Comparing Past Market Crashes

Since the stock market is all over the news again today, I thought it would be interesting to look at some past stock crashes and see how the current one compares.

In the chart below I have graphed the crashes of 1929, 1973, 1987, and 2001 alongside the current fall, with the peak points aligned near the left. Each crash is scaled on the y-axis to show the percent of the peak Dow Jones price.

Dow Jones Crashes
Click to enlarge

Yesterday’s close was 380 days after the recent 2007 peak in the Dow. Here is the total drop 380 days after peak for each crash above:

1929: 38.6%
1973: 18.3%
1987: 24.2%
2001: 13.6%
2007: 38.6%

Will the current crash play out over the next two years more like 1987 or 1929?

Update: Updated the chart to reflect today’s close. The Dow has now fallen further in the current crash (40.8%) than it did in the same length of time from the peak in 1929 (39.9%).


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

77 comments:

  1. 1
    Charles Dean says:

    That’s a great chart. Although with what’s going on today, you maybe should’ve waited until NYSE closed today, since we may end up down another 500.

  2. 2
    The Tim says:

    I may post an update after the close.

  3. 3
    buyStocks says:

    Great graph. I think the take home point here is they are all drastically different. So my guess is that it will not be like any of the above. Just looking at the 1929 is pretty painful, i’m guessing after all those temporary spikes everybody called a bottom, bought, and then it fell again and so on and so on.

  4. 4
    Sniglet says:

    It may seem inexplicable, but the swiftest rallies have always occured in the midst of massive bear markets. 1929 through 1932 saw more than HALF of the top 20 single day rallies to date. The bear market of 2001/2002 saw several record breaking rallies as well. Recently, we’ve had one day wonders that brought the Dow up 1000 points.

    If anything, dramatic rallies are flashing sell signals. The rallies that last are ones that have a slow and laborious climb.

  5. 5

    […] Seattle Bubble has a simple chart showing a few Dow Jones crashes overlayed on the same chart. […]

  6. 6
    rose-colored-coolaid says:

    Great chart, but since ours is still declining and 1987 was already on a permanent uptrend, it seems like a better question to ask if our decline is more likely to follow 1929 or 1973.

  7. 7
    Charles Dean says:

    Apparently Tim is entertaining, but not very useful.

  8. 8
    harryberlin says:

    Many are predicting a Q2ish recovery, though 3 of the 4 previous crashes took much longer.

  9. 9
    casey1167 says:

    I am just glad Tim has a good looking dog, and we are not all hamsters or something……

    My suggestion woudl be to throw in the NIKKEI 225 from 1990 – 2000… that is probably a good comparison.

  10. 10
    David McManus says:

    I’m so glad the bottom was called a couple of weeks ago. Good advice.

  11. 11
    mukoh says:

    Me thinks 1973 looks more like a close scenario. Who knows can be 1929. Anyways Tim great chart

  12. 12
    Thomas B. says:

    I think it looks like the 2001 recession because blue looks like purple if you squint.

  13. 13
    Slumlord says:

    If the cause of the current decline was falling home prices that led to destabilizing of mortgage-backed debt and home prices are still falling, what does this portend for the future? I expect this implies a second great depression. Worse yet, the government is busy vaporizing our tax dollars in bailouts for the financial sector while doing very little to stimulate the productive parts of our economy.

    This weekend would be good time to mix some fall leaves into the soil of your new vegetable garden, you will need it more than you know.

  14. 14
    anony says:

    Dang it Tim,

    Why do you have to be such a buzzkill all the time.

    I’m going back to getting all my economic news from the NAR. They make me feel warm and fuzzy.

  15. 15
    Lurker says:

    Fantastic graph. I’ve always found the 18 month offset price graph to be a real eye opener.

  16. 16
    David McManus says:

    Read the comments here.

    It’s downright scary how right some of us were.

  17. 17
    vxxcvxxc says:

    This recovery is going to take decades folks! Housing iprices n seattle will be cut in half. So don’t put down $550k just yet..let it unravel and you can pick it up for $250k if you have cash left! People are going to leave this expensive area in major numbers.

  18. 18
    Scotsman says:

    If one focuses on the structural similarities leading into the crashes, as well as the government’s response, then 1929 is the clear winner. Both 1929 and our current situation were precipitated by credit and real estate bubbles, and both crashes were met by massive government intervention which distorted market efforts to clean out the system and move forward.

    While I enjoy exploring comparisons between today’s events and the past as much as anyone, it’s important to start every analysis on a clean sheet of paper. Today’s economy is different, and those differences need to be incorporated into our analysis. When an economy based on debt fueled personal consumption, insurance, and real estate collapses, it’s premature to call a bottom until we see stability in those sectors, and perhaps even some signs of recovery. That’s not happening. So the only honest conclusion is that we’re still headed down, and 1929 is the best prior model of how that might play out.

