Re: This is my Second Buy Recommendation
[quote author=“Eric Landstrom”]
Andy, you’re mistaken in your understanding of the paradox of thrift. The paradox says that as economies falter people save more and spend less and less until the slowing spending bases on a sustenance level relative to the culture at which time the economy can then grow. The paradox of thrift does not state the death spiral is endless as you seem to presume. All to say you’ve got a false assumption and that you should realize that in a year or two economists will complain that Americans are saving too much and spending too little unless we get a tax break or an incentive to spend money.
FWIW, stimulus don’t work because they are a redistribution of wealth. Sure the money gets spent but the people from whom the money was taken will over time spend less that the total sum of the stimulus net loss in total spending.
That wasn’t my comment on the paradox of thirft and certainly not my understanding of it. Notice, that I used the allusion of devil’s snag to describe how umployment and a slowdown in consumer spending should lead to further slowdown based on intuition. That comment, had nothing to do with my understand of the paradox of thirft. See my comment on the paradox which is in my response to you. The comment that you quote comes from my general backing of my recommendation and has to do with general comments regarding the economy at large, and the connection between economic recovery and the injection of liquidity.
But, on the issue of the paradox of thrift, I think the assumption of the paradox is faulty in and of itself. It presumes that Americans are predisposed to save. I disasgree. Americans have never been good savers and this is part of the reason why our recessions are so short lived. Even now, consumer spending is still fairing very well. While consumer confidence is in the tank, consumer spending is still doing well by any comparable historical standard.
END COMMENT TO ERIC LANDSTROM
NEW COMMENT TO THE BOARD AT LARGE
Before you start to consider whehter we are entering a second great depression, consider the following facts:
1. GDP (current dollars) declined exactly 45.6% in the four years between 1930 and 1933.
2. REAL GDP declined 26.5% in the four years between 1930 and 1933.
3. Here are the unemployment rates year:
1929 - 3.2%
1930 - 8.7%
1931 - 15.9%
1932 - 23.6%
1933 - 24.9%
4. Personal income, from those who still had their jobs, dropped 50% (FIFTY PERCENT - 50) during the four years between 1930 and 1933.
5. REAL GDP 1930 - 1933 (in billions)
1929 - $865.2 (no data available from BEA)
1930 - $790.7 (-9.42% yoy)
1931 - $739.9 (-6.42% yoy)
1932 - $643.7 (-13.00% yoy)
1933 - $635.5 (-1.27% yoy)
Real GDP declined (-)26.5% between 1929-1933
6. GDP Current Dollars 1930 - 1933 (in billions)
1929 - $103.6 (no data available from BEA)
1930 - $91.2 (-11.97% yoy)
1931 - $76.5 (-16.12% yoy)
1932 - $58.7 (-23.27% yoy)
1933 - $56.4 (-3.92% yoy)
Current Dollars GDP declined (-)45.6% between 1929-1933.
7. GDP Real Dollars 2004 - 2008 (in Billions)
2004 - $10,675.8 (3.64%)
2005 - $10,989.5 (2.94%)
2006 - $11,294.8 (2.78%)
2007 - $11,523.9 (2.03%)
2008 - $11,720.0 (1.70%)*
Real GDP has increased (+)9.78% bewteen 2004 and 2008. *Based on readings from Q3 data.
8. GDP Current Dollars 2004 - 2008 (in Billions)
2004 - $11,685.9 (6.62%)
2005 - $12,421.9 (6.30%)
2006 - $13,178.4 (6.10%)
2007 - $13,807.5 (4.77%)
2008 - $14,429.2 (4.50%)*
GDP Current Dollars increased (+)23.5% between 2004 and 2008. Based on Q3 data.
9. Unemployment rate at the end of each calander year between 2004 and 2008.
2004 - 5.40%
2005 - 4.90%
2006 - 4.50%
2007 - 5.00%
2008 - 6.40%
10. Personal income has yet to fall on the year. Personal income increased $24.5 billion in September in the midst of the financial crisis. Personal disposible income also increased $25.7 billion for the month of September. We’ve seldom seen personal income, personal disposable income and personal consumption expenditures fall in 2008 and when it does in any onre month, its usually quite minor and is followed with a rebound in the following month.
So compare the economic conditions between the great depression and the current environment. While historical data doesn’t mean shit, you could compare the most recent umployment data, personal income and expenditures data and GDP to the environment of the great depression to understand how much worse things would have to get in order for the U.S. to experience anything close to what happened in the depression.
So. Lets see what would have to happen for a Second Great Depression to occur. Personally, I think that even trying to compare our environment to the great depression severely minimizes or belittles the real tragety faced by those who actually experienced true economic hardship. The modern financial markets, the media, analysts and economists, are being “little bitches” as it were. Its like trying to compare 911 to the Holocaust. That being said, lets just take a look at how bad things would have to get to see a depression.
1. Personal income would have to be cut in half for those who are employed.
2. We’d have to see more than 15 million job losses to even begin to enter the employment situation seen heading into the depression.
3. Real GDP would have to decline $3.106 trillion dollars as opposed to the $100 billion decline that is expected for 2008 if Q4 GDP falls on the worst end of the spectrum in terms of the estimates.
4. Real GDP declined 9.42% YoY in the first year of the depression (1930). Real GDP would have to fall over $1.1 trillion in 2009 to see a similar start to this economic downturn. This is opposed to the $100 billion drop seen in the “2008 recession.” So, just to start this depression, we need to see economic activity fall 11 times what they did in 2008. Unemployment would have to skyrocket to 13% next year. Personal income and expenditures would need to drop some 10% by the end of 2009. Government spending would have to go negative as well despite all the stimulus packages and spending plans that Obama is anticipated to put in place.
Personally, I think its way too early to talk depression. We could start talking depression once GDP falls more than 6% on the year, once unemployment skyrockets above 10% and once personal income and expenditures start to see some major collapse. Saying that these things are going to happen means absolutely DICK! The data doesn’t support anything the markets, the media and economists are telling us. The Federal Reserve still expects growth in 2009 for fuck sake. And we’re talking depression? Please.
This is exactly why I stand beside my buy recommendation. Buy on all weakness. If the DJIA enters 6,000 and Apple goes to the low 70’s, buy with two fists. That’s my take on the issue. I’d rather bet against a depression than labor under the delusions presented by a stock market, media, and group of economists who have known to be wrong 77% of the time. I’ll bet against a $1.1 trillion decline in real GDP next year. And if I’m wrong, its priced into the markets already.
The DJIA being at 7,500 today is like the DJIA being at 6,000 in 2003. Remember, read GDP and personal expenditures increased dramatically (some 20%) in the years after 2003. That means the markets are more undervalued today at these levels than they were in the previous bear market. These companies, who are seeing 11 year lows, are more fundamentally sound today than they were in 2003. They also earned a lot more in net income meaning their valuations are more attractive.
When economic data starts to come in better than expected, which I expect to happen some time in 2009 as sentiment gets more and more unrealistically bearish, money will start to come off of the sidelines. Those who bought at these disasterous prices, will benefit the greatest. The greatest wealth creation is made when others are fearful.
bought any yet.
