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Today's Market WrapUp 01.20.2009 Mon Tue Wed Thu Fri Barbera Archive The Obama Administration It has been a long time since a US President took office under such extreme economic conditions. In the last 100 years, we have seen FDR take office amid the Great Depression, Gerald Ford take office in the wake of Watergate, and Ronald Reagan take office in the midst of a severe recession and energy crisis. On this occasion, there can be no doubt that it is refreshing to have such an articulate, and well spoken intellect taking over the helm of the US government at a time when so many major decisions are in the offing. In contemplating the historic events of today, I thought I would take a little retrospective at the last 100 years of US presidents during the time for which there have been actively traded financial markets. Prior to 1885, it is hard to gauge the economic/financial conditions under which a new president was inaugurated as the stock market did not exist. In my view, President Barack Obama is facing arguably the worst set of circumstances ever seen, ever confronted by a new US President or, at the very least, the second worst when it comes to the state of the nation and financial markets in the post industrial revolution era. Strangely enough, the only other President who took office under the same kind of miserable circumstances was Gerald Ford in early 1974. Now we know that statement is a bit controversial right off the bat, but bear with me for a moment while I make the case. A number of you have probably been watching the media today and have seen the Obama and FDR comparisons, which have been airing quite regularly these last few weeks. In many respects there are clearly valid comparisons to be made. Both men had to cope with extremely bad economic circumstances upon taking office, and both men employed huge Keynesian budget deficit spending in order to stimulate the economy out of contraction and put people back to work. Obama’s Presidency is already shaping up as a kind of “New Deal – Part II.” Dwelling on the comparison a bit further, it is true that when FDR was inaugurated for the first time on March 4th, 1933, the country was still mired in the Great Depression. At that time, virtually 25% of the workforce was unemployed, with Industrial Production down by more then 50% since the peak in 1929. On his inauguration day, two million people in the US were homeless and over 9,000 banks had failed between 1929 and 1933. During that time, $140 billion dollars disappeared as a result of the bank failures or roughly 145% of a single year's GDP.
Yet, while the problems that Roosevelt inherited were arguably more extreme than today’s, it is important to point out that on at least some level, the problems were already beginning to abate when he took office. For example, take a close look at the chart of the DJIA for that time period (see below). The absolute bottom was seen at a reading just over 40 on the Dow in July of 1932, as the US was forced to close its banking system in the infamous ‘bank holiday.’ After that, the stock market recovered sharply off the lows, and then made a pull back and higher low in early 1933. The vertical dashed line to the right side of the chart is drawn in on FDR’s first inauguration date. Notice there was a strong rally into the inauguration, which was then partially reversed, but which in the weeks thereafter gave rise to a strong advance which saw the DJIA lifting well off its prior lows. Part of this was FDR’s initial moves to devalue the Dollar and revalue Gold which re-monetized the financial system. Nevertheless, I'll point out that by early 1933, the DJIA had already broke out above its primary bear market down trend lines which were the series of three lower highs seen in the course of 1931 to 1932. Thus, the primary bear market had already been showing at least some signs of dissipating even as FDR took office. Put another way, FDR’s timing was nearly perfect and while there is no doubt that he was a great leader, it didn’t hurt that the timing of ‘when’ he took office coincided nearly perfectly with a nascent improvement in the state of affairs. While the depression was far from over, at least on a ‘survivability’ rating, whether the ‘system’ would survive was by early 1934 no longer a major question.
In the years after the Great Depression, and in particular after World War II, the US hit its stride with a strong economy powering a huge secular growth phase from 1942 to 1966. In the early Kennedy years, the US ran into major difficulties about a year after President Kennedy was elected with the Cuban Missile crisis. Markets crashed and the economy pulled back, but so much of the US economy was moving strongly forward that even during the depths of the missile crisis, the US economy was never in anything like the kind of dire straits seen today. Not until the mid and late 1970’s with the dual Arab Oil embargos, the Watergate fiasco, and the rise of runaway inflation did a President face truly difficult economic conditions. In the case of Ronald Reagan, who came into office on January 20th, 1981 after a terrible economy in the Carter years, conditions in the broad economy were once again very difficult. In this case, a double-dip stagflationary recession was unfolding with the second truly deep downturn confronting Reagan. However, like FDR, the first contraction seen in early 1980 had already been seen, with many of the worst inflation episodes taking place in late 1979 and early 1980. The price of Gold had already turned down well off the highs by January 1980 and even though the Fed was in aggressive tightening mode (via Paul Volcker) the situation had a certain clarity underpinning it as the curative policy prescription of ‘strangling inflation’ with high real rates was understood as the correct path to stability. Thus, while Reagan inherited a horrible economy, like FDR, in some ways the worst of the downturn had actually preceded him including the extreme lows in consumer confidence. The previous chart (above) shows the behavior of the stock market before and after Reagan’s inauguration with the dashed vertical line representing his inauguration date. Notice that the stock market never exceeded the March-April 1980 lows (on the lower left side of the chart), despite the fact that the recession, which accompanied the bear market on the right side of the chart was deeper and more protracted.
While both Roosevelt and Reagan confronted dire circumstances, looking back, it could be argued that the President who actually inherited the biggest mess was President Gerald Ford, who replaced a resigned President Nixon in August 1974. Again, the chart above shows the point where President Ford took office and we see that within days of his inauguration, the DJIA began a relentless multi-month plunge. Until the FDR or Reagan instances, here we see a stock market that continued to move aggressively lower, at the time a veritable bottomless pit, with the price structure characterized by a long series of lower highs and lower lows both preceding and following the time when Ford took office. In this regard, with confidence in the political system a shambles and at record lows, Oil prices shooting sky high, and the stock market recording months and months of new lower lows, the Ford administration confronted a situation where the downturn was still “a work in progress” with an unknown end. It is, in this regard, of a contraction still gathering full force that the new Obama Administration finds itself today.