  19. 19
    Scotsman says:

    In a side note, National City Corp., NCC, the first bank in the U.S. to offer mortgages to the public, went under today. It’s Friday- let’s all lift a glass to the end of the bank that literally started it all.

    http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/10-24-2008/0004910969&EDATE=

  20. 20
    alex says:

    interesting that it didn’t really look like a crash until last month…. seemed like your docile, tame bear market

  21. 21
    SeattleMoose says:

    It will play out closer to 1929. I just hope that in the process America get its much needed enema to wash away:

    1) Corruption in financial system (yep, letting business regulate itself has been such a HUGE success….)
    2) Our hypocritical “free market” where profits are privatized and risk/loss socialized (Bailout, Son of Bailout, Grandson of Bailout, ad nauseum…)
    3) American’s misbegotten “entitlement” mentality (Joe six pack goes back to living in a van down by the river)
    4) Rampant consumerism and living beyond one’s own financial reality

    We are only in the 3rd inning and have a long way yet to fall…..

  22. 22

    THIS IS A FUN GRAPH TIM, CONSIDERING THE GRIMNESS OF THE TOPIC

    I predict different than the 70s and the 30s…..why you ask?

    Although the Great Depression seems to have stock crash numbers that line up closer to now than the 70s [especially with another 30% drop Roubini predicts], we’re really in uncharted waters. The 30s had the dust bowl reducing food production, albeit today we have a food production shortage [we import food now] due to uncontrolled growth in America. This overgrowth has added wage constriction and foreclosure rates never seen prior to the Great Depression starting, so our plate is uniquely full trying to plan our way out and in many ways its worse now than then, especially the 12 Trillion federal deficit coupled with almost a complete lack of a domestic industrial base. In many ways there’s no comparison.

    How will we get out of this unchartered mess today? We need REAL change, not bailouts to try to keep the existing paper shuffling service economy going with continued deficits.

    Where will we turn for help in America? I see the American technical workforce developing an industrial base again, as our only way out……we have no choice now.

  23. 23
    Brian says:

    Scotsman-

    There’s a huge difference in the government intervention this time around compared to the great depression. The book 1929, and books by Milton Friedman make that pretty clear. The 1929 crash was a market failure (or caused by the markets). The ensuing chaos was a goverment failure in that its economic policies ended up making things worse. Back then people didn’t know how inflation worked, and thought that price controls would solve problems, among several other ridiculous policies. Goverment can control inflation and deflation fairly well. During a depression they need to inflate (lower rates like they’re doing now). The gov’t actions in 1930s were deflationary causing there to be an even tighter money supply.

    Our current economic policies may seem a bit like socialism, but you will note that it was FDR’s socialist-like policies that got us out of the depression.

    Our current mess is much more sophisticated, but we know a lot more. It’s hard to say where we’ll end up, but I’d put my money on 1973.

  24. 24
    Markor says:

    I liked Greenspan’s mea culpa. He’s a proponent of Ayn Rand and her objectivism. I thought her ideas in Atlas Shrugged are ridiculous and depressing. Now we get rock-solid confirmation that they are dead wrong.

    What I most hope comes out of this fiasco is that Republicans never ever again grace the White House or have a majority in Congress. I’d like to see their voters be shunned in society too. (Not entirely their fault, but mostly, for putting criminals in power for 8 years, and they deserve a good shunning for other things too, like warring for cheaper gas prices.)

  25. 25
    pfft says:

    what you should bring out of this is that stocks are still not cheap.

    what you should also remember is that comparisons to the Great Depression are overrated. everyone wants to use the GD as a way point. it’s just one of many points in history and may be wrongly seared in our memory as a reference for what may happen. there are plenty of other panics and depressions in the last 200 years and each has it’s own characteristics. if you thought every panic and recession since 1929 was going to be the next great depression you’ve been wrong. each boom and bust are different. nobody thought the inflationary period of the 70s was possible. some may think that we’ll bounce of the bottom like in the mid-70s and then by say 2015 be flat since 2000. who knows? maybe the Dow is at 30,000 but inflation reigns instead of a repeat of the 70s where the market is flat for more than a decade.

  26. 26
    Sniglet says:

    During a depression they need to inflate (lower rates like they’re doing now). The gov’t actions in 1930s were deflationary causing there to be an even tighter money supply.

    Actually, some economists believe the Fed (and US govenrment) went all out in trying to increase the money supply in the depression, but that the money simply didn’t trickle down to the broader economy. Sounds familiar…

    Rothbard criticizes Milton Friedman’s assertion that the central bank failed to inflate the supply of money. Rothbard asserts that the Federal Reserve bought $1.1 billion of government securities from February to July 1932, raising its total holding to $1.8 billion. Total bank reserves rose by only $212 million, but Rothbard argues that this was because the American populace lost faith in the banking system and began hoarding more cash, a factor quite beyond the control of the Central Bank.

    http://en.wikipedia.org/wiki/Great_Depression

  27. 27
    Buceri says:

    I could not believe Greenspan!!!!

    “Oopsie; I guess I was wrong about those bankers not taking advantage and self-regulating”.

    Really?? Do you give an alcoholic the keys to the bar??? How old is this guy?? 85-88?? How could you be so naive????!!!!

    Must be pretty horrible to realize that your professional credo was wrong all along this late in life. And to have to admit it on TV.

  28. 28
    mark says:

    It’s been argued that we would have been in a recession for the past 8 years if it weren’t for the housing bubble and massive deficit spending by the federal government.

    The run up in home prices made everyone feel rich. Americans withdrew and spent over $800 Billion per year over the past several years. They purchased everything from cars, vacations, furniture, boob jobs, and home remodels with the money. Add in an extra $500 Billion budget deficit per year, on average, to the spending spree, and you get what looks like a strong economy.

