Thursday, March 12, 2009

"Why It's Actually Different This Time"




Trying to find the bottom in the market feels like looking down the shaft of a 2000 ft deep well.

The spasms in the the charts belie the simple fact that many corporations have substantially more debt than income, and are likely not to make it in the long run. Placing money short or long has been, as the market guys say "like trying to catch a falling knife."

Writing for Seeking Alpha, Lee Eugene Munson and Patrick Kirts draw broad, yet correct, strokes of the state of the economy in "Why It's Actually Different This Time." Importantly, they explain why, and identify many important hurdles before us.

"A few things lead us to think we are in worse position in 2009 than in 1974 or 1932. For one, we've fallen deeper and faster than we did in even the Great Depression, let alone the mid-70s. It took years to reach the lows in the last two events, but only a year and a half ago, we were at 14000 on the DJIA.'

"We are also now in a very different geopolitical position; Western nations are net debtors, and Asian countries are now net creditors. After World War I, the US and Britain were the world's creditors. Now, savings have dried up, both for countries and a great number of individuals in the West--and the US is in the most debt of all. We cannot fund our own recovery. On a related note, it is clear that the Obama administration has a shrinking window of time to address our economic woes, but each new action seems to add to the pessimism and uncertainty."

".....the US faces a demographic problem it did not face during the Great Depression..... In the 1930’s there was no retirement or thundering herd of people living off portfolios and not working. We had no cost containment questions relating to healthcare or the pervasive need for all young people to go to college and indebt themselves....."

"During the past decade.....the largest destruction of resources in history occurred. The fall in the prices of the 'assets' whose 'value' rose so much during this period is the necessary precursor to the redirection of capital to more productive--that is, wealth-creating rather than wealth-destroying--efforts."

"Wall Street and Washington, however, seem to see the situation quite differently. The actual functioning of the market economy seems lost on them, even on most of the 'free-marketers'.... Thus, what must be stopped is the fall in asset prices. This type of thinking cannot produce recovery, because it dictates a response based on easy money and debt, the same things that created the problem."

"Using Depression era metrics, experts estimate actual unemployment at almost 15%. But it took until the end of 1931 to reach this point...."

"Only when the economy starts producing profits will a turnaround be possible, and this cannot happen until the losses that have piled up are fully realized.... Capitalism depends upon both private reward and private loss. Right now, that is not happening. Government bailout money is simply keeping unmarketable assets inflated to protect the balance sheets of the most politically connected in the finance industry."

"The Federal deficit is projected to be 12.26% of GDP in 2009, up almost four times from the 2008 proportion of 3.21%. This new debt could cause extensive problems for the dollar and dollar-denominated assets."
"The world derivatives market is now many times, perhaps as much as ten times, greater than world GDP. A serious disturbance here, where not only financial institutions but also many corporations mathematically manage their risks, could be catastrophic."

".....an objective appraisal of the larger economic facts almost requires a pessimistic outlook. Jim Rogers may be overstating things when he describes current US policy as 'ridiculous' and 'insane,' but we can't be sure he is wrong."



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