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January 20, 2009 The Audacity of Hope
- The total return for the period from 11/20/1998 to 11/20/2008 matches that of the period from late 1928 to 1938 (the Great Depression, World War II). By this observation, the stock market may have already discounted a 1929 –1933 type depression.
11/20/1998 – 11/20/2008 R.I.P.
The title of this memo, as investors, says it all! It is audacious to be hopeful, these days, for anything. However, this is exactly why we must begin to adjust our thinking.
While we can’t know what will happen we can at least observe. With that in mind, we’ll observe the period from 11/20/1998 to 11/20/2008. The total return for that period matches the period from late 1928 to 1938! An annual compound loss of (2.58) or a cumulative loss of 23%; dividends included. By this calculation and observation, the stock market may have already discounted a 1929 –1933 type depression.
It is hard, even in our media-hyped fear mongering modern world, to envision that future circumstances would produce a depression with a total earnings wipeout and unemployment soaring to 25%.
Compare the current financial crisis to the war years: 1938-1942
Keeping in mind that the stock market deals with the future and what might happen while the news deals with what has happened, let’s look at the war years 1938 to 1942.
From the time global war was visible in 1938 to the blackest days of 1942, when the risk of losing the war was the greatest, the U.S. stock market fell 60%. This compares to a 52% top to bottom decline 10/09/2007 to 11/20/2008.
Some facts:
- 430,000 American lives were lost in that war.
- Between 50 and 72 million civilians/combatants were killed in that war.
- From 1939 through 1942, Germany and Japan were winning the war, perhaps soon to occupy and control the Pacific Rim, Europe and the Americas, including the U.S.
- In Europe, only England and Russia were not occupied and London was being bombed nightly.
From the actual start of the war in the Fall of 1939 thorough the critical turning point in 1942, the U.S. stock market fell 44% compared to the recent 52% decline. Now, some perspective, does this imply the risk of life, fortune, freedom, future prosperity and well being is greater now than it was back then? I think not.
- Is there any real risk of being ruled by foreign despots?
- Is there now the real risk of total confiscation of personal assets and wealth?
- Are our very lives now at risk?
To say today’s stock market risk factors are the greatest since the depression is absurd.
As a model for the current crisis the great depression does not stand up to even a cursory examination.
Catastrophic policy mistakes following the 1929 stock market crash
Two catastrophic policy mistakes transformed a severe economic downturn following the 1929 stock market crash into a deflation depression:
- General adoption of aggressive trade protectionism – There are no significant pressures now
- Federal Reserve allowed both widespread bank failures and a severe contraction in money supply, exacerbated by the gold standard.
It is clear from the speed, scale and radicalism of the Fed’s ongoing response to the “credit crunch” that they intend to not repeat that mistake. Clearly, they have learned something; with a different set of consequences that we’ll cover in 2009.
Other differences between the current financial crisis and that of the 1930s
There are other crucial differences with the 1930’s. Most bank deposits are now federally insured. Government spending forms a much larger part of the economy and significant components of it automatically rise if the economy declines. These “automatic fiscal stabilizers” are much larger than they were then. Furthermore these factors are replicated across the global as fiscal stabilizers exist in every economy now and bank deposits are widely protected.
Looking beyond
So this leaves us, like the stock market, looking forward to 2009 and beyond, looking to the “audacity of hope” and what can surprise us.
- The new president and leadership from Washington
- So far, crisis responses have been monetary. For 2009 they will be fiscal; evidenced by the President elects plan to create 2.5 million jobs. This is been repeated around the world.
- A plan to end the Iraq war
- Much lower interest rates
- Much lower fuel prices
While 2009 will have news headlines almost too unbearable to read, as investors, I am hopeful we have much to be optimistic for.
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