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Thursday, November 20, 2008


richard russell

via prieur de plessis at minyanville -- this as a sort of waymarker. russell is 84 and has been editing the dow theory letters since 1958. he was five years old in 1929.

Here's what Richard Russell (Dow Theory Letters) -- one of the few market commentators with first-hand experience of the Great Depression -- has to say:

The market is warning of a coming depression. Next year there’ll be a huge problem of unemployment, job openings will have disappeared, and every business will be going over its personal thinking in terms of who the business can do without.

The sentiment in the country will be dark grey to jet black. Fortunes will have been wiped out. Thousands of savings plans and 401Ks will have been shattered. Americans who have never experienced true hard times will be living hard times. Confusion and fear will be rampant. How do I know all this? I’ve been here before, I know the signs.

i'm not sure what to make of this kind of pessimism, though i surely agree with him. just today i commented at david merkel's blog:

i would suggest that — while the financial crisis shares features with many financial crises, including 1907 — the economic features have unfortunately little in common with such sanguine views. the financial crisis was a trigger, a detonator, for something else.

mr merkel’s emphasis on total debt-to-GDP is essential in my view — that is the lodestone by which we’ll find our way out of this. and it is further essential to understand the consumer aspect of this crisis — economic historian david livingston recently wrote a must-read essay on the convergence of thirty years of declining real wages (and its converse, record profits) with unprecedented consumer debt loading via a scheme of securitization that amounted to a credit market version of the investment trust of the late 1920s.

that scheme has collapsed completely, and much as with the collapse of blue ridge and shenandoah in 1929 there is simply no going back — debt will now have to normalize now vis-a-vis incomes at tighter-than-normal underwriting standards as grossly inflated balance sheets are reduced, and that promises a very dark march ahead.

nothing of the kind was afoot in 1907 or 1987 or 1998. it is now. that must be understood to understand the economic fallout.

i still think it’s an open question as to whether government can find a way to transfer (through TARP and what will surely be its successors) enough private debt onto its own balance sheet to mitigate the most apocalyptic visions of liquidation — but early returns are obviously terrible, and there very probably isn’t enough balance sheet capacity to take on the entire pile which must be resolved. hopefully they don’t annihiliate the currency in so doing.

nevertheless, the breadth and extent of the current pessimism makes me shiver. it's uncomfortable.

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