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Friday, February 13, 2009

The More Things Change

I’ve been reading the news lately and find it amusing and interesting how many times history repeats itself. The latest one to amuse me is A-Rod, or Alex Rodriguez. For those of you who don’t know, A-Rod is the third baseman for the Yankees. He is the youngest player to ever hit 500 home runs, and has a 10-year, $275 million dollar contract (to do something that’s fun). Recently (February 7), it was reported that A-Rod tested positive for steroids during the 2003 season (when he won the MVP and broke 300 career home runs). So, we have a high profile top athlete, cheating to achieve success. Gosh, what a surprise!

Then we get Michael Phelps. Michael Phelps, as I think everyone knows, is the human porpoise who garnered 8 gold medals at the Beijing Olympics. Michael was playing with another banned substance, but this one wasn’t a performance enhancer. Michael led a Spartan life of training for years to reach the pinnacle of his sport. His endorsement value was purported to be $50 million dollars. Yet Michael seemed to think it was a good idea to be photographed drinking beers (I’m OK with that) and smoking a bong (a bong, for readers who didn’t grow up in the 60s-80s, is a marijuana pipe). So we have a 23-year old being stupid. Gosh, what a surprise!

Oh, and Bernie Madoff. Now A-Rod and Michael Phelps may be high-profile stupidity poster children, but Madoff is a truly impressive criminal. For years, Madoff ran the largest investment fraud (by a factor of almost 100!) ever committed. He swindled $50 Billion from investors, including Steven Spielberg, Kevin Bacon, John Malkovich and Zsa-Zsa Gabor. What’s truly impressive is that Bernie kept the scam going for over 20 years, and stiffed mostly his friends. A monstrous crook, who if we saw him in a movie, would find the plot too preposterous. Crooks near money. Gosh, what a surprise!

I was talking to my mom, who was fretting about stupid athletes and crooks. I pointed out that stupid athletes and crooks have been around as long or longer than sports or money. The more things change the more they stay the same.

Which leads me to some observations about the current financial mess (‘abomination’ also is a suitable descriptive word). Whenever we are in a crisis, we tend to see the trees, and miss the forest. There are, to be sure, some unique aspects of this bear-cession; but there are some historical precedents as well:

“This is the worst market since the 30s.” Well, maybe. This market is awful, and down over 40% from its peak. The media is running around making gruesome comparisons to the Great Depression. However, I’ll bet many of us can remember a really ugly bear market, where the S&P 500 dropped 49%. It was 2000-2002. 1973-74? Dropped 48%. So this is ugly. But we’ve seen ugly before. Oh yeah, and 12 months after the trough in 2002, the market had regained 34%. 12 months after the trough in 73-74, the market had regained 38%. They go down, they go up.

“Unemployment is going through the roof and that will drive us into a depression.” Unemployment is spiking (now at 7.6%) and people out of work is bad. However, unemployment has spiked 7 times in the past 50 years. In 1975, it was well over 8.5%, and in 1982, it was over 10%. Oh, and guess what happens after the spike in unemployment? The market goes up. 12 months after the 1975 spike, the S&P 500 was up 31%. 12 months after the 1980 spike, the market was up 31%.

“Consumer Sentiment is in the toilet!” The U of M Consumer Sentiment Index (which may explain Michel Phelps recreational activities) is near a 28-year low of 57.9. That’s about what it was in February of 1975 (and the market went up 22% in the next 12 months), but not as low as it was in May of 1980 (when the market went up 18.1% in the next 12 months). It’s close to the plunge in confidence in October of 1990, (when the S&P 500 went up 29.1% in the next 12 months). The consumer confidence level behaves like a 15 year old teenage boy at a dance: the low confidence is eventually followed by more confidence.

“The debt load on this bail-out is going to kill us!” With the Stimulus package now passed, and the bank bailout bill, the United States will be running a monstrous deficit. This deficit can only be funded through debt, which increases our national debt load. However, measurement of numbers in absolute is not as relevant as numbers in perspective. If we look at National debt as a percentage of GDP, even with the Stimulus/bailouts, the National debt as a percent of GDP is lower than all the years from 1942 -1960, and is still lower than in 1993-94. Gross debt (public and private) is high, but I’m thinking the new rules of banking (like you need a real job, a real credit score and some security) will modify that debt load.

“This time it’s different!” This statement is probably right in more ways than those that utter it realize. There are some unique characteristics of this bear-cession: zero interest rates, 75% declines in energy prices, global asset declines, low real estate prices, and more money out of the market than in the market. Never in any prior downturn have the economics been so good. We’re just missing that one little important ingredient: Confidence. When confidence comes to the table, we will see an economic recovery.

As I talk about the causes of this debacle with people, I usually hear a common theme “I can’t believe all of those greedy crooks on Wall Street could get us into this mess!” Gosh, greedy crooks on Wall Street. What a surprise. The more things change, the more they stay the same.

Happy Spring

Leon and the Team

PS: As a practicing Catholic, I noticed that the Church is re-instituting indulgences, or the practice of paying the Church for absolution of sins (never mind it’s why Luther started the Protestant Reformation in 1517). I find the use of indulgences interesting in these times, and wonder if Madoff may convert?