    I wonder what will drive the economy higher from here.

  29. 29
    TJ_98370 says:

    Redemptions and margin calls are going to really put pressure on hedge funds. As assets get dumped onto the market, prices are going to fall even further. Mr. Roubini, who has respectable credibility has this to say –
    .
    GLG’s Roman, NYU’s Roubini Predict Hedge Fund Failures, Panic
    .
    …..Nouriel Roubini, the New York University Professor who spoke at the same conference, said hundreds of hedge funds will fail as the crisis forces investors to dump assets. “We’ve reached a situation of sheer panic,” said Roubini, who predicted the financial crisis in 2006. “Don’t be surprised if policy makers need to close down markets for a week or two in coming days.” ….
    .
    Weeeee. What fun! Let’s see if he is right!

  30. 30
    Buceri says:

    Best quote I’ve seen about Greenspan’s testimony:

    Steve Goldstein at Marketwatch:

    For a man who was once remarkably hard to decipher, Alan Greenspan is now as clear as an empty Lehman Brothers office.

  31. 31
    David Losh says:

    The premise is that what we are seeing today is a crash.
    I don’t think so.
    In my opinion this is a normal progression.

    What was the run up in the stock market before 1990 as compared to the other financial crisises? Was there a run up of 10,000 points before the 1929 crash or any of the others?

    No, 1987 was a reaction to an over heated stock market from 1980 to 1985, then from 1985 to 1987.

    There has never been a run up in stock prices like what we have seen. Again in my opinion this is a long over due correction.

  32. 32
    Buceri says:

    Mark said:

    I wonder what will drive the economy higher from here.

    _____________

    Mark; we have no choice and go back to manufacturing. 67% of the economy based on consumerism was a shaky base.

    We’ve been demonizing unions for over 20 years and now, we have no jobs. Go figure.

  33. 33
    Scotsman says:

    Brian-

    I think most would agree it was WWII that put an end to the GD, not FDR’s socialist policies. It wasn’t until the U.S. spent generously on capital goods and technology in an effort to win the war that America finally rebuilt an industrial base, making labor productive enough to generate the wages/personal income that carried us through the 60’s.

    It is the government’s meddling that distorts the market, slowing the reallocation of capital and resources from old uses to more productive areas. In the current situation government involvement has propped up failed banks at great expense, burdened the taxpayers and economy with even more non-productive debt, and failed to recognize the reality that housing values are gone and won’t return anytime soon. Worst of all, the idea of moral hazard has been diluted, leading to even more distortions in what market mechanisms remain.

  34. 34
    David Losh says:

    http://ichart.finance.yahoo.com/z?s=^DJI&t=my&q=l&l=off&z=l&p=s&a=v

    Let’s see if this link will work, it’s a good illustration of what the market has done since 1929.

  35. 35
    David Losh says:

    http://ichart.finance.yahoo.com/z?s=^DJI&t=my&q=l&l=off&z=l&p=s&a=v

    Let’s try this again and see if this link will go to a graph that shows what the stock market has done since 1929.

  36. 36
    Yesler Hill says:

    “It is the government’s meddling that distorts the market,”

    Hmmm, no, actually quite the opposite. We are currently witnessing what happens when you remove oversight and regulation from capitalism. Capitalism’s ethic is to maximize short term profit – no matter what. And unregulated this leads to the kind of social chaos, and eventually barbarism, we are nose diving into.

    All that “laisse faire”, neo-liberal classical economics are so very yesterday, as kids say. The jig is up, the banksters have run it in to the ground, and once again, society has to clean up after the greedy rampage.

  37. 37
    TJ_98370 says:

    Buceri said:

    I could not believe Greenspan!!!!

    “Oopsie; I guess I was wrong about those bankers not taking advantage and self-regulating”.

    Really?? Do you give an alcoholic the keys to the bar??? How old is this guy?? 85-88?? How could you be so naive????!!!!

    Must be pretty horrible to realize that your professional credo was wrong all along this late in life. And to have to admit it on TV.
    .
    I agree with what you are saying, Buceri. But I admire the guy for admitting he was wrong, even though it was a half-assed confession. When was the last time you saw / heard a politician admit that he / she was wrong?
    .
    FWIW he is 82 years old.
    .

  38. 38
    TJ_98370 says:

    Scotsman said:
    .
    …..“It is the government’s meddling that distorts the market,”…..
    .
    And then Yesler Hill said:
    .
    Hmmm, no, actually quite the opposite……
    .
    Classic –
    Was it a departure from existing regulation or government meddling (increased regulation) that resulted in Freddie’s and Fannie’s reduced capitalization requirements?
    .

  39. 39
    2k says:

    The current situation resulted from missteps by both Republicans and Democrats.

    In 1999 Bill Clinton repealed Glass-Steagal act of 1933 that separated investment banking and consumer banking. He was advised by democtart Bob Rubin, former Treasury Secretary and Citibank executive. That bill was submitted by Republican Phill Graham (former economic adviser to McCain).

    In 2004 SEC headed by Chris Cox signed off on increasing investment banks’ leverage to 40-1. The bill was heavily lobbied for by Henry Paulson, current Treasury Secretary.

