines it above. I just don’t see new highs [except in PM and then energy] in this market. I am wearing my crash helmet every day at my desk.
The way I see it, the stock markets are organized crime at its best. It is a case of the seeing leading the blind. The big money players have the power to move the markets up or down at will. What’s more, they are supported by the manipulated and falsified reports generated by the various governmental agencies. The herd responds to the information as if it came from God and respond accordingly. In the meantime, those who are in the know, at the top of the pyramid make the right moves and take the profits, sending the herd back to the drawing board, to see what went wrong. What’s different in this current economic cycle of events, is that the world as a whole is stuck at the same time. Thus, the situation has become bigger than its makers. As we move further down this road, fiat currency values are evaporating and the heard is becoming more aware of the game being played. The old standby, gold and silver are standing in the wings to receive the wounded and disabled herd. What’s more, the big money is also being forced to join the herd, as this is the only safe place to retain value. This is a case where the wealthy are forced to take shelter with the herd. Funny how things work! In the end, the world of economics and finance as we know it, is headed for a makeover. Round and round she goes, where she stops, no one knows. One thing is sure, the wealthy will always end up on top. Because they play by the golden rule. Those who have the gold, make the rules. It is also conceivable that a major war may be in the cards, before this series of events plays out.
For all the conjecture above about perceptions vs. realities [implied] I would remind all of C.S. Peirce’s Pragmatic Maxim.
“Whatever is perceived to be the practical implications of [it], is in fact the definition of [it].”
So you can talk all day long how this coming depression won’t happen because the equities, the bonds the etc. are different this time and it all means nada if the pragramtic definition of the people who make decisions simply see the market day’s opening as a systemic and undeniable failure. Down happens because people see tomorrow as worst than yesterday. That is simply it hombres and nothing else will matter when the panic sets in except the pragmatic maxim.
I see a rally back to Dow 10500, after that who knows. One day at a time my friend.