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“Why This Is NOT the Great Depression”: A Reader Writes..

Received this from reader Justin and thought it put some thingd in perspective..

Over the past few months, the media has discovered another story to strike fear into the hearts of America, and incidentally to sell newspapers and airtime. This time it’s not SARS, terrorists, or once-in-a-lifetime hurricanes (which seem to happen every year or so), it’s the Great Depression. I do not want to make light of the current economic situation because it is serious, and likely the most serious of our lifetime. However, as part of justifying my continued buying into the current market, I did some research to understand if perhaps this time the world was really coming to an end. Here’s what I’ve found regarding the Great Depression:

* S&P 500 PE multiple over 30
* 25% unemployment
* 5000+ bank failures with numerous panicked bank runs resulting in $140 billion lost by depositors (no FDIC insurance)
* 30% GNP contraction
* 50% duties on imports
* Huge drought that led to the Dustbowl in an economy heavily dependent upon agriculture
* No unemployment benefits
* No social security
* Severely delayed government interventions

Where are we today?

* Current S&P 500 PE 18
* 6.1% unemployment
* Under 20 bank failures with not a penny lost by depositors and an increased FDIC insurance
* 2008 GDP is up
* No Smoot-Hawley
* More diversified economy
* Increased unemployment benefits, which means they are spending money even if they aren’t working
* Numerous, ongoing domestic and international initiatives

Math of current situation:

Financial loss estimates (Jan Hatzius, Goldman Sachs; Nouriel Roubini, NYU) – -$2 trillion

US Govt. intervention (stimulus pkg, “bailout”, AIG loan) – +$1trillion

Private sector (SOV funds, Hedge Funds, Buffet, etc.) – +500 billion

___________

Potential Unrealized Losses -$500 billion

Actual losses (US Stocks $8 trillion; US Home Equity $4 trillion) ($12 trillion)

The $12 trillion loss appears to be an overshoot to the downside. How do I explain it? There are 2 answers I’ve come up with. First, in my opinion, the majority of these are paper losses, which will be “written up” over time, which is why I’m buying equities. I think the market will soon realize that companies are reporting solid earnings, and that there is pent up, quality consumer demand for cars and homes, albeit at lower levels than 2007. Second, it’s pure irrational fear, ie the best time to buy. Here’s a simple analogy to drive home my perspective. Someone yells “fire!” at the local movie theater. You have 2 choices. You can follow Jim Cramer and run for the exit, or you can sneak in with Warren Buffet and watch the movie for free in an empty theater. I think I’ll stay for the double feature.


Disclosure (“none” means no position):None
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5 replies on ““Why This Is NOT the Great Depression”: A Reader Writes..”

The analogy of yelling fire in a crowded theater is not totally appropriate. In real life, people generally don’t yell unless there is a fire, so this is not an issue. However, Wall St has a habit of yelling “Fire” when there is none so we need to consider whether the warning is warranted or not. The “boy that cried wolf” may be the more relevant analogy. In the past, I’d have dismissed the current Wall St. fire alarm. This time, I’m not so sure. Tread carefully and keep your eye peeled for smoke.

Are you kidding me?
“2008 GDP is up” -and will be revised and there is no way next year will not be horrible with the lending situation. It takes more than 2 weeks for things to play out in the whole economy.

“6.1% unemployment” -and rising

“More diversified economy” -we exported much more then. Look at GM,Ford,Chrysler now. If I’m not mistaken we have a huge import dependent economy. China?

The other differences are bc of the new deal changes and bigger gov. Don’t see how their relavent. Recessions don’t start and end in 3 months. Decades of deleveraging is hell.

If you listen to Buffett he has been saying he sees a bad recession. Well, they just admitted to it so, I’ve learned to respect Buffetts opinion. George Soros seems very bearish because he doesn’t even see anything being done that will be effective in stopping the banks from freezing. 00-02 was barely a correction. This is the end of an era.

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