A Protracted Bear Market?-Minyanville

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A Protracted Bear Market?

John Mauldin Jan 05, 2009 10:15 am


		Maybe, but stimulus package is a wild card.

That being said, the numbers do suggest that unemployment will be much higher than we see in a typical recession and will last longer. How much higher and how much longer we won't know for some time. Let's look at a few graphs which tell the story about housing prices and equity markets after a financial crisis.

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The next graph shows that equity price declines are much steeper, but shorter in duration.

Click to enlarge

Interestingly, on unemployment Reinhart and Rogoff note:

"... that when it comes to banking crises, the emerging markets, particularly those in Asia, seem to do better in terms of unemployment than do the advanced economies. While there are well-known data issues in comparing unemployment rates across countries, the relatively poor performance in advanced countries suggests the possibility that greater (downward) wage flexibility in emerging markets may help cushion employment during periods of severe economic distress. The gaps in the social safety net in emerging market economies, when compared to industrial ones, presumably also make workers more anxious to avoid becoming unemployed."

So Much for the Detroit Bailout

The 9.3% drop in GDP noted as the average, illustrates the problem of using averages as predictors. The really horrible drops were mainly due to the Asian crisis of 1997 and the Argentinean debacle of 2001. Throw those out and my guess is the average drop was more in the neighborhood of 5%, which is still a very serious recession, no doubt.

I’ll let you read their conclusion, as it’s short and instructive. (You can read the entire paper here. It’s brief -- as economic papers go -- and very readable.) Now, their conclusion:

"Since the onset of the current crisis, asset prices have tumbled in the United States and elsewhere along the tracks lain down by historical precedent. The analysis of the post-crisis outcomes in this paper for unemployment, output and government debt provide sobering benchmark numbers for how the crisis will continue to unfold. Indeed, these historical comparisons were based on episodes that, with the notable exception of the Great Depression in the United States, were individual or regional in nature. The global nature of the crisis will make it far more difficult for many countries to grow their way out through higher exports, or to smooth the consumption effects through foreign borrowing. In such circumstances, the recent lull in sovereign defaults is likely to come to an end. As Reinhart and Rogoff (2008b) highlight, defaults in emerging market economies tend to rise sharply when many countries are simultaneously experiencing domestic banking crises."

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Comments (2)

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Mr Bacan

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01-05-2009, 12:55 pm
John, In your "Bulls Eye" book (excellent, I must say), you make a very good case that the historic average P/E is 15. I think you are correct in that people have forgotten it is the average P/E, and much lower numbers are Read More

Peter Brock

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01-07-2009, 11:37 am
Lower P/Es are not only possible, but when they occur, they endure, often for many years at a stretch. 1975 to 1982 jumps to mind. Good article about aftermaths by the way. Read More


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