In the case of the stock market, like the 1974 market, prices (see chart above) are holding just barely above prior lows and reside below a long series of accelerating declining tops lines. Unfortunately, I would actually argue that of all three prior instances, the Great Depression, 1980-1982, and 1973-1974, the current situation is probably the most untenable in that so much remains to be seen. To begin with, like the Great Depression a deflationary de-leveraging process has been at work and all conventional economic and monetary levers have been pulled, thus far to no avail. Monetary policy has now entered the no mans land of the “ZIRP” (zero interest rate policy) and “quantitative easing,” neither one of which may have much effect, if derivative inspired losses continue to mount. Judging by the continued death plunge taking place on a daily basis in the major bank shares, it seems that there is a great deal still very wrong with the macro-economic picture. One could argue that at least in Roosevelt’s day, some of the deeply rooted financial problems were a bit more in plain view -- ‘less opaque’ – than what we have today. In the 1930’s, while excess leverage also represented a huge blight on the financial landscape, unraveling the scope of the problems was not nearly as impossible as the morass we see today which centers on OTC derivatives. To this end, the Obama Administration has its work cut out for it to an unprecedented degree. In my view, it was wise for the newly inaugurated president to set the bar very low in his inauguration speech this morning. Anything else would invite potential criticism 6 months, or 12 months down the line when or if these problems continue to prevail. Like crowds, markets can be extremely fickle and this market seems intent on heading a lot lower. Despite the optimism and hope for positive change which accompanied this morning's inauguration, the S&P barely took note pressing down relentlessly throughout the day. Driving the negative mood on Wall Street was once again, trouble in the financial sector, with Barclays Bank (BCS) down over 40%, PNC Group down over 30%, BAC down 19%, JP Morgan down 14%, Citicorp down 14%, with huge losses hitting the shares of Suntrust (STI), Wells Fargo (WFC), Goldman Sachs (GS), and Morgan Stanley (MS). In fact, given the massive collapse underway in the financial sector it is amazing that the stock market ended the day down only -336 points on the Dow. The table below shows the Year-to-Date percentage declines for some of the largest institutions in the US including the so-called Fortress Four Banks, Citi, BofA, JPM, and Wells.
Pretty unnerving to see this kind of additional collapse especially on the heals of huge losses the prior year. Against this backdrop, it is clear that the Obama stimulus may be ‘too small’ to stem the mounting deflationary tide, and that the Obama Administration could be in the unenviable position of having to try swimming upstream against a speeding tsunami. If the markets are coming to the conclusion that events are spiraling beyond anyone’s control, then the S&P and the DJIA are heading for a fresh round of bear market lows and could quickly collapse to levels not seen in many years. For the time being, the downtrend lines are in place on all of the major averages, the financials are once again leading the way, and Grandfather Bear seems to be once again firmly behind the wheel. On the economic front much is riding, or was riding, on the ability of the major averages to hold above the November 2008 lows. A decisive break down below those lows in my view can only signal a deepening economic contraction moving from severe recession to depression. At this point the odds of new lows in the stock market are mounting by the day and with it, the odds that a massive unwinding will continue to befall the broad economic landscape. In the chart below, I show my GST Primary Trend gauge for the broad economy of the US which includes 12 leading gauges of economic activity including Consumer Confidence, ISM and Industrial Production. Note that this gauge has now broken down for a long term rising trend channel and is in a strongly down trending environment.
To illustrate the acceleration or deceleration in any economic trend, I take the Primary Trend gauge and plot the difference between the indicator and its 8 month moving average. That differential is shown in the histogram plotted in the chart above. I then plot another moving average on the oscillator as an early warning gauge for potential trend changes. At the moment the histogram is making new, multi year lows, and is below the declining moving average. The 1980-81 recession is shown at the far left, with the 1990 recession and the 2001 Internet Bust recession in the middle and right side of the chart. This contraction is moving down at a pace rarely seen and in my view, based on the early going in 2009, seems to be pointing at a developing ‘worst case’ outcome – a falling knife, complete with building systemic threats in the global financial system. As can be seen on the next chart, I rebase the current bear market to those seen in the US in 1930 to 1933, and in Japan between 1990 and 1995. Believe it or not, so far this bear market has actually had a weaker profile with a lesser ability to sustain rallies and a steeper down angle slope that rivals or exceeds either of these prior events. The Bottom Line: The US stock market is on track to signal a building depression, and right now, there increasingly seems to be very little anyone can do to arrest this trend in motion. Of all the outcomes that were possible for the first few days of 2009, the outcomes seen thus far project an awful trend still ahead, possibly far worse than most of us would have imagined and for that, there is good cause to be truly discouraged as the longer the contraction lasts, the more lives will be affected. On days like today with markets unraveling by the minute, one looks for signs of hope and at least on that score, the new President, articulate and intelligent, is a shining beacon for one and all. We wish him Godspeed.
Above: the current bear market using S&P 500 (bold line) versus the 1930 to 1933 decline. At the close, the DJIA ended down 336.27 index points or 4.06% to close at 7,944.95, while the S&P 500 ended down 44.86 points or 5.28% to finish at 805.26. The NASDAQ also tumbled sharply with high beta technology stocks crumbling by 5.61% with the NASDAQ Composite ending down 85.73 index points to finish at 1443.60. The 10 Year Bond yield ended at 2.35% up .05 basis points. That’s all for now, Frank Barbera Copyright © 2009 All rights reserved. CONTACT
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