Sunday, December 07, 2008

Recession Darts

I have been attempting to write about economic stuff because I have been reading/watching so much of it since the election, but it all boils down to everything is bad, and getting worse. Not fun to write about. 

The only up side is the report that Mortgage rates for new home buyers might plunge to 4.5% to try and pick up the housing market. So if you are thinking of buying now, and assuming you still have a job, this is the best time to buy in over 35 years. Assuming that deflation doesn't make that real interest rate much higher, and the housing market doesn't drop another 30%!
And since that is the "good news" I thought I would throw another dart at the board and guess where things are going based on the scientific method of guessing and assumption. First this analysis of past resections, and then a great chart by dshort.com comparing the four big bear markets of the past 100 years (with the current one being the second worst already). By combining them and using the great depression as a time-line to follow, I came up with the chart on the left which puts the end this bear market at September 2009 and puts the DOW at 6,341, or down 65% from its peak over a year ago. That's not the nearly 90% drop of the great depression, but that is hardly a condolence. And if the market does predict the economy 6 months in advance, that would put the end of the recession at January 2010.

This is significantly worse than what I thought in late October when I said the Dow would bottom at 7,750 next October. That's a big window but either way, that is still either 10% lower than we are now or 26% lower. Roubini sees 20-30% so I am in good company I think. 

And to finish off, the one bit of real actual good news is still that President elect Obama is saying all the right things all the time with a massive stimulus in the form of American infrastructure renewal from day 1. We have spent the last several decades with the right side of deficit argument being that deficit spending is bad, but in this case a balanced US budget right now would be a disaster. Hoover did the same thing before the great depression, and it took the New Deal and WWII to get the economy back on track. So pure Keynesian economics wins when the market has failed - worry about deficit spending but do it anyway! 

1 comment:

Mberenis said...
This comment has been removed by a blog administrator.