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How Bad Is It?
October 27, 2008
The financial press is full of comparisons between today’s market crash and the 1929 crash that led to the Great Depression. As the market performs its daily task of balancing fear and greed, it becomes increasingly apparent that fear predominates.
What does a depression look like? Economists have no firm benchmark to separate a recession from a depression. To provide some perspective, from 1929 through 1933, the United States saw real economic output fall by nearly a third and unemployment rise from 3% to 25%. Stock prices took a quarter century to regain their peak.
• Today’s stock market crash has wiped out all of the gains from the last bull market, losing more than $8 trillion since it hit an all-time high one year ago. The severity of this crash is causing comparisons to the crash that preceded the Great Depression. VIX, a measure of market fear, has risen to its highest level since it was introduced more than 15 years ago.
• U. S. industrial production has declined by the largest amount in 34 years and auto purchases drove off a cliff. Individual investors are abandoning everything that has the slightest hint of risk. Confidence has been shattered, even in money market funds, and the extent of the collapse may have scared individual investors away from stocks for a long time to come.
• U.S. consumer confidence has fallen more sharply this month than in any month since records began in 1978.
• In a combination of losses and redemptions, hedge funds saw their assets decline by $210 billion in the three months through the end of September, the biggest quarterly drop in their history.
• Wall Street’s so-called “smart money” – the hedge funds – have put a total of as much as $400 billion into cash equivalents.
• Merrill Lynch analysts report that the U.S. Bailout will have a profound inflationary impact on the dollar.
• About 75% of listed Japanese companies now trade below book value, including Toyota.
• Losses in Latin America stock markets are the worst in the region’s history.
• All financial assets – stocks, bonds and currencies – have come under tremendous pressure in Europe and in many of Europe’s post-Communist countries.
• Corporate bonds here in the United States have had their biggest declines in history and analysts are reporting that the corporate bond market is predicting the worst recession since the Great Depression.
• The number of large syndicated U.S. loans rated as problematic has nearly tripled in the past year.
• Stock trading has been halted repeatedly in Russia and in Brazil; emerging markets’ stocks, bonds and currencies have sunk in lockstep.
• When the Dow closed out its worst week in its 112-year history with its most volatile day ever, other markets such as the Japanese, German and British markets fell even further.
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