@AllAmerInvest Depression, Jobs Rate, Trade War, Euro

Is US economy flirting with 'modern-day depression'?

While economists have made no secret of their fears that another recession is about to strike, the real danger could be worse.

Instead, the country could be headed for a 21st century version of a depression, an economic term that, unlike a recession, defies a standard definition but instead conjures images of soup lines, 25 percent unemployment and a devastated economy.

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U.S. Adds 103,000 Jobs; Rate Steady at 9.1%
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The Trade War With China
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THE CHINESE UNDERGROUND BANKING SYSTEM: What It Is And Why It Should Scare You
http://read.bi/oZjwFG

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CNBC Bonus Bucks Answers for Friday, October 7, 2011
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Robert Shiller Says the Depression Scare is Back

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Worse than the Great Depression?

I picked this up over on VOX. They have an interesting analysis of the current state of affairs economically and the great depression.

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

They also present a series of charts to back up there analysis. Here is an example.



To read more, go here.

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Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

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Bear Markets Revisited 1929-1933

This is a update of an article I put up on March 18. Since then, the current bear market rally that started on March 9, around 676 area has extended itself to about 20 percent. In the chart below you will notice that bear market rallies averaged 30 percent from 1929-1933. The bear market rallies averaged about two months in duration. It is always interesting and educational to study the past. A friend of mine pointed out that the market dropped like a lead brick many times during that period, and that the low made in 1929 was not the low of the bear market.

File this under food for thought, and looking beyond the obvious.

The following lists the bear market rallies, and the duration, from 1929-1933.


The following list the bear market rallies, and the duration, from 2007- to the present.

Good information and perspective that I picked up over on FT Alphaville.

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Roubini Video on Insolvent, Zombie Banks

Nouriel Roubini,(aka Dr. Doom), proclaims that unless drastic action is taken soon, the world as we know it is about to come crashing down (Part One).

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What Are the Odds of a Depression?

International evidence suggests there is a 20% chance our stock-market crash will lead to much worse.

The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.

What Are the Odds of a Depression?

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Irving Fisher the forgotten economist

Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip.

I caught this article over on the Economist. Good perspective and worth reading.

Out of Keynes's shadow

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Go here to see the charts.

SHORTLY after he was elected president, Barack Obama sounded a warning: “We are facing an economic crisis of historic proportions…We now risk falling into a deflationary spiral that could increase our massive debt even further.” The address evoked not just the horror of the Depression, but one of the era’s most important thinkers: Irving Fisher.

Though once America’s most famous economist, Fisher is now almost forgotten by the public. If he is remembered, it is usually for perhaps the worst stockmarket call in history. In October 1929 he declared that stocks had reached a “permanently high plateau”. Today it is John Maynard Keynes, his British contemporary, who is cited, debated and followed. Yet Fisher laid the foundation for much of modern monetary economics; Keynes called Fisher the “great-grandparent” of his own theories on how monetary forces influenced the real economy. (They first met in London in 1912 and reportedly got along well.)

As parallels to the 1930s multiply, Fisher is relevant again. As it was then, the United States is now awash in debt. No matter that it is mostly “inside” or “internal” debt—owed by Americans to other Americans. As the underlying collateral declines in value and incomes shrink, the real burden of debt rises. Debts go bad, weakening banks, forcing asset sales and driving prices down further. Fisher showed how such a spiral could turn mere busts into depressions. In 1933 he wrote:

Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip.

Though they seldom invoke Fisher, policymakers in America are applying his ideas. In academia Ben Bernanke, now the chairman of the Federal Reserve, sought to formalise Fisher’s debt-deflation theory. His research has shaped his response to this crisis. He decided to bail out Bear Stearns in March 2008 partly so that a sudden liquidation of the investment bank’s positions did not trigger a cycle of falling asset prices and default. Indeed, some say the Fed has learnt Fisher too well: from 2001 to 2004, to contain the deflationary shock waves of the tech-stock collapse, it kept interest rates low and thus helped to inflate a new bubble, in property.

