Monday, March 2, 2009

The Dow

I just looked it up. Did you know that the Dow Jones Average did not get above 3,000 until 1991, and that it didn't reach its current level of just above 7,000 (as of yesterday) until 1997. It peaked at 14,164 in October, 2007. Now it's declined 49% in 17 months.

A similar crash happened in 1974-75, when it fell from 1,051 to 571, a decline of 46%. In 1938, the Dow went from 194 to 99, a decline of 49%. In the Big One of 1929-32, the Dow went from 381 to 41, a decline of 89%.

That means that if our economy is the worst at least since 1982, and possibly as bad as the the Great Depression, then we've got a long way to fall, probably between the 49% of yesterday and the 89% of 1932.

Let's say that it fell back to its 1950 level, what would that be in inflation-adjusted dollars? I kid you not, it's about 1,700. That's hard to conceive, obviously. But with this economy, to badly paraphrase the Lord, 'nothing is impossible.'

Bill Bonner, one the better economic contrarians, is betting on below 5,000 as the bottom (I think another place he said he wouldn't be surprised with 3,000). He writes at the Daily Reckoning:

And here’s a good question for you, dear reader: If the smartest investor in the world can’t make money in this market, how do you expect to? If we were you, we wouldn’t even try. You see, this is not a recession...and it’s not a buying opportunity. It’s a depression.

And at this stage in a depression, the best thing to do is to sell stocks, not buy them. Because they have further to fall...and because they could take a long, long time to recover.

We’ve explained the difference between a recession and a depression before. But we’ll do it again. A recession is a pause in an otherwise healthy, growing economy. A depression is when the economy drops dead. And when it drops dead, the assets that people owned – stocks, bonds, houses, derivatives, debt – are called into question. What are they worth, now that the economy that created them no longer exists? That’s the big question. The U.S. economy has been expanding for the last 60 years – largely by increasing consumer spending and debt. Now, neither consumer spending nor debt is increasing. In the last 6 months, consumers have suddenly reversed their free-spending ways. Borrowers and lenders have repented too. But if it is no longer an economy that grows by increasing consumption and does it grow at all? And what about all those businesses that are set up to provide products and services to the consumer economy? A nd what about all the debts and obligations that the consumer economy produced; what are they worth?

That’s what everyone wants to know.

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