    Fannie Mae and Freddie Mac, major contributors to current mess, were heavily supported by (and pushed to buy sub-prime loans) by Barnie Frank and Chris Dodd, democrats. Frank Raines, former CEO of Fannie Mae is economic advisor to Barrack Obama, democrat.

    Let’s not make this a political issue. Stupidity and corruption are prelevant in both parties.

  40. 40
    Yesler Hill says:

    “The current situation resulted from missteps by both Republicans and Democrats. ”

    I really think it goes back to 1980 when the Democrats repealed the federal usury laws. That really opened the door to letting speculators just go hog wild, unleashing the greatest pyramid scheme in history. Essentially.

    Freddie and Fannie should never been semi-privatized in the first place. My understanding is the the bill for the war in Vietnam was driving the US debt so much that the feds wanted to remove the mortgages from their balance books. That was also a mistake, so maybe the problems really go back to that point. Especially as the current “troubles” have roots in housing.

  41. 41
    2k says:

    Barak Obama and Frank Raines or John McCain and Phil Graham. Oh, boy.

  42. 42
    Jonny says:

    the market will bottom at 5,200

  43. 43
    alex says:

    Jonny, why not 5217? Let’s get specifc, man!

  44. 44
    Everett Renter (Used to be Buyer) says:

    I have some extra scrap wood if anyone posting on this site would like use it to build an apple cart. You might want to get a jump on things and get your cart built and get out there soon so you can stake out your street corner spot before this Depression gets into full swing and someone else gets all the prime spots. I hear some of the best spots have already been taken, so hurry…

  45. 45
    mikal says:

    Mark at #28
    You are correct. With the bailout that number comes out much higher. If this country doesn’t go back to making value added goods we will be done.

  46. 46
    deejayoh says:

    I really think it goes back to 1980 when the Democrats repealed the federal usury laws.

    Which piece of legislation would that be, repealing which laws? AFAIK, it is a state level issue as to what level of interest rates is considered usurious or unlawful

  47. 47
    braden says:

    great graph. I have been looking for something like that. It takes us away from these day to day guestimates and has us look at the big picture.

  48. 48
    mark says:

    “Which piece of legislation would that be, repealing which laws? AFAIK, it is a state level issue as to what level of interest rates is considered usurious or unlawful”

    That is my understanding also. In the early 80’s, when interest rates had been raised to fight inflation, consumer loans dried up. The problem was that banks had to pay a higher interest rate to obtain money than they could lend it back out at. It didn’t make sense for banks to loan, they couldn’t pay 15% to borrow and then be held back by the law and only allowed to loan at 12%.

    I think that it was South Dakota that was the first one to break ranks and allow lending at higher rates. South Dakota then attracted a great many credit card operations to their state. Someone filed suit claiming that credit card companies had to follow the law of the state where the credit card holder lived conerning what interest rate could be charged. The banks countered claiming that the limit was set by the state where the credit card was issued. The supreme court sided with the banks and the rest is history.

  49. 49
    Ray Pepper says:

    Housing prices will be cut in 1/2 in Seattle? Thats it I’m coming North when that happens. We have no Pagliacci’s or Dick’s burgers here in the South End.

    I’ve always liked West Seattle ! Close to airport… I will take a turn-key Brick Tudor 2000 sq feet at 280k. Tell me when you find one west of 35th. That will be 1/2 off.

  50. 50
    Red says:

    I feel so bad. The home I bought 4 years ago in Redmond for 650K is now not selling even for 530K.

    Its so bad. These banks need to be punished for easy lending and there by making the prices high for homes.

    So bad, bad!

  51. 51
    deejayoh says:

    Today’s headline by E Rhodes:

    Seattle-area house prices decline

    Seattle’s annual home-price decline now exceeds that of many other major cities — including New York, Chicago, Portland, Boston, Dallas, Denver and even hard-pressed Detroit — putting to rest the idea that Seattle might have been immune to the national slump.

    Phew! glad we got that misconception out of the way!

  52. 52
    Yesler Hill says:

    “Which piece of legislation would that be, repealing which laws? AFAIK, it is a state level issue as to what level of interest rates is considered usurious or unlawful”

    I misspoke, actually it was the passage of the Depository Institutions Deregulation and Monetary Control Act, which superceded all previous federal usury laws. The Federal Reserve used to set interest rates for savings banks and other lenders. usury is a federal issue; interstate commerce and all. What we have now are the states mismanaging usury regulations.

    http://en.wikipedia.org/wiki/Depository_Institutions_Deregulation_and_Monetary_Control_Act

  53. 53
    jonness says:

    “Where will we turn for help in America? I see the American technical workforce developing an industrial base again, as our only way out……we have no choice now.”

    That’s the way I’ve been thinking about it these last few months as well. It goes along with the idea of earning what you spend as opposed to simply borrowing vast sums of money to live beyond your means. One way of living is sustainable and healthy, and the other is doomed to failure. A robust economy must have solid fundamentals at the capstone if it is to weather expected naturally occurring future storms.

    But Bernanke is 100% convinced the way out is to borrow our way out. The next step will be to stimulate consumer spending, which will place money directly into circulation. If we go too far down this road, it could lead to inflation, which means Americans will have to earn more to keep up.