Were Fisher alive today, “he would tell us we have to avoid deflation, and to worry about all that inside debt,” says Robert Dimand, an economist at Brock University in Canada, who has studied Fisher in depth. “The ideal thing is to avoid these situations. Unfortunately, we are in one.”

Fisher was born in 1867 and earned his PhD from Yale in 1891. In 1898 he nearly died of tuberculosis, an experience that turned him into a lifelong crusader for diet, fresh air, Prohibition and public health. For a while he also promoted eugenics. His causes, both healthy and repugnant, combined with a lack of humour and high self-regard, did not make him popular.

In 1894, on a trip to Switzerland, he saw, in water cascading into mountain pools, a way to “define precisely the relationships among wealth, capital, interest and income,” Robert Loring Allen, a biographer of Fisher, wrote. “The flowing water, moving into the pool at a certain volume per unit of time, was income. The pool, a given volume of water at a particular moment, became capital.” Over the next 30 years he established many of the central concepts of financial economics.

In 1911, in “The Purchasing Power of Money”, Fisher formalised the quantity theory of money, which holds that the supply of money times its velocity—the rate at which a dollar circulates through the market—is equal to output multiplied by the price level. Perhaps more important, he explained how changing velocity and prices could cause real interest rates to deviate from nominal ones. In this way, monetary forces could produce booms and busts, although they had no long-run effect on output. Furthermore, Fisher held that the dollar’s value should be maintained relative not to gold but to a basket of commodities, making him the spiritual father of all modern central banks that target price stability.

During the 1920s Fisher became rich from the invention and sale of a card-index system. He used the money to buy stocks on margin, and by 1929 was worth $10m. He was also a prominent financial guru. Alas, two weeks after he saw the “plateau” the stockmarket crashed.

To his cost, Fisher remained optimistic as the Depression wore on. He lost his fortune and his home and lived out his life on the generosity of his sister-in-law and Yale. But his work continued. He was prominent among the 1,028 economists who in vain petitioned Herbert Hoover to veto the infamous Smoot-Hawley tariff of 1930. And he developed his debt-deflation theory. In 1933 in Econometrica, published by the Econometric Society, which he co-founded, he described debt deflation as a sequence of distress-selling, falling asset prices, rising real interest rates, more distress-selling, falling velocity, declining net worth, rising bankruptcies, bank runs, curtailment of credit, dumping of assets by banks, growing distrust and hoarding. Chart 1 is his: it shows how deflation increased the burden of debt.

Fisher was adamant that ending deflation required abandoning the gold standard, and repeatedly implored Franklin Roosevelt to do so. (Keynes was of similar mind.) Roosevelt devalued the dollar soon after becoming president in 1933. The devaluation and a bank holiday marked the bottom of the Depression, though true recovery was still far off. But Fisher had at best a slight influence on Roosevelt’s decision. His reputation had fallen so far that even fellow academics ignored him.

Contemporary critics did poke a hole in his debt-deflation hypothesis: rising real debt makes debtors worse off but creditors better off, so the net effect should be nil. Mr Bernanke plugged this in the 1980s. “Collateral facilitates credit extension,” he said in June 2007, just before the crisis began in earnest. “However, in the 1930s, declining output and falling prices (which increased real debt burdens) led to widespread financial distress among borrowers, lessening their capacity to pledge collateral…Borrowers’ cash flows and liquidity were also impaired, which likewise increased the risks to lenders.” Mr Bernanke and Mark Gertler of New York University dubbed this “the financial accelerator”.

The downward spiral can start even when inflation remains positive—for example, when it drops unexpectedly. Consider a borrower who expects inflation of 2% and takes out a loan with a 5% interest rate. If instead inflation falls to 1%, the real interest rate rises from 3% to 4%, increasing the burden of repayment.

Asset deflation can do much the same thing. If house prices are expected to rise by 10% a year, a buyer willingly borrows the whole purchase price, because his home will soon be worth more than the loan. A lender is happy to make the loan for the same reason. But if prices fall by 10% instead, the house will soon be worth less than the loan. Both homeowner and lender face a greater risk of bankruptcy.

