Heathrow Airport is a nightmare in many ways. It is so large it can take hours to get from one terminal to the next. Yet, when we came back from Vancouver on Saturday, we landed at 10:30AM. By 11AM we were in central London.
We flew through the airport…got the express train. The whole thing took only a fraction of the time it takes us when we fly into Dulles at Washington.
But London was in a sour mood when we returned.
“Decade of pain predicted for public services,” was the headline on Friday’s Guardian from London. The reason for the decade of pain is the obvious one. Tax receipts are down – because of the depression. Governments are caught in a bind. Their revenues go down just as their costs – offering bailouts, counter-cyclical stimulus, and handouts to the unemployed – go up.
Ireland and California have been in the news on this subject. But they’re hardly alone. It’s a problem for almost all governments in the English-speaking world. As for the rest of the world, we don’t know.
Ireland is facing its own decade of pain. So is California. This morning, California is in the news. Apparently, a deal has been worked out. The state will stay in business…and even pay off its IOUs. But it will mean cuts of ‘services.’ Here at Markets and Money, whenever we modify the word ‘services’ with the word ‘government’ we feel we should warn readers that we don’t really mean it. Most government services are a disservice…like a government-subsidized business they are a fraud on the economy, absorbing valuable resources in order to provide a ‘service’ that is worth less than the inputs that were required to provide it. The service is a disservice to the broader economy.
And today too we find that England is sinking deeper into depression; it too will have to endure a decade of painful honesty.
“UK Slump Identical to that of 1930s,” says Saturday’s headline in the TIMES.
A chart traces the decline…to minus 5.6% GDP growth over the past 12 months…paralleling the decline following the crash of ’29.
“The collapse is Britain’s economy now rivals the worst days of the Great Depression…” continues the report.
If it continues following along on the 1930s track, the UK economy will continue to decline…and bottom out at 7% or 8% below pre-crisis output. Then, it will bottom out over a period of a couple years before beginning a recovery, back to pre-crisis GDP levels.
If that’s correct, we’re only about 2/3rds through the depression in terms of output…and only about 1/3 in terms of time. Remember, the first leg of the Great Depression lasted 43 months. So far, this one is only 19 months old. It probably has a ways to go.
The stock market has a ways to go too. The Dow was up 23 points on Friday, bringing it to 9093. Like the economy, the stock market runs in long cycles – from bull to bear and back to bull again. The first post- war bull cycle took the Dow from under 100 to nearly 1,000 in 1966. Then, the index shilly-shallied around for the next 16 years. Adjusting for inflation, investors lost more than half their money during that period. Then began the big bull market that dominated our financial lives until 2007. But this bull market actually topped out in January 2000 – in real terms. Adjust for inflation and investors made nothing during the 2000-2007 period. So, the current bear market has been going on for nine years already. But if it lasts as long as the typical major bear market of the 20th century, about 18 years, that means it is only about half over. Look for it to end sometime between 2015 and 2020.
Where will the Dow be then? We can make a guess. If the economy were to lose, say, 10% of GDP…the loss in incremental sales would probably erase about 50% of corporate profits. And the financial industry, which had been responsible for 40% of corporate profits at its peak, will probably go back to a more reasonable figure of 10% of corporate profits – so that’s a loss of 30%. Of course, there’s some overlap on these figures – and a huge dose of Daily Dead reckoning – but maybe the loss of corporate earnings averages about 60%. So, if 2007 were a base of $100 in corporate earnings, we can expect only $40 sometime in the future.
The most important thing that happens in a bear market is that the multiples go down. Investors, who were prepared to pay $25 for a dollar’s worth of earnings at the peak of the bull market begin to think they’ve been too optimistic. As the depression deepens they begin to see things differently. They see earnings continue to fall and feel they should be more cautious. So they take down p/e ratios…from 25 down to as low as 5. But let us say the p/e ratio goes to 8…on Dow earnings that are only 40% of what they were in 2007. Where would that put the bottom? Dow 1600. Allow for a little inflation…maybe 2,500.
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