No Soup Lines ... Yet?

On October 9th, 9:36am, Elizabeth MacDonald posted a blog entitled We are Not Headed for a Great Depression". The market was up slightly for the day, so perhaps she was feeling relieved. She stated that the market might "drift lower", but apparently felt that the market had made a bottom. As further evidence, she noted that we don't have an soup lines stretching around the block.

By the end of the day, the DJIA was off 7% for the day - 8.5% from when she posted her article. That doesn't feel much like "drifting lower" to me...

If we go back before the 90's boom, to 1992, the djia was at about 3300. Applying inflation and ~2% real market value gain (the long term average) - 6600 would have been a "rational expectation" in 1992 for the djia in 2008. We're standing at about 8600 - still about 23% over valued relative to that. How badly scared will people get if we just drop 23% more - forget about under-shooting the market's real value.

Alternatively, reverse inflation on 8600, and the market hasn't been this bad since the djia bottom for 1997 (~6700).

Or, if we consider the market price to have been rational in 1997 rather than 1992, and project it forward (2%/yr, 2.5%/yr average inflation = 4.5%/yr), the djia should be at around 10500. (Of course, in 1997 people were talking about "the long boom" upon which "Dow 36000 -(C)1999" was based.)

So at best, the market should be considered to have crashed 20% below a "1997 rational expectation" level. If we don't get back to 10500 in the next 3 months, I think we'll have to accept the market's verdict that investors in 1997 were already drinking the coolaid, and that the credit crunch has caused enough damage to throw us into a DEeP REceSSION.

Soup lines would only appear well AFTER the market crashes, Elizabeth. The main indicator that the Great Depression was going to be "different" (from my admittedly limited reading of history), was that timely efforts by the rich and powerful to stop the market slide - by injecting liquidity - had no sustained effect. A tipping point had been reached, and any small recovery was seen as an opportunity by investors to secure some cash "just in case". Wave after wave of investors got fed up watching their wealth evaporate, and sold off more and more of their holdings, desperately hoping to get enough cash to "buy in at the bottom" and recover some of their losses, or to at least have something to live on until the recovery.

I've taken out my "just in case" cash, but my investment advisor tells me that I'm in the tiny minority - most of his clients are sitting fully invested, desperately hoping that the slide reverses. Maybe they're right and I'm wrong - or maybe it just means that there's a lot more small investors out there who have yet to take out some cash "just in case".


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