Today, debt in America excluding that of financial institutions and the federal government is about 190% of GDP, the highest since the 1930s, according to the Bank Credit Analyst, a financial-research journal (see chart 2). There are important differences between then and now. Debt was lower at the start of the Depression, at 164% of GDP. Mortgage debt was modest relative to home values, and prices were not notably bloated: they fell by 24% between 1929 and 1933, says Edward Pinto, a consultant, so were roughly flat in real terms. Debt burdens shot up because of deflation and shrinking output; nominal GDP fell by 46% between 1929 and 1933.

Debt burdens are high today mostly because so much was borrowed in the recent past. This began as a logical response to declining real interest rates, low inflation, rising asset prices and less frequent recessions, all of which made leverage less dangerous. But rising leverage eventually bred easy credit and overvalued homes.

Even without recession, falling home prices would have impaired enough mortgage debt to destabilise the financial system (see chart 3). Recession makes those dynamics more virulent; deflation could do similar damage. Broad price indices fell in late 2008. Granted, that was caused in part by a one-off fall in petrol costs; but America’s core inflation rate, which excludes food and energy, has fallen from 2.5% in September to 1.8%. Goldman Sachs sees it falling to 0.25% in the next two years.

That is low enough to mean falling wages for many households and falling prices for many firms. More widespread and deeper deflation would mean that property prices would have to fall even further to restore equilibrium with household incomes, creating another round of delinquencies, defaults and foreclosures.

What is the solution? Fisher wrote that it was “always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted.” Alas, reflation is not so simple. Although stabilising nominal home prices would help short-circuit the debt-deflation dynamics now under way, any effort to maintain them at unrealistically high levels (where they still are in many cities) is likely to fail. Higher inflation could help bring down real home prices while allowing nominal home prices to stabilise, and reduce real debt burdens. But creating inflation is easier said than done: it requires boosting aggregate demand enough to consume existing economic slack, through either monetary or fiscal policy.

Though the Fed does not expect deflation, last month it did say that “inflation could persist for a time below” optimal levels. It is mulling a formal inflation target which, by encouraging people to expect positive inflation, would make deflation less likely. But its practical tools for preventing deflation are limited. In December its short-term interest-rate target in effect hit zero. The Taylor rule, a popular rule of thumb, suggests it should be six percentage points below. The Fed is now trying to push down long-term interest rates by buying mortgage-backed and perhaps Treasury securities. With conventional monetary ammunition spent, fiscal policy has become more important.

In 2002 Mr Bernanke argued the government could ultimately always generate inflation by having the Fed finance large increases in government spending directly, by purchasing Treasury debt. Martin Barnes of the Bank Credit Analyst thinks this highly unlikely: “You’d have capital flight out of the dollar. The only way it works is if every country is doing it, or with capital controls.”

Fisher died in 1947, a year after Keynes, and remains in his shadow. Mr Dimand notes that Fisher never pulled the many strands of his thought together into a grand synthesis as Keynes did in “The General Theory of Employment, Interest and Money”. More important, Keynes’s advocacy of aggressive fiscal policy overcame the limitations of Fisher’s purely monetary remedies for the Depression.

Yet Fisher’s insights remain vital. They have filtered, perhaps unconsciously, into the thinking of today’s policymakers. On February 8th Lawrence Summers, Mr Obama’s principal economic adviser, called for the rapid passage of a fiscal stimulus “to contain what is a very damaging and potentially deflationary spiral.” His advice bridges Fisher and Keynes.

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Paul Kasriel: Great Depression, Just The Facts

Paul Kasriel is an excellent economist and saw the mess we are in coming.

In this article he debunks some of the myths about the depression and explains why the recovery could come sooner than people think.

This is worth taking the time to read.

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Paul Kasriel: Great Depression, Just The Facts
Paul Kasriel: Great Depression, Just The Facts

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Betting Against the Doomsday Scenario

One of the hottest topics among investors is the volatility in the market and how to play it. The Chicago Board Options Exchange volatility index, the VIX, is the most often discussed measure of volatility in the market. The VIX traded at its highest levels ever during the hard down leg of this recent bear market.

