“No other financial crisis since the Great Depression has led to such widespread dislocation in financial markets, with such abrupt consequences for growth and unemployment, and such a rapid and sizable internationally coordinated public sector response,
the note [IMF report] said, highlighting the severity of the global situation.
One way to measure the depth of a recession is to compare the amount of excess capacity that was created and industrial capacity utilization of manufacturing it. Again, the graph shows how in both the 1981 and the resumption of economic expansion from 2002 to 2008 could not recover peaks before and entered the recession with significant excess capacity already existing, but the use of manufacturing capacity is now 65.7% against 68.6% at the bottom of 1982. Again this measure shows the depth of the recession to be greater than the combined 1980-82 recession even if the current recession is not over yet.
1980 had a rally and it crashed down to 1982 which was the bottom of the DOW. The problem with 1982 is compared to 89 82 was start of meaningful bull market but 2009 is the same thing as the 1929 massacre where the Dow dropped substantial amount and recovered 50% just like in 2009 and then it went into a C decline, A down, B recovery, C decline that ended up wiping out 89% of the DOW’s market cap. So, in 1982 the P?E multiple which is price of stock multiplied by earnings, was 8 times in 1982 and is 26 time sin 20009. Bull markets do not start with PE of 26. Dividend yields were 6 percent in 1982 and now in 2009 they were 2 percent.
You have to have a little knowledge of dividend yields: if you have $1 dividend and 10 dollar stock, you have 10 % dividend yield, but if it trades at 100 and you get 1 dividend, its only 1 percent. Bear market bottoms dividend yields will be in 6 percent range because the stocks are going be low and the dividends going be high. Right now we have dividend yields below 2 percent. The book value means if we take a company, sell everything, pay off creditors with cash, divide balance up to shareholders, and that gives you book value of company.
The bottom of a real recession; something that leads to meaningful long term rally; we’ll see stocks sell at a discount of their book value. For example, suppose we have a stock book value of a share that happens to be 5, the stock value will sell at 3 per share so its selling at a discount to book, and in bad times this will happen. To understand, in bad times, you may have a 400 stereo and want to sell for 200 in bad times at a discount to book value because you need money. The same things happens with companies but the only difference is the value is bigger. Right now, stocks are selling at 2 times book and selling a a premium (not smart).
Comparing the 1982 Bull Market with the 2009 Rally>
|Dividend Yields||6%||below 2%|
|Book Value||Discount to Book||2X Premium|
|Monetary Policy||Reducing money growth and inflation rates||Creating money growth and inflation rates|
|Fiscal Policy||Aimed at reducing nondefense spending||Aimed at accelerating nondefense spending|
|Deficits||Peaking and coming down relative to GDP||Surging to 10%+ relative to GDP|
|Global Trade Barriers||Were being torn down||Are being erected|
|Regulation||Deregulation in vogue||Re-regulation rising|
|US Dollar||Plaza Accord bull market||Mercantilist bear market|
|Household Credit||Balance sheets and participation rates expanding||Balance sheets now contracting|
|Tax rates||Income, capital gains and dividend taxes declining||Taxes Rising Now|
|Interest Rates||The US & Canada (and other parts of the world) saw double digit interest rates for prime lending and mortgages. Mortgage rates saw peak of 25% in Canada!||Interest rates are pathetically low and are being lowered in attempts to stimulate economic activity.|
Sources: Gluskin Sheff, S&P, Bloomberg
Interest rates were sky high to fight inflation
The government had raised interest rates in the 1970s to about 18% and Canada had 26 percent mortgages in Canada bonds were paying 19.5 % and the point was because of the raging inflation in the 1970s they raised interest rates to very high level to kill inflation. So, you can see right there they were tightening monetary policy like crazy. Today, we have the cheapest money since the great depression, and remember in the future that anytime you see interest rates drop to 2 to 1 percent, you know were in for a global depression. It only happens maybe 70 to 80 years, but it will happen again and again; generally at least once in someone’s lifetime.
Right now we have easy money that created a stock, bond, credit, real estate, credit card bubble which will end up in hyperinflation. A deflationary collapse will occur when they take this cheap money away and its going to get ugly. Fiscal policy in 1982 they were trying to slowdown government spending, but today in 2010 they are trying to spend on everything they can think of.
The US visible debt is 14 trillion, but with unfunded liabilities is something like 120 trillion in the US. Deficits were peaking in 1982, but today our deficits have gone absolutely insane relative to the GDP in the USA. By the way: Canada’s debt is also over 800 billion dollars and not man are aware of this and will likely rise past 1 trillion in the coming years before all this “stimulus spending” is over.
Trade barriers were being torn down
Global trade barriers were being torn down in 1982, but now they are being erected to protect their own country from foreign goods and services. Eventually this becomes global because when one sets up barriers, the other must respond in the same manner. In regards to regulations, 1982 we saw de-regulation being popular in the 1980s and 1990s, but now we are making more regulations because of all the loss of these regulations. This is not to say that regulation is a good thing, but it is often a knee-jerk reaction by governments that a market solution could more easily and efficiently solve, but the government often causes these regulatory problems and magically comes up with a solution, often with the result of more governmental control We could compare this to the real estate collapse that transpired in the 2007 collapse where the ball was started in the late 1970s all the way with Carter and to Clinton in 1998-1999 when several pieces of legislation were changed to make it appear the government was giving up control to the “free market” when in fact they were doing the exact opposite in the long term because they knew it would cause a collapse in the end.
US Dollar was king
The US dollar was in a bull market in 1982, but now it is essentially in a collapse mode within the next cycle. This year (2010) will see one last rally in the US dollar, while Gold will have one last decline, oil should go down one last time. Gold stocks will go down as well as silver and the Canadian dollar. Sometime during this year, the US dollar will peak and everything will reverse and then you’ll get into the super cycle part when the commodities rise substantially, while the US dollar collapses. This will cause it to lose reserve status officially sometime in the next decade because they keep printing money in futile attempts to stimulate an economy running on borrowed money.
Credit cards are serious problem
Household credit was in good shape in 1982 and the recession really forced people to deal with reality. The balance sheets of the economy are completely out of whack as they have the greatest debt of a national and consumers in history. These signals spell nothing but doom for the US because they are no longer competitive and their “cycle” is done.
Tax rates in many parts of the world are very low while the US has among the highest and will go higher because Obama is trying to institute health reform with its exponential need for higher taxes to fund it. Indeed, there are 308 million people in the US while 103 million pay tax, while the other 205 million do not pay tax. So, you have 103 who pay taxes while the rest of the 308 million are net recipients of tax money. It gets worse because only 10% of the 103 million pay 90% of the tax base. That means 10.3 million people support 298 million others and when these 10.3 million people realize the increase in taxation they will need to endure to support this ballooning population base, they will either vacate the US to lower tax areas or simply stop producing as much seeing no need because of tax punishment. All of these scenarios will likely lead to a collapse of the US government, but this is what it needs anyway to survive and restart.