March 2, 2009
markets dropped further today, between 3.99% and 4.66%.
to close at 1,323,.
to close at 6,723,
and the S&P
to end at 701.
essentially unchanged at at $40.06
a barrel, while gold shaved off a bit to $940.
to end the day at 52.65.
Michael Ashbaugh published his weekly technical
analysis article, The Technical
Indicator: Dow industrials poised to venture into the 6,000's, this
morning shortly after the market opened. In it, he confirmed what I had
suspected: that the VIX is entirely too high to telegraph a new bear
market bottom. He also argues that it will be at least five months before
a new bull market could occur. Of course, the Dow has penetrated the 7,000
level by 275 points. Meanwhile, Mark Hulbert has thrown in the sponge on
the November, 2008, lows being the bottom for this cyclical bear market: Nov. 20 lows failing (First Take).
No doubt the market is oversold. If this were a normal,
inflationary recession--the kind the Federal Reserve can reverse by
lowering interest rates--I would probably already be heavily invested, but
it isn't. And just a few days ago, some prestigious investment advisors
were reiterating that the November lows were the
lows, and that smart investors were buying in now before the next bull
market thundered out of the gates. (Minyanville's Todd Harrison was even
turning optimistic: March
Madness: Be prepared for a 20% move.)
Some additional writings by Paul Krugman include:
Permanent Link to Dow 6,000!
not quite. But it does look as though the Dow will go below 7K today."
In Permanent Link to A quick response to Scott Sumner,
he tries to straighten out a misconception.
In Permanent Link to Irrational after all,
he quotes another author who has observed that the S&P is now below
where it was when Alan Greenspan gave his famous 1996 irrational
exuberance" speech. to this he adds the fact that after taking
inflation into account, the S&P is about 25% below where it was then.
In Permanent Link to Capital control memories,
he recalls how in 1998, in the midst of the Asian financial crisis, "I
came out in favor of temporary capital controls; a bit about that here.
At the time it was regarded as a horribly unorthodox and irresponsible
suggestion ó and I had a long, very unpleasant phone conversation with a
Senior Administration Official who berated me for my anti-market ideas.
Today, that wild and crazy idea is so orthodox itís part of standard IMF
[International Monetary Fund] policy.
There are obvious parallels with the current debate over bank
In Revenge of the Glut,
he writes, "The
international economic crisis is the revenge of the global saving glut.
And the glut is still out there, worse than ever.".
In Climate of Change,
He says, "President
Obamaís budget represents a huge break from policy trends. If he can get
it through Congress, he will set America on a fundamentally new course."
I'm still committed to a policy of cash and caution
regarding the potential outcome of this current financial pullback. If it
drags on for years, with the U. S. stock market pulled down with it, I'd
prefer not to be dragged down with it. Under other circumstances, I know
from experience that it's awfully hard to time the market. I've lost a lot
of money by switching to cash and not knowing when to get back into the
market when it moved up again. The "This time it's different" is
a famous-last-words litany among experienced investors. Mark Hulbert has
just called attention to the fact that "buy-and-hold" advice is
finally falling out of fashion, and that this commonly happens at or near
market bottoms. And I'm sure he's right, but I'm not sure that this time,
the market rules of thumb outweigh the economic fundamentals. Also, one
might argue that when Mark Hulbert publishes this observation in
Marketwatch, it achieves a certain level of orthodoxy itself. Who knows?
This outlying event that only occurs once a century might confound the
sophisticated investors who have learned to sidestep the common missteps.
Or maybe not. The next few years should tell the tale.
But I buy the idea that, maybe,
this time is
the S&P's new low of 704,
it's now down by 55.3%.
The Dow's low of 6806
brings it down 52%
from its 2007 high. The NASDAQ's
low of 1,328
pulls it down 53.6%,
although it's still 43
points above its 2008 intra-day low of 1,285.
Meanwhile the VIX has moved up 10.7% to 51.31... a little bearish, but, I
should think, far from a capitulation of the bulls(?). The most bullish
thing that could happen would be for panic selling to set in, with the
market indices plunging dramatically, followed by dramatic recoveries. On
the other hand, if the market just keeps working its way down, partially
recovering toward the end of the day, there still won't be (I should
think) a bottom in sight.
