Hi Alan. I have noticed that SI is swarming with people who find a large number of similarities between today and 1929. The greatest difference is of course that in 1929 a large percentage of stocks were purchased on margin, while today most are held outright by mutual funds. Thus any moves that took place in 1929 would be much greater than those today.
In 1929 the market fell a bit over 50%, then slowly recovered most of that loss through the following Spring before beginning a long grind down that lasted two more years. In 1929, as now, there were problems elsewhere in the world, but business in America was sound, and even growing, and there wasn't a recession in sight. But problems in foreign markets increased, trade barriers were erected, international trade ground to a halt, and world-wide standards of living spiraled down until the world was in depression.
Given the fact that the market is much less margined today than in 1929, a 20-30% fall followed by a rally regaining about half of that would roughly parallel what happened in 1929. If the world markets continue to crumble, it will eventually affect us. Farmers in the midwest are already hurting badly due to low commodity prices, and thus I see the potential for regional problems. North Dakota wheat farmers are in the worst condition in years. In Nebraska, farmers are holding on to corn where they can to hope for better prices next year, and people raising cattle and pigs are taking a beating as well. As far as foreign markets, SE Asia, Japn, South America, Russia, Africa, and Eastern Europe have so far been affected, and their stock markets are all down significantly YTD. This leave the US and Europe as healthy.
It is possible I suppose that we can escape this without a recession, but the more problems that occur overseas, the more it will affect us. I am optimistic that worldwide few countries will act to restrain free trade, and thus am not anticipating a replay of 1929, but I do think a recession is coming. If a recession comes, and companies see declining earnings, then I expect to see declining PE ratios as well, and a decline in stock prices, but I do not see this as catastrophic. I have seen projections of the dow going to 1000, but I don't think this is realistic, I doubt we will go under 6500. Here is a projection of 5000: forex.co.il
As for interest rates, I am sure you will not see a decrease in rates until the Dow falls below a level that Greenspan considers reasonable. I think the Dow was at about 7000 when he labeled it as "irrational exuberance", so I am pretty sure that a fall to below 7000 would not be viewed as alarming. I think that he will not act until the Dow gets to the 6500 range, or so. I also don't think he will raise rates, rather I see the continuation of the status quo.
Carl
|
