Where The Heck Is The Bottom?Ronald R Cooke A Logical Conclusion One can make a case that sometime in 2010 our stock markets will "bottom out". In this scenario, the DOW will decline below 5700 and the NASDAQ will fall under 430, after 33 to 35 months of highly volatile trading. How did I reach this conclusion? Read on. According to this morning's [Thu 16th?] stock market news on CNN, most economists believe this will be a relatively short and shallow recession. This conclusion is apparently based on an extrapolation of past economic performance in comparison with currently available data. To construct this scenario, one merely needs to look at the "usual" market direction indicators. Corporate profits, GNP, auto sales, the Purchasing Manager's Index, payroll employment, personal income, public consumption, retail and durable goods sales, housing starts, and the value of the dollar are all negative. Unemployment is up, along with the rate of inflation. By themselves, the data underlying these factors would indicate a mild to moderate recession lasting into 2010. If you watch CNN or FOX, however, three factors could derail this conclusion. Economists appear to be unsure how to measure the impact of the mortgage crisis, the rash of financial institution failures, or the sudden decline of available credit. No one seems to know how to include these three "challenges" in the recession calculation. No matter. If we ignore them - goes the thinking - perhaps these factors will not have a long term impact on the direction of the stock market. But. I do protest this shallow and incomplete analysis. This stock market is unlike anything we have experienced in our lifetime. Extreme volatility has thus far been the norm. The markets have been in a virtual free-fall since mid- September. Last Friday the DOW closed below 8500 (down 40% in 12 months) and the NASDAQ came in under 1700 (down 42% in slightly less time). This week the DOW rocketed upward by 1300 points in less than 9 hours of trading, and then promptly lost almost 1200 points in the next 8 hours. Past performance has never been anything like this. Throw out the rule book. We are in new territory. So. Where is the bottom? Constructing An Alternative Scenario I was watching Neil Cavuto on Fox News last weekend. Like many media personalities, he just doesn't comprehend the gravity of our precarious economic environment. For a business commentator, failure to understand the economic fundamentals is inexcusable. Let us see if we can help him out. Neil: This isn't your usual economic contraction. If we want to construct a high probability scenario, we must develop a way to include all the probable economic factors in our recession equation, and then characterize the interaction of these factors with our culture. How will people, including governments, react to this crisis? And how will this reaction shape the probable outcome? Let's summarize the "challenges" ahead....
I could add three more critical factors to this list. But I will not. They take a lot of explanation and I am running out of space. Suffice it to say, these factors make an ugly contraction highly likely. A Look At History Do we have a historical model that gives us a clue as to what lies ahead? Yes. The panic of 1873. And I do mean panic. There was a v shaped stock market contraction. It took several years to reconstruct an over-extended banking system. Bankruptcies skyrocketed. Corporate profits were miserable. Real estate values fell. Credit dried up. Wages were cut. By 1876, unemployment had risen to 14%, sending tens of thousands into the streets. There were bloody riots. Employment frustration and lousy policy led to labor conflict. Crime increased. The panic of 1873 was accompanied by industrial consolidation, politically motivated violence, and a call for institutional nationalization. Welfare systems were overwhelmed. Millions took solace in the practice of fundamental religious beliefs. Aliens and Jews became scapegoats for a failed economy. Political systems were destabilized. Yes, Neil. This is what happens in a depression. Conclusion It is hard to construct an optimistic scenario. It is far more likely this crisis will not be resolved until 2012 - or later. Look for economic destitution accompanied by political conflict. Given the acceleration of this contraction, and the challenges listed above, a DOW under 5700 and a NASDAQ below 430 are perfectly feasible. These economic events will exacerbate the already deep philosophical divide between "Red" and "Blue" Americans. Debilitating cultural turmoil and bitter political confrontation are in the wind. No matter who wins the American elections, the next four years are going to be brutal. But don't believe me. I could be wrong. Do your own homework. And pray I am not being overly optimistic when I say - "We can get through this." Ron Ronald R. Cooke About The Cultural Economist - Ron graduated with an A.B. in Economics from Bates College. He has been an auditor, line manager, computer salesman, marketing manager, product planning manager, and V. P. of Marketing. A management consultant by inclination, Ron has a comprehensive background in business development, product planning, market research, and industry analysis. He has authored multiple market research reports, contracts, business plans and operations research studies for corporate clients in 12 countries. Prior experience includes technology assessment, the evaluation of corporate financial performance, and the negotiation of corporate acquisitions. Ron is a former instructor with UCSC, and developed the curriculum for a science based approach to decision analysis. He has pursued the study of Cultural Economics since 1969, and has authored "Oil, Jihad and Destiny," [Amazon,] a thought-provoking research report on oil depletion (Opportunity Analysis - 2004, and revised in 2007), and "Detensive Nation," a book that redefines the role of government in an Energy Detensive EcoSystem (The Cultural Economist - 2007). |