I managed not to notice which of the news channels it was on Monday afternoon, but one of the ‘experts’ about the economy made a curious and perhaps timely, reference to the “D” word yesterday while bemoaning this economic development and that. As a result, I’ve started a Google News scan periodically on the word “depression” just to note its increasingly common use as we move forward into what could be a very disappointing, like to the point of depressing winter and spring for the economy just ahead.
Among the 68,640 returns for the word on Google’s news engine this morning were headlines like these:
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“Great Depression Lessons, but What are They?” in the Wall Street Journal online.
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“Obama, FDR, and Depression” parallels are critiqued.
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Amity “Shlaes and the Depression” discusses parallel policy missteps between the Depression-era and now.
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More contemporaneous: “Chance of depression overshadows G20 summit”
Unfortunately, the chances of just that occurring seemed to increase on Monday as the federal bailout of AIG swelled to $150-billion, American Express decided to become a bank in order to get in on a ‘free money’ festival, Circuit City filed for US bankruptcy protection, and GM stock tumbled to just over $3 indicating the hard times are far from over, and as one analyst reportedly has cut his GM price outlook for GM to zero.
Moreover, the whole global mood is beginning to downshift. Oil, which showed a bit of a leveling off lately is back down to the $60 range as prospects of China’s half-trillion economic stimulus has worn off quickly.
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If I were back in school, I’d be writing up papers that would chronicle the propagation of negative news into the economic system. The paper would go something like this:
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1. Because of the federal interventions, yields on certain types of fixed income investments have soared to the 25% range.
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2. We would therefore expect the marketplace to assign the stock market investments a similar kind of return, such that a 25% yield would result in a common market price/earnings ratio of 4.
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3. Given that the price/earnings ratio of the Dow has been recently up in the 18-19 range, one could speculate that good investment equities could drop by 4 (the competitive PE) divided by 18 (the recent P/E) or about 22% of their recent highs.
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4. The Dow could therefore be penciled out as heading from its high about 14,100 to perhaps 3,130. More broadly, the S&P 500, which has been as high as the region of 1550, could be headed for the 341 level.
One of the characteristics of faculty advisors, mutual fund owners, and those who lose the majority of their net worth in an economic depression is denial. “That’s just theoretical stuff, George…with the Fed and Treasury firmly in control, they won’t ever allow things to get that bad.”
But I’d counter with the observation that yes, it really could. To prove it to you, I’d trot out Starbucks as pretty good example case of a company which is among those to ‘first arrive’ at the forefront of the yield repricing dilemma.
If you ,take a look at the overview of the company, you’ll note that yesterday’s price was a bit over $10 while if you look at the five-year chart, the company traded within a few coins of $40 per share.
This morning’s $9.50 bid on the stock, divided by the $39.63 high a couple of years back is a loss of more than 75% from its highs. What’s worse, “Starbucks to slow growth as profit falls” in the WSJ today notes SBUX earnings have falling 97%.
I don’t mean to sound like I’m picking on Starbucks – I’m not. In fact, I think Howard Schultz is an excellent CEO and I’ll take a split-shot double Americano tall with a shake almost any time.
My point is that Starbucks is deep into the repricing mode, as in General Motors. GM which was down to 3.36 at the close on Monday was at 42.64 on a two-year chart. GM has lost 92% of its value.
One could argue that what’s ahead of us – as a nation and as a world – is a dramatic repricing of all shares to these kinds of levels. I have to tell you, I get a chuckle out of CNBC’s graphics layout which boldly proclaims “The New Economy” in the lower left of the screen at times. Yep, I reckon they’re got either a fine wry sense of humor or they’re more delusional than a dyed-in-the-wool fund manager.
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Meanwhile, the layoffs are spreading. there’s a report out of KSLA-TV in Shreveport that the US Post Office may be planning, for the first time in its history, to lay off 40,000 workers, or about 5.8% of its workforce. Among strategies being tied: Early retirement for those over 50 with 20-years, or more, of service.
It’s all quite sobering to see it arrive, as I’ve been writing about for nearly a decade, but the Second Depression certainly seems to be upon us. Not all the news is bad – yet. There are still the occasional items about how this company, or that, is actually benefitting from the change of lifestyle. McDonalds says are up 8.2% for the month.
I’m just guessing there’s more to it than just having cheaper coffee than Starbucks.
Another Bot Hit
Meantime, a reader who caught “the AMEX turns into a bank in order to get money” story, and sends this…
“Evening George,
Check the news at link below. Doesn’t this start to confirm “It is within this period from late November onward that the [credit card system] starts to [grind to a halt]. ” from the Alta 709 Part Six release on Oct 18th??
We’ve seen their debt downgraded and now they’re becoming a Bank Holding Company so they can get money from the Fed Window.”
Yep, close enough. Remember that a lot of the linguistic pointers are to shifts as opposed to a specific single shift. December twin quakes are examples of specific events, while the October 7th financial meltdown turn, the credit card system grinding down, and the pending resumption of emotional release language on November 14th (+/-) are more about sweeping change.
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Me? I haven’t had my credit card limit lowered yet, but I keep the balance at $0. I won’t be surprised when it comes, though, as part of a tightening of the screws. What’s the old saying? A bank is willing to lend you money as long as you don’t need it?
Missing Bomb
Turns out the US lost one of its nuclear bombs beneath the ice of northern Greenland in 1968, reports the BBC. Darned interesting read…
Yankees Go Home Department
US anti-drug operations are running into bumps in Bolivia, Ecuador, and Venezuela, reportedly because the drug warriors were stirring up political opposition to local governments.,
Gee, imagine that: US forces stirring up dissent in countries with substantial energy and natural resources. Who’da thought?
Admen Changing Up
Used to be that sex, seduction, and high end-oriented television ads ruled. But, says the NYT Times this morning, thanks to the changing economy it’s now “Goodbye Seduction, Hello Coupons.“ You just know times are bad when sex isn’t selling….OMG are things that bad?
Happy Anniversary
This is the 90th anniversary of the end of WWI. If you were a soldier in WW I, you’re welcome to come by for a shot of #7 – on me.
Not So Free Speech
The headline that in Burma, a “Blogger jailed for 20 years over poem that mocked Burmese dictator” reminds us how important the right to free speech is. Don’t even need a soap box to stand on, but it does help if you have connections with a radio host or own a string of newspapers…