    A computer programmer with a BS in CS can be had in India or China for perhaps $7k/yr. The same programmer in the U.S. costs $70k/yr. Labor for other occupations has similar discrepancies. I’ve recently been contemplating what will happen if we see inflation during our attempt to increase our manufacturing base in order to get out of this mess. Since we are ultimately competing with other countries’ manufacturing labor, our inflation drives up our cost of competing in a global economy where imbalances already exist.

    OK, so here is the scenario. The U.S. prints vast amounts of money and pumps it into the economy. It saves the day, and inflation occurs bringing us out of a depressionary economy. Bubble house prices seem affordable because money is now worth so little. The median wage is $50/hr., and Boeing machinists are making $150/hr. Everything is hunky-dory, other than the fact that the cost of manufacturing the same products elsewhere is 25 cents/hr.

    So my question is. How does inflation/deflation actually play into the goal of increasing our manufacturing base?

  54. 54
    Yesler Hill says:

    The way a new manufacturing, and farming, program would work best is if it were decentralized, manufacturing nearer the consumer. The same with food. If food were grown all over, neaerer people, it would be cheaper, and would not be prone to these contamination out breaks that we’ve been having. The advantage of the exurbs collapsing, is that they could be torn down, and the land recultured for farming.

  55. 55
    Scotsman says:

    jonness- I think of it as a chess game, with the opposition’s players limiting my potential moves. In the past (games) there weren’t as many pieces on the board and my side had more options, we could move about more freely. Now international competitiveness, unfavorable currency devaluations, political concerns about energy, and massive amounts of debt on all levels have my key pieces/players boxed in and on defense. It’s not check-mate yet, but I can see how the game is going to end.

    I read and write on a number of blogs. What surprises me most as an economist as I surf around is the extent to which people are willing to ignore the math, and somehow believe that the numbers, and their lives, will all work out as they have in the past. They won’t.

    Here’s one example of how far off reality the thinking is. The S+P 500 is currently at about 875. A recent analysis of the earnings of the S+P shows that the companies that make up the index have earned about $45 this year, half of the original estimates. Yet the index remains at a multiple of around 20. Given the risk involved, a multiple of 10 would be more realistic. 2009 projected earnings of $25 and a multiple of 10 means the S+P is headed for 250. Yet many think this is a bottom? Denial, ignorance, disbelief, all still rule the day. Bubbles are everywhere, not just housing. Stop the games, let them pop, and let us all get back to building a future on a sound foundation.

  56. 56
    buyStocks says:

    Scotsman –
    Regarding your comments on the S&P index and companies earnings; is that data and ratio graphed anywhere over time. That would be an awesome graph, and would give more credence to your point,

  57. 57
    buyStocks says:

    To begin answering my own question, I found a very cool long-term analysis here with graphs. It only goes to 2002, but still very interesting:
    http://www.gold-eagle.com/editorials_02/jmiller092402.html

  58. 58
    buyStocks says:

    Sorry, found one more to fill in dates from 2002-2007, which can be found on wikipedia:
    http://en.wikipedia.org/wiki/PE_ratio

    So, now Scotsman, I’m assuming your multiplier is the P/E ratio. It’s very interesting, because during bear markets it does seem to historically go down to 10, but then seems to hang around to 15-20 during gradual bull markets, and then goes way high during bubbles. So, can I then extrapolate that S&P fair value ranges 450-900(10-20 multiplier) during 2008, and the projected 2009 will be 250-500(again, 10-20 multiplier). And while were in bear market will hover in the lower range, but then will go to the upper range when it starts to turn into a bull market. This helps me fundamentally understand the real value of the market (the actual earnings) plus the additional psychologic component.

    Despite the above analysis, I’m still gonna increase my dollar averaging into equity indexes for retirement (very long term), because the above analysis is dependent on specualting what the earnings are gonna go, which then get multiplied by the psychology.

  59. 59
    Scotsman says:

    One of the major challenges faced by the stock markets has been the distortion of fundamentals brought about by 401K plans. It helps to be a bit older, old enough to remember that prior to the early ’80’s 401K plans with matching employer contributions didn’t exist. Saving and investing were a bit less structured, and matching contributions rarer. Private pension funds were more common, but expensive and not nearly as aggressive.

    When 401K plans and their tax deductibility became the new game, money began to flow into the stock market in ever more significant amounts, and on a more consistent basis. More often than not, the money flowed into markets without looking as closely at the individual companies being bought. Money market funds, not in dividable stocks were most often the choice of long term investors. The constant influx of new money coupled with a lessening of discretion and oversight led to distortions in risk analysis and market fundamentals.

    Today we find ourselves in a market where S+P 500 stocks are thought to carry the same risk premium and multiplier as a decent corporate bond. This is clearly not true, and the time to pay the piper has come, as evidenced by falling stock values. And yet many don’t understand why the economy is changing. They only see their portfolios down 20-30% and wonder why.

  60. 60
    Brian says:

    You might try http://www.crestmontresearch.com for P/E and market level graphs. Beyond the Horizon is a great PDF. Site’s kind hard to havigate though.

    Note that today earnings are under their long-term profit margin mean, and P/E ratios are around 17. You can get historical S&P 500 data at their website.

