USA/Global: Anatomy of a Crash
Summary
Readers know of our viscous addiction to Prof. Kindleberger's fantastic anatomy of stock market crashes. We discussed this at length in January, already having "called" a US stagflation back in Spring, 2006.
We re-visit Prof. Kindleberger's marvellous, proven framework and put a time line and numbers on it, asking how much more downside there is.
We also give you something that you may wish to yell about: on previous occasion we have railed against how investment banks have managed to privatize their gains and socialize their losses. Today we put numbers on this avaricious sophistry.
Finally, find out why our own portfolio is up by over 20% since the market crash of last October
Topics Covered
- Stock market crash: how far more to go?
- Here is something to fire you up!
- How to make money off this idea
Background
1. Stock market crash: how far more to go?
We are in uncharted territory regarding the extent of the decline. Since 1968, which is when the CEIC Data series start, there have been five major US stock market crashes lasting over 20 months. On average, the markets have fallen by 29%, give or take 12 percentage points on either side. This means that the market could fall by up to 41%. Well, that is history. Since the NYSE Composite peaked on 31st October 2007, it has fallen by 45.4%.
My hunch is that markets have another 20% to fall from here, at which point they will get stuck in "L", but for how long?
Using these same five crashes for our pattern prediction, however, the average length of the market's decline has been 23 months, or nearly two years, give or take 3 months on either side. Given that the market peaked at the end of last October, i.e. a year ago, the bottom "should" be reached between July - December of next year.
Just to re-iterate our other pattern prediction of yesterday: the lending cycle should bottom in 2011.
2. Here is something to fire you up!
Here is the other part of the anatomy of a crash: its undergirding of greed.
In today's Hong Kong Standard, we ran across a fabulous article by Bloomberg's Jonathan Weil, "Bankers will get bonuses, thanks to us". To quote this brilliant writer, "Not only did we, the taxpayers, save their (i.e. an investment bank's: your author) company...More importantly, we funded their 2008 bonus pool."
His point is trenchant: banks are paying much more to their employees than they are earning for their shareholders.
Here are the facts of greed, according to this journalist:
| Bank | Size of accrued employee compensation 2008, US $ billion | This as a multiple of pre-tax earnings | How much its stock market value has dropped, US $ billion | |
| Morgan Stanley | $ 10.7 bn | nearly twice | -$ 34.7 bn | |
| Goldman Sachs | $ 11.8 bn | nearly twice | -$ 41.7 bn | |
| Citigroup | $ 139.3 bn (since 2004) | over twice | -$ 168 bn |
He goes on to write that "Morgan Stanley needed the Treasury's cash. Goldman didn't, but got it anyway." Gosh, I wonder what hanky-panky the Club's boys were up to here? So much for Paulsen yelling at those Chinese for their lacking transparency...
The Bloomberg journalist concludes that "From the start of their 2004 fiscal years through Monday, the big stand alone investment banks lost about US$ 38 billion of stock market value. During the same period, they reported about US$ 239 billion of employee compensation expense." In other words, "...for every dollar of shareholder value destroyed, the (banks': your author) employees got almost three."
One final, acerbic thought of his about the game being played. "It is one thing for a company to pay much more to employees than it earns for its shareholders. It's quite another to keep doing it while receiving taxpayer bailout bucks. Before securities firms were public companies, a brokerage in need of capital would have called on its partners to pony up. That's how it still works at private partnerships, such as law firms. The reason they don't get taxpayer rescues is that they can't credibly threaten to take down the world's financial system."So: "too big to fail" makes you strong at the broken places...
3. How to Make Money Off This Idea
- Always consult your financial adviser first.
- We are long of SDS:US, an ETF which shorts the US market.
- We are long of SKF:US, an ETF which shorts the US financial sector.