Paul Krugman's second article below, Permanent Link to Friedman and Schwartz were wrong,
seems to me to be absolutely
The stimulus package will be too little and may well be too late (with no
significant effects expected before next year), but there's been the
argument advanced by investment advisors that, never you fear, all the
money the Fed has pumped into the economy will begin to take effect later
this year, and you'll see the economy bottom and turn up. Now Dr. Krugman
is signaling that the fundamental thesis that if the Fed had provided
ample liquidity to the economy in 1929, the Depression would have been
averted, is wrong. It's not working as advertised. And for me, that throws
under the bus the claim being made by investment advisors that later this
year, the money the Fed is pumping into the economy will turn it around.
For the past ten days (which is as far back as I can
look at trading volume in 15-minute intervals), there has been heavy
selling about half an hour before the markets have closed, followed by
lesser buying into the close.
Here are several other commentaries by Dr. Krugman,
including his last two editorials.
In the first of these, Permanent Link to Equilibrium decadence (wonkish),
he explains that beginning in 1970, a concept called Phelps volume
combined with the concept of rational expectations
shook "the foundations of Keynesian ideas about monetary and fiscal
policy". The world of economics then split into two camps: one that
rejected Keynesian theory altogether, and another that attempted to retain
an altered version of Keynesian theory on the basis of empirical data that
seems to support it. The school of thought that rejected Keynesian theory
quit teaching it, and now, a generation of economists have grown up who
don't know anything about Keynesian theory except that it's unfashionable
and allegedly wrong. These economists are preaching that the government
can't prevent or ameliorate an impending Depression, and can only make
things worse by trying.
I wasn't around during the Panics of the past when
there was no government intervention, but what I think we have to remember
is that during the Panic of, for example, 1873, most people lived on farms
and were somewhat self-sufficient. Houses were still passive shells, with
no electricity or running water. There would have been no utility bills,
although there would have been property taxes to pay.
When I was a child growing up in the Depression,
parents lived with and were commonly supported by their adult children.
That's a lousy arrangement for both the parents and the adult children.
There was no such thing as medical insurance, Social Security,
unemployment compensation, or insurance on your savings accounts. Show me
someone who longs for the good old days, and I'll show you someone who's
never lived in them. I give thanks every summer day for our central and
automotive air conditioning units and our carefree gas furnaces. (To
a percentage basis, the S&P
index has fallen 54.38%
from its October 11, 2007, intra-day high of 1,576
to its intra-day low so far today of 719.
has surrendered 51.3%
of its 10/11/2007 intra-day high of 14,199
in falling to today's intra-day low so far of 6,917.
The NASDAQ Composite has backpedaled 52.7%
from its October 31, 2007, peak of 2,862
to today's early low of 1,355.
I'm not sure about this, but I think these numbers constitute the largest
percentage pullbacks in these indices since the Great Depression. And the
reason for mentioning these "record-breaking" pullbacks is that
they further underscore the fact that this contraction is a different
breed of cat from anything since the Great Depression.
In this excellent article, Prieur
Perspective: Market Refuses to Rally-, Prieur du Plessis updates the
inflation-adjusted Dow, including its trend lines,
similar to the inflation-adjusted Dow that I posted below
in 1998. He also shows that the earnings-per-share peak-to-trough
ratio has declined more than at any time since the Great Depression
(exceeded only during World War I). He cites two rays of hope in wrapping
up his article. The first is that the credit markets are loosening up, and
the second is that the Citi Financial Conditions Index is showing marked
improvement, "which tends to lead economic activity such as auto
In Signs of the
market hitting its bottom, Mark Hulbert observes that there are signs
that the market may be about to hit its cyclical bear bottom within the
next few weeks. (Bear in mind that yesterday morning, Mr. Hulbert
presented the case that last November 20-21 represented the cyclical bear
market bottom.) I would add the note of caution that this deflationary
recession or depression is qualitatively different from any of the
recessions since World War II, and that experiential rules concerning the
technical action of the equity markets may be overruled by the underlying
downward economic spiral.