    It’d be pretty tough for earnings to fall to $25, and for P/E ratios to fall to 10 in the short term. For earnings to fall that low, it’d either be a short-term margin blip like the decline in 2002 was, which actually caused P/E ratios to rise. Or, it would mean GDP fell 50% (Great Depression 2.0).

    I can certainly understand expectations of near-zero growth for the next n years, but I haven’t seen anything remotely convincing suggesting a *huge* drop in GDP.

    Stocks aren’t cheap by any historical measures right now, but they’re not dramatically overpriced. The big question mark for me is on GDP. Has anyone seen any research on estimates for GDP over the next 2 years?

  61. 61
    Scotsman says:

    Who’s in the S+P 500? Hmmm- Bear-Sterns, (oops, guess not anymore!), D R Horton, Ford, Gm, Home Depot, Lowes, Merck, Pulte Homes, Time Warner,…….. I don’t think any of them are expecting 2009 to be a banner year, but I could be wrong.

    When I look at the index I can’t help but see the 12 month near term upside potential as zero, and a drop is almost a certainty. Why would anyone pay a multiple of 20 when an FDIC backed bank bond can be had for a multiple of 25? The risk/return is completely out of touch with reality. But those 401K contributions keep flowing in every month, “averaging down” like the advisor’s tell us to, and supporting a market that will surely die a hard death soon.

  62. 62
    economist says:

    I really think it goes back to 1980 when the Democrats repealed the federal usury laws.

    That makes no sense whatsoever, given that interest rates were near all-time highs then and are near all-time lows now (even assuming there was such a law in the first place, as noted above).

    Bubbles happen when interest rates are too low, not when they are too high. As if that even needed to be said.

  63. 63
    Another Tim says:

    We are currently witnessing what happens when you remove oversight and regulation from capitalism. Capitalism’s ethic is to maximize short term profit – no matter what. And unregulated this leads to the kind of social chaos, and eventually barbarism, we are nose diving into.

    All that “laisse faire”, neo-liberal classical economics are so very yesterday, as kids say. The jig is up, the banksters have run it in to the ground, and once again, society has to clean up after the greedy rampage.

    When have we had actual laissez faire capitalism? Government intervention in the economy has been status quo for so long nobody knows what true free market capitalism is anymore.

  64. 64
    rainy says:

    Bubbles happen when interest rates are too low, not when they are too high. As if that even needed to be said.

    How do you explain the housing uprise in the late 80’s? The interest rates were quite a bite higher at that time.

  65. 65
    anony says:

    US dollar inflation affects the dollar’s ability to buy foreign products and services as well as domestic, all else being equal. If you had to pay the US programmer twice as many US dollars, you would have to pay the Chinese programmer double the dollars as well.

  66. 66
    deejayoh says:

    That makes no sense whatsoever, given that interest rates were near all-time highs then and are near all-time lows now (even assuming there was such a law in the first place, as noted above).

    the law referred too exempted depository institutions from state interest rate caps. Given that inflation was in double digits, and some state interest rate caps were much lower – banks were losing deposits so the Fed stepped in and overrode the states.

    Saying that this seemingly logical response to rampant inflation somehow caused today’s bubble is creative new spin I haven’t heard before. Different than the Fannie/Freddie meme because it’s more obscure perhaps – but I don’t know that it’s any more logical.

  67. 67
    softwarengineer says:

    ROUBINI PREDICTS STAG-DEFLATION (DEPRESSION) AHEAD

    Don’t worry about inflation from the bailouts, here’s an excerpt from Roubini’s RGE report this weekend:

    “….Finally, while in the short run a global recession will be associated with deflationary forces shouldn’t we worry about rising inflation in the middle run? This argument that the financial crisis will eventually lead to inflation is based on the view that governments will be tempted to monetize the fiscal costs of bailing out the financial system and that this sharp growth in the monetary base will eventually cause high inflation. In a variant of the same argument some argue that – as the US and other economies face debt deflation – it would make sense to reduce the debt burden of borrowers (households and now governments taking on their balance sheet the losses of the private sector) by wiping out the real value of such nominal debt with inflation.So should we worry that this financial crisis and its fiscal costs will eventually lead to higher inflation? The answer to this complex question is: likely not.First of all, the massive injection of liquidity in the financial system – literally trillions of dollars in the last few months – is not inflationary as it accommodating the demand for liquidity that the current financial crisis and investors’ panic has triggered. Thus, once the panic recede and this excess demand for liquidity shrink central banks can and will mop up all this excess liquidity that was created in the short run to satisfy the demand for liquidity and prevent a spike in interest rates.Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.Third, wouldn’t central banks be tempted to monetize these fiscal costs – rather than allow a mushrooming of public debt – and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers? Not likely in my view: even a relatively dovish Bernanke Fed cannot afford to let the inflation expectations genie out of the bottle via a monetization of the fiscal bailout costs; it cannot afford/be tempted to do that because if the inflation genie gets out of the bottle (with inflation rising from the low single digits to the high single digits or even into the double digits) the rise in inflation expectations will eventually force a nasty and severely recessionary Volcker-style monetary policy tightening to bring back the inflation expectation genie into the bottle. And such Volcker-style disinflation would cause an ugly recession. Indeed, central banks have spent the last 20 years trying to establish and maintain their low inflation credibility; thus destroying such credibility as a way to reduce the direct costs of the fiscal bailout would be highly corrosive and destructive of the inflation credibility that they have worked so hard to achieve and maintain.Fourth, inflation can reduce the real value of debts as long as it is unexpected and as long as debt is in the form of long-term nominal fixed rate liabilities. The trouble is that an attempt to increase inflation would not be unexpected and thus investors would write debt contracts to hedge themselves against such a risk if monetization of the fiscal deficits does occur. Also, in the US economy a lot of debts – of the government, of the banks, of the households – are not long term nominal fixed rate liabilities. They are rather shorter term, variable rates debts. Thus, a rise in inflation in an attempt to wipe out debt liabilities would lead to a rapid re-pricing of such shorter term, variable rate debt. And thus expected inflation would not succeed in reducing the part of the debts that are now of the long term nominal fixed rate form. I.e. you can fool all of the people some of the time (unexpected inflation) and some of the people all of the time (those with long term nominal fixed rate claims) but you cannot fool all of the people all of the time. Thus, trying to inflict a capital levy on creditors and trying to provide a debt relief to debtors may not work as a lot of short term or variable rate debt will rapidly reprice to reflect the higher expected inflation.In conclusion, a sharp slack in goods, labor and commodity markets will lead to global deflationary trends over the next year. And the fiscal costs of bailing out borrowers and/or lenders/investors will not be inflationary as central banks will not be willing to incur the high costs of very high inflation as a way to reduce the real value of debt burdens of governments and distressed borrowers. The costs of rising expected and actual inflation will be much higher than the benefits of using the inflation/seignorage tax to pay for the fiscal costs of cleaning up the mess that this most severe financial crisis has created. As long – as likely – as these fiscal costs are financed with public debt rather than with a monetization…”