It is not well known, but much of this volatility was caused by monster sized position that were built into the market during the bull market from 2002-2007. Traders were betting against a rise in volatility with all kinds of swaps and derivatives plays--hence they were short volatility. When volatility started to go up they were forced to buy volatility to cover their short positions.  They then found out they were part of a "herd"--they  all had the same positions. The extreme volatility levels we saw in the October-November period were exacerbated by smart investors who understood they could take advantage of the situation by buying volatility in front of these traders-- as the traders were trying to  cover and exit their short positions. This explains, in part, the extremes we saw in the VIX.

The VIX indicator, which acts as a reflection of the expectation for market swings in the future stood at 42.91 on January 30. This is down from peaks around 80 during October and November.

The big question now: is volatility high or low and how to play it?

Betting Against the Doomsday Scenario

Posted By David Gaffen On January 30, 2009

Rob Curran reports:

If you scoff at pundits and journalists pontificating on the possibilities of a second Great Depression, Credit Suisse says there’s a way you can put your money where your mouth is.

Comparing the volatility implied by S&P 500 equity derivatives for the next ten years with other miserable economies, Credit Suisse strategist Edward Tom said the current scenario priced in is considerably worse than the “lost decade” of 1990s Japan. The current risk expectations on long-term equity derivatives line up with the realized volatility on the stock market during the “entire ten-year span following the Oct. 28th crash of 1929,” Mr. Tom says.

In other words, you could bet against long-term volatility and have a U.S. economy as bad as Japan’s for ten years, and still win the bet. That’s because volatility has been so high that expectations in turn are also very high, much higher than the norm. The Chicago Board Options Exchange volatility index, which reflects expectations for market swings in the coming month, is still trading at 42.91, which, excluding 2008, would be the highest expectations for swings in the S&P 500 since the depth of the tech bear market. Longer-term volatility — looking at futures contracts — remains even higher.

In the go-slow days of the 2002-2007 creeping bull market, one popular trade was to go short volatility. Traders bet against volatility using “variance swaps” or other derivatives , in the expectation that just about any increase in volatility was a short-term one, and that the market would remain quiet.

In the last several months, however, volatility has been off the charts. The realized volatility in the fourth quarter of 2008 was 64.9%, according to Credit Suisse. And so betting against long-term volatility need not even be a bet on a return to the staid trading of 2002 to 2007, but it’s just a way to bet against the doomsday scenario.

Credit Suisse recommends short-selling long-term volatility as part of a more nuanced hedging around stock positions. But some may be tempted to make an outright bet.

”The idea of shorting long-term vol is very compelling since it has basically never been this high, and quants keep getting excited about the fact that ‘the market can’t keep moving every day of the next 5 years as it has done in the last 5 months,’” said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund. “One problem: the assumption is that the USA is going to be the same country as we know it.”

That’s the doomsday scenario. If there is a second Great Depression, Mr. Di Mattia says, all bets are off. And many of the assumptions built into financial markets during the last fifty years could be swept away. Of course, in that case, investors will have a few more problems than a volatility bet that didn’t work out.

15 Great Stocks From the Great Depression

I ran across this interesting article. It includes the 50 best performing stocks from 1932 to 1954 by cumulative total return. Lately, I find myself thinking we are near one of the greatest investing opportunities of a lifetime. There is little doubt in my mind that once the market capitulates there will be some stocks you can buy, own them for twenty years, and make a future. I am also thinking hard about which international stocks will be big winners of the future. China?

I also want to remind people that the final big lows in the depression market were not made in 1929 but in 1932. The Dow did not regain its pre-crash level until 1954. Same story in the period from 1966-1982. Does this mean we are in for 20 years of sideways action in the market?

Can you make money after the final capitulation in a bear market? Check this out.

Electric Boat: Unsinkable Submarine Maker

Cumulative Total Return 1932 to 1954: 55,000% (Rank in Top 50: 1)
Where is it now? A unit of General Dynamics (GD)

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Read on and enjoy.

15 Great Stocks From the Great Depression