The Great Depression Online

Great Depression Online Archive Issue:

The Most Dangerous Stock Market Ever

Great Depression Online
Long Beach, CA
September 04, 2009

Inside This Issue You Will Discover…

*** Silver Buckshot
*** Watching Paint Dry
*** The Most Dangerous Stock Market Ever
*** And More

Silver Buckshot

Yesterday, Vice President Joe Biden took his foot out of his mouth, licked his index finger, held it up to the wind, and concluded the $787 stimulus bill “is in fact working.”

“The recovery act is not a single silver bullet,” explained Biden.  “I think of it as silver buckshot.”

Perhaps Biden is right.  Perhaps the economy’s on the mend.  Just pick up the business section of any newspaper and you’ll find numerous accounts why this is so.

“Further Evidence Points to Recession Bottoming Out,” said an AP headline yesterday.  “Productivity and factory orders are up,” the story reports.

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Manufacturing’s up too.  The Institute for Supply Management’s manufacturing index, released earlier this week, rose to 52.9…anything above 50 indicates growth.

We’re not here to deny these accounts.  In fact, we hope they’re true.  We want economic growth just as much as the next guy.  Still, we’re suspicious of what we read and hear…and what comes out of the mouths of politicians of all stripes. 

We can’t quite comprehend how exactly, after a 25 year credit binge, the economy could’ve purged all its excesses in less than two years.  The arithmetic just doesn’t add up.

Yet even if the economy is bottoming out, what will recovery bring?  The answer, alas, may be painfully disappointing.

Watching Paint Dry

Bill Gross, PIMCO’s Bond King, and someone who knows what’s going on, believes recovery may not be what people expect.  Moreover, they’ll be surprised by what they get.

“Well, the surprise is,” explains Gross, “that there’s been a significant break in that growth pattern, because of delevering, deglobalization, and reregulation.”

“It’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years.  We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly …; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins … saving to the grave.”

Allan Meltzer, writing in the Wall Street Journal, seems to echo Gross…

“My best guess is that the recovery will be a bumpy ride along a low-growth path.  Recovery will be helped by lots of monetary stimulus and low inventories.  Some calendar quarters will see healthy growth, but trend growth will be low because housing will remain weak, the cash for clunkers program borrowed sales from the future, and the Obama administration’s economic program raises business costs and reduces profits.”

In other words, while growth may return, it won’t be the rip-roaring growth that has followed past recessions.  It’ll be slow, sluggish, and practically nonexistent…like watching paint dry.

The Most Dangerous Stock Market Ever

The stock market rally may have finally run out of steam.  Even with yesterday’s 0.9 percent increase, the S&P500’s down nearly 3-percent over the last week.

Readers of the GDO know we’ve maintained all along…that this will go down as the all time suckers rally.

Of course we don’t know what stocks will do any more than the next guy.  But we have our hunches, guesses, and, where available, we have historical precedent for guidance.

When looking back at the S&P500, so as to look forward, we are horrified by what we see.  Our eyes bug out and our jaw drops agape at the hazard before us.  For right here, in front of our eyes, is the most dangerous stock market the nation has ever seen. 

To most, the S&P500s perilous perch is obscured from view by what appears to be an index well below its all time high.  But if you consider its price, the stock market is more expensive than it has ever been by a factor of three.

Here’s what we mean…

“Generally speaking,” says Barry Ritholtz, “when the PE ratio is high, stocks are considered to be expensive.  When the PE ratio is low, stocks are considered to be inexpensive.  From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s and trough somewhere around seven.

“The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s).”  [Editors Note: Even at the height of the dot-com boom the PE ratio was little over 40.]

“As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high.  Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129.”

This means stocks are three times more expensive than they were right before the bubble burst in early 2000.

If that doesn’t make the hair crawl up on the back of your neck…you’re either short the market or a total psychopath.


M.N. Gordon
Great Depression Online

P.S.  Our friends over at Elliott Wave International have announced they will keep Bob Prechter’s recent 10-page market letter free until September 9.  If you missed earlier announcements, now is the time to download it free.  In this issue, Bob gives a warning he’s never had to include in 30 years of publishing – namely, that the doors to financial safety are closing all over the world.  There are but a few opportunities left and little time to take them.  Even as this happens, the terrible irony is that so many people believe the conventional wisdom, which claims “the worst is over.”  Act now before this 10-page issue returns to full retail price.  Last Chance.

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