  68. 68
    george says:

    I only know what I read in the Seattle Times:

    Feb. 2006: Median home prices could shoot up 30 to 40 percent over the next two years. “I feel comfortable with that, although 40 percent would be in the upper end of possibility,” Yun said.

    September 2006: “It would take some combination of a recession, a jump in inflation and a jump in mortgage rates to cause a big drop,” he said. If that happened, he’s confident the Federal Reserve would take measures to stimulate the economy, allowing Seattle to again escape a sustained decline in home prices.

    December 2006: “This bubble lunacy is still prevalent, but not in Seattle, and I’ll keep saying that,” said Gardner, of the land-use economics firm Gardner Johnson…He expects closer-in areas to appreciate about 10 percent over the coming year; farther out, 7 percent appreciation will be more the norm for single-family homes and for condominiums.

    July 2007: Seattle-area prices will continue to climb this year and appreciation will “be above 5 percent. But hitting double-digit in 2007 may be somewhat difficult,” said Lawrence Yun, the senior economist at the National Association of Realtors

    November 2007: Yun suggested Seattle will continue as one of the bright lights, which it’s been this year…Yun suggested that Seattle may be joining such cities as New York and San Francisco as “superstar cities” whose desirability attracts affluent newcomers who bring the buying power to continue pumping up housing prices.

    December 2007: “Conway anticipates average Puget Sound-region home prices will decline less than 1 percent next year, and sales will be down about 5 percent, before rebounding in 2008.”

    October 26, 2008 Britsch predicts that will mean “a huge shortage” of building lots three years from now — which would drive up new-house prices. Hurme seconds that forecast.”There’s going to be big price increases coming in a relatively short time, like 18 to 24 months,” Hurme says.

  69. 69
    Matthew says:

    Capitalism is not a perfect system, but it’s the best system we have. I was watching an interesting video on the market crash of 1929 and many of the economists interviewed that were alive during the Depression stated that every 30 years or so we have some sort of economic crisis because the financial memory is only about 20-30 years long.

    Ironic how the Europeans are quick to blame the Americans. I don’t believe any investment banks in the U.S. were holding a gun to their heads to purchase MBS, CDS, and other products. European institutions had just as insane leverage ratios as their U.S. counterparts, and many countries in the world also have gigantic housing bubbles (Spain, UK, Australia, etc.)

    One reason that could make this crash different than 1929 is the truly global nature of our financial markets. While the rampant speculation, easy credit, and household debt all mirror 1929, the global nature of the crisis does not. Also the government intervention is different this time around.

    Warren Buffet is most certainly our generations William Durant.

    Some other similarities between than and now:

    Collapse of auto industry
    Many people trading on margin
    Ridiculously easy credit
    Real Estate boom in Florida
    Extremely volatile market, huge swings up and down. Market appeared to be healthy a number of times before finally tanking.
    Bank failures

  70. 70
    Scotsman says:

    My neighbor is looking for homes to buy in the Renton area, as rentals. When I said I thought prices might fall further, he responded that he’d read “there was going to be a housing shortage soon.” “And they aren’t making any more land.”

    I don’t even try to explain anymore.

  71. 71
    Yesler Hill says:

    “Saying that this seemingly logical response to rampant inflation somehow caused today’s bubble is creative new spin I haven’t heard before”

    I’m saying that these deregulatory actions opened the door to, led to, the situation where clever banksters took advantage of the democrats’ 1980 federal abolition of usury laws, and Reagan/Bush/Clinton deregulation, and used all this lack of social oversight to “lead” us straight here.

    My ideas really aren’t that creative, I just read economists and history that is not spun by the neo-liberal/Chicago School crowd.

