Mid-September 2008 Update of “The Second Great Depression”


MISCELLANEOUS   Starting today, “The Second Great Depression” will no longer be published.  It will be replaced by “The Great Depression of Debt” which will be available in December.  The new book is just an updated version of the first book.  John Wiley & Sons, the new publisher, insisted on the new title so it wouldn’t be confused with the earlier book.


LEHMAN and MERRILL LYNCH   No one wanted to buy Lehman Brothers and the Fed/Treasury would not bail them out, so they are filing for bankruptcy.  The fact that no one wanted to buy them despite the fact that much of their business is healthy, underscores the severity of their $60 billion of soured mortgages.  This does not bode well for the future of the other investment firms, since they will have trouble getting infusions of cash to enable liquidity and future lending.


Merrill Lynch, which was not stressed as badly as Lehman Brothers, was bought by Bank of America for $50 billion.  Based on historical value, this seems like a bargain for BOA; but time may prove otherwise.


Although the Fed/Treasury stood their ground on not bailing out Lehman Brothers as they did the Bear, they did further loosen their lending practices in an effort to reduce additional bank and investment firm failures.  So although there was no direct bailout, the Fed/Treasury took another giant step in involving taxpayers in the mortgage markets.  In addition, ten banks set up a $70 Billion fund to help enhance liquidity in the debt markets.


THE STOCK MARKET   The world markets are panicking as the financial systems implode.  The S&P 500, as I write this on Monday morning, is set to open at the lowest level in two years.  And even then, as many readers of this blog note, the markets seem to be substantially behind the real economy.  As I have noted before, this is probably due to the on-going investments coming through 401k plans, where people seldom change their investment choices; and the extremely successful investment campaign given by brokers, etc, that you should not try to time the market and you should just keep investing no matter what.


My depression book was published in May, 2005.  If at that time, someone started investing a set amount each month in the ETF TIP, they would be 12% ahead of someone who had invested in the same manner in the S&P 500.  If someone had invested similarly in the ETF GLD, they would be 22% ahead of the S&P 500.  However, during this time frame, GLD had price volatility (as measured by standard deviation) almost four times that of TIP, indicative of risk.


My prediction for the S&P 500 is 1085 by the end of this year, and I still feel that this is likely.


FUTURE OF THE FINANCIALS   It is generally acknowledged that government-run organizations are rife with inefficiencies and bureaucracy.  And, the results of the last twenty years or so of unregulated capitalism, especially in the financials, show that the greed and short-sightedness of corporate management cause them to make decisions that are not based on either their customers’ or stock holders’ well being.  Management takes their money and runs!  Well, the takeover of Fannie/Freddie is a hybrid of the worst of both worlds.  It does not have the profit driver of a private company or the social interests of a public firm.  The government says that it is ready to put in up to $200 billion to support these firms.  How about $500 billion of our money?  Already, Congress is pressuring Fannie/Freddie to loosen lending standards to get housing reenergized.  That is all we need!


Some economists have estimated that up to 1000 banks and investment firms will fail.  Although the number will be high, I don’t believe that it will reach that level.  In this Lehman Brother’s fiasco, the Fed/Treasury loosened loan requirements.  They will continue loosening as banks get in trouble until the effective result is rescues-by-loan.


In my last update, I went through why I thought that housing would not bottom out until 2012/2013.  The financial firms will follow this same scenario, since their issues are being driven by the mortgage problems.


As always, people should use their own judgment/data to affect their own investment strategies.  Intelligent people can, and do, disagree.




One Response to “Mid-September 2008 Update of “The Second Great Depression””

  1. infinityasi Says:


    What do you think of Barack Obama’s economic recovery plan so far? It seems to me to be nothing more than big government spending in just two sectors, highways and school remodeling, and yes, green energy projects. What about the rest of us not involved in that kind of work?And, do you think massive tax credits (e.g. $70,000 to every American who files taxes targeted for housing purchases, energy efficient cars etc.)might work? Or assuring everyone a minimum income of $12,000 a year using the negative income tax advocated by Milton Friedman? Or firing the federal reserve and switching to banking only with the U.S. Treasury giving out interest free loans? Or, is there no solution, and we all have to pay the price? Richard

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