As we embark on this new calender year, I have taken some time to review and analyze data, new and old, before setting my 2009 market expectations. Upon further review, I am of the belief that the generational downward moves in the markets experienced in 2008 will not abate in the aggregate during 2009. My previous column, published on the Market Oracle and also picked up by Jack Myers day life, a media website in NYC, compared the DJIA in 1929 and today. As we all know, the Great Depression began in 1929, highlighted by massive stock losses. The DJIA performance of July 2008 to the present, is quite similar in chart performance.
Folks, even though we are in a distinctly different world today-far removed from the agricultural economy of 1929, there are similar stresses in our financial world of 2008 and 1929. First and foremost, credit contraction-the literal shutting down of credit by banks in 1929 caused the market meltdown of that era. When banks called in their markers in the stock market, stock holders were forced to sell, commencing a market collapse that dived 90% peak to trough. The similar instances of bank credit contraction and bank failures are too large to dismiss as mere coincidence.
Our Federal Reserve has promised virtual unlimited backing of virtually every credit instrument on the planet to save our economy from the ravages of credit contraction. The literal unlimited printing press of money has landed at our feet via the Fed, with guarantees of credit to all who have their hand out. The notion that our money supply can multiply to such heights is quite scary, as such actions would lead to massive inflation if not held tightly in check. In other words, for every dollar the Fed prints up to buy bad banks, bad mortgages, or bad car loans, they must find a way to retire a dollar presently in circulation to keep our money supply stable. I believe the Fed will attempt to accomplish this feat by implementing a staged program out in time so that major monetary inflows will be accompanied by retirement of previous monetary inflows to limit the inflationary effects of it’s initiatives. Although this notion has a conceptual ideal, I do not believe it can succeed based on faith alone. The Fed’s measures are unprecedented, and they themselves can not guarantee success. Monetary policy has, in my opinion, been the genesis of the economic calamity we face today, and as such, expanding such a faulty monetary policy cannot be the panacea to correct the ills that plague our financial system.
Our new President has embarked on an aggressive stimulus plan to energize our sagging economy. President Obama will attempt to stimulate our economy by providing three million infrastructure jobs that will return three million unemployed folks to work, and in theory, return three million people to the shopping malls and tax rolls. The glaring elephant in the room, if you will, is that President Obama plans on borrowing the money to implement this plan. The question I ask of you-if you were having financial difficulties, would you take out another loan and spend the proceeds on temporary, or consumable items to cure your finances? I don’t believe any prudent individual would implement such a personal stimulus plan. My point is, once the three million infrastructure employees have completed the roads and bridges and whatever else we happen to be fixing under the plan, what happens? These employees are temporary by nature, thus they will return to the rolls of the unemployed after their jobs are completed.
I’m not sure that’s really a plan I want to get deeper into debt signing on to.
As for the markets, I don’t believe they will ultimately sign on to such a plan. I believe the market will see this plan for it’s shortfalls and behave accordingly. We are losing 600,000 jobs per month, and the effects of such staggering job losses on spending will continue to erode an already faltering economy. Public companies will see further declines in profits as a result of the contracting economy, and their stock prices will continue to decline. Although 1929 was 80 years ago, 2008 may prove to be deja-vu, with 2009 replicating 1930. The similarities in economies are real between these two periods, thus the similarities in the DJIA performance. I believe 2009 will be the year we all start to personally feel the effects of this economic downturn, from a loved one losing his or her job to more bank failures limiting our access to funds.
I hope I’m wrong on this one, folks, but I don’t see any way out of the present economic circumstances that are eroding our way of life but one-take the medicine. When Washington and the Fed wake up and realize that a sharp depression allowing markets to adjust (it’s called capitalism), whereby the strong survive, thrive, and ultimately create wealth to hire the unemployed, will we see the end of this economic downturn. Government intervention has never in recorded history enabled an economy out of a downturn. Conversely, government intervention has always perpetuated and exasperated economic downturns. This time should be no different.
This year I will stay nimble, in cash, and await opportunity should it arise. I am out of the markets and will stay out until the charts deviate from their present course. Expect the DJIA to end the year just shy of 6000.
Best wishes for a safe, happy and healthy new year.