    “When have we had actual laissez faire capitalism? Government intervention in the economy has been status quo for so long nobody knows what true free market capitalism is anymore.”

    I was using the term “liberally”. Thankfully for all of us, we’ve never had an actual pirate economy. But, if you look from 1980 until today, you see that both the Republicans and Democrats have moved relentlessly to deregulate and privatize. And it’s gotten as close to unregulated capitalism as we’ve ever had.

    There are always “government” regulations; whether they restrict actions by corporation, or whether they forbid social oversight and regulation. It is always a social decision. there is no magic ecosystem of the economy that exists outside society. The economy is always a social choice. For the last 28 years, I contend we have chosen the path of government backing predatory lending, gross speculation and ponzi schemes.

    My contention is that all that Chicago School ideology has been proven completely wrong, and more correctly – dangerous to social stability and sustainability. Not to mention how neo-liberal classical economics has exacerbated the environmental problems we humans are causing.

    The time has come where we need to recognize that our previous social choices have gone horribly, horribly awry, and society needs to return to the helm, and not let the banksters navigate the ship any longer. Call it a bridesmaid socialism (copping ideas from socialism to prop up capitalism), call it Keynsianism, but it is what we need.

  72. 72
    deejayoh says:

    I’m saying that these deregulatory actions opened the door to, led to, the situation where clever banksters took advantage of the democrats’ 1980 federal abolition of usury laws, and Reagan/Bush/Clinton deregulation, and used all this lack of social oversight to “lead” us straight here.

    “straight here”!?!?!?

    Twenty eight years later?

    Sorry, you’ve shown absolutely no causal linkage between the feds “Abolishment” of non-existent usury laws to today’s lending situation. Do you think that usury is the problem? Are you saying subprime, 2/28 teaser rates and negative amortizaton loans are a direct result of this bill? Since it took over 20 years to show up, I’m afraid I need it spelled out a bit more clearly.

    Rambling off into discussion of keynesian vs chicago school economics seems a bit of a tangent when your core premise a) doesn’t seem to be supported by the facts (e.g. there was no fedreal usury law to “abolish”) and b) you haven’t linked the change in law to any behavior today that caused the issue.

    Hey, I have an idea, maybe somewhere in the intervening series of Reagan/Reagan/Bush #1/Bush#2/Bush #2 presidencies something could have been done about this horrendous Jimmy Carter eff-up! Perhaps they didn’t see it as a problem either? until today, when we are looking for scapegoats?

  73. 73
    Yesler Hill says:

    I’m not looking for scape goats; I’m interested in history. How and why things happened. I am not saying (read my posts), that any one thing, on a certain date, was the key that started all this neo-liberal econ crap, my point is that with the abolition of usury in 1980, this was a start in decoupling the economy from social regulation. Deregulation in creased and increased over the following 28 years, and the financial gangs used this lack of regulation to create chaos and scam billions. I think the real lynch pin in the last eight years of hoodlum banking is though, directly related to the repeal of Glass-Steagall.

    As far as causality, etc. I really don’t know how else to make the point, except to point at history.

    Tangential? The topic is comparing economic crisis.

    I’m not a keynsian, I just use that rubric in polite company; some people get real twitchy if I use the term “socialism”!

  74. 74
    rainy says:

    Some other similarities between than and now:

    Collapse of auto industry
    Many people trading on margin
    Ridiculously easy credit
    Real Estate boom in Florida
    Extremely volatile market, huge swings up and down. Market appeared to be healthy a number of times before finally tanking.
    Bank failures-

    Bank failures in the 1920’s, We didn’t have the FDIC back at that time. So any money in the bank was not protected and therefore people could lose all of their money. This time around the money is more protected within the banking system.

    Our whole economic system is different as well. We have much more diversity in the marketplace. So it can be hard to predict how much further this can and will drag on. Only time will tell.

  75. 75
    deejayoh says:

    Yesler –
    got it. I thought you were coming from somewhere else. I tend to agree that the repeal of Glass Steagall (aka Gramm-Leach-Bliley) was a linchpin in the acceleration of this mess. I think the change in interest rate regulation was a case of unintended consequences – which could have easily been rectified at any point in the intervening period had someone wanted to. But no one did. I think the term was “reaganomics”

  76. 76
    Yesler Hill says:

    “I think the change in interest rate regulation was a case of unintended consequences”

    Well said; I don’t the Democrats, especially the Dems back then, were looking for thsi outcome, I just think they got caught up in the ideology that had built up steam in the 70s of neoliberailsm, did the restructuring of interest rates, etc, trying to be good “free marketeers”, when in fact, they should have stood by their guns and tried a more direct social/public investment industrial policy.

    I’m not a socialist, like everything should be owned by one Ministry or the other. I’m more interested in backstops, and public ownership of things like utillities. But. with the old school Nader twist of increased citizen/public oversight. Nader’s proposed “Citizen Utillity Boards”, etc. I think capitalism works best as small business, but once it gets so big that it can control society, I facor more democracy and a repeal of “corporate personhood” as the most efficient methods of restraining large scale capitalism. Blah blah blah. Sorry, talking too much.

  77. 77

    […] I thought it would be interesting to post an update on the stock market crash graph that I first posted back in October. […]

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