Rodryk writes: I highly recommend looking at an article titled "The Aftermath of Financial Crises".
http://www.economics.harvard.edu/files/faculty/51_Aftermath.pdf
On p.5 there is a graph showing peak-to-trough equity price declines and years duration of downturn.
Interestingly, the average peak-to-trough equity price decline in historic bear markets after severe financial crises was -55.9%, with the average downturn phase of the cycle lasting 3.4 years. Considering the S&P high of 1576.09 in Oct 2007 and the low of 666.79 in Mar 2009 we already have seen a -57.7% decline in just 17 months or 1.4 years, thus an duration significantly below average.
Regards,
Rodryk
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Hi Rodryk,
ReplyDeleteInteresting reading...I liked the part about "massive government debt"...That is so true. I don't know how they measured the peak to trough declines but from my chart service I got ~89% decline in 1929 versus their chart ~65%...
The speed of this decline has been eye popping that is for sure! Who knows if we will have another wave of declines to new lower lows or not...I tend to look for patterns of 3- from my count we have had 2 bubbles- The great Tech/Nasdaq Bubble, the Housing Bubble (I remember Greenspan saying there was no bubble)...The question remains are we in progress of establishing the 3rd and final bubble? Is that a debt bubble or money supply bubble?
All I know around Silicon Valley- a lot of folks are getting laid off...Jobs are becoming scarce. It would not surprise me if unemployment has a long ways to go in its current trend.
From the media standpoint, it seems that after one month of better than expected data, everything is going fine and 2009 is about to be up and ready for a new multiyear uptrend on the equity and housing markets. As an example, I read a few days ago that the banking crisis is now just a footnote in the financial history of the USA.
ReplyDeleteI’m very discreet and so, I like this document which puts into perspective the present situation, giving it an important dimension, the time scale. In a nutshell, I understand that, except for the GDP, we are at the beginning of the crisis process.
As Rodryk points out, markets were faster than usual and reached rapidly the average decline. Compared to other crisis the document mentions, many more traders are now connected to the markets and streaming news are accessible for everybody at low price (ex: tradethenews.com): does it explain such a volatility and speed or are there other explanations?
Didier wrote: "....does it explain such a volatility and speed or are there other explanations?"
ReplyDeleteIt was just my impression that 'The Masters of the Universe' knew what was coming down the pipeline, in September, as did some well-placed persons, and they secured their own stock positions to best advantage before the failed Bailout vote, and the news about Lehman's failure was fully out. Manipulated the media to create panic, and bought back stock at fire-sale prices. Rinse and repeat until you've sucked trillions out of the market to cover your derivatives losses. Lay low until enough time has passed to fool the masses, and then make it look like your balance sheets can now be trusted, and that you are indeed profitable! The political manipulation to ban shorting of BANKS (but not the rest of our stocks) at that time was a nice twist. Many bank stocks shot up 30% briefly, allowing another layer of manipulation by the cogno scenti.
Sign me, Cynical