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John Tepper Marlin

John Tepper Marlin

Posted March 6, 2009 | 09:12 AM (EST)

Enough Blood on the Street?

The U.S. economy lost 651,000 more jobs (nonfarm payroll) in February, says the BLS, for a cumulative loss of 2.6 million in the past four months. The unemployment rate rose from 7.6 to 8.1 percent.

These numbers were anticipated by the stock market to some extent yesterday. The market is always looking ahead and historically leads the economy by months. Higher unemployment rates are expected. Meanwhile, how low can the market go?

In 1815, Nathan Rothschild said that the time to buy stocks was "when there is blood on the streets". Are we there yet?

The Great Depression lasted a decade, but the Dow industrial index hit its low in less than three years. It fell 89 percent from its high of 381 on September 3, 1929 to its low of 41 on July 8, 1932. The economy remained sour for the rest of the decade but the stock market picked up.

For the enthralling story of what happened during those years, I recommend chapters 17-20 of Liaquat Ahamed's timely Lords of Finance: The Bankers Who Broke the World. I had the pleasure of listening to Liaquat talk at a recent evening event in New York City. He modestly disclaimed knowledge of the financial disasters that were going to happen and simply said that the Time magazine cover showing Robert Rubin, Larry Summers and Alan Greenspan with the caption "Committee to Save the World" suggested to him the idea for his book. The title reminded him of the name given to the top bankers working on global financial problems after World War I, "The Most Exclusive Club in the World." The book studies the origins of the Great Depression that is clearly told by taking the different perspectives of the four leading actors of the period, the Lords of Finance -- Montagu Norman in the UK, Benjamin Strong at the New York Fed, Hjalmar Schacht in Germany and Emile Moreau in France.

Yesterday's stock-market drop brings us to a cumulative decline that can only be compared with the 1930s. Fearful of today's jobs report, investors drove the major U.S. stock averages down 4-7 percent. Jack McHugh has tallied from how far down this took the markets from their peaks.

I think we can all agree that what ails our economy and markets is worse than anything since that awful time [the Great Depression], and the worst punishment Mr. Market has meted out since the 1930's was a drop in the S&P 500 of just less than 50% (1974 & 2002).
The cumulative drop from their peaks (October 11, 2007 so far is:
Dow Jones Industrial Average -- All Time High: 14,198. March 5 - Down 53.6% to 6594.
Standard & Poor's 500 -- All Time High: 1576. March 5 - Down 56.7% to 683.
Russell 2000 -- All Time High: 856.50. March 5 - Down 59.2% to 349.45.
KBW Bank Index (BKX) -- All Time High: 121.16. March 5 - Down 84.3% to 18.97.

Barry Ritholtz's blog provides this list of Blue Clip penny and under-$10 stocks: AIG (39 cents - less than it costs to mail a letter). Citigroup (98 cents). E*Trade (66 cents). Fannie Mae (39 cents). Freddie Mac (39 cents). Unisys (37 cents). Ford ($1.83). GM ($1.83). Las Vegas Sands ($1.97). MGM ($1.99). CIT ($2). Kodak ($2.50). Bank of America ($3.15). New York Times ($4.00). News Corp ($6.15). Xerox ($4.36). International Paper ($4.22). Alcoa ($5.55). GE ($6.75). Dow Chemical ($6.56). Wells Fargo ($7.95). Dell ($8.50).

In terms of timing, the Dow peaked before FDR came to office - before he was even elected. So the fears are lingering longer now than they did then.

In what ways are markets and economies possibly worse off than in 1932?
- Expectations are higher because billions of people in the developing countries who were anticipating joining the global economy are seeing their hopes dashed or diminished. The 1930s effects were severe but were concentrated on the industrialized countries. The potential for instability in some countries is great and the proliferation of weapons makes this scarier for more parts of the world than in the 1930s.

- The size of the credit overhang is much larger. The gold standard, for all of its faults in extending the distress in the 1929-33 period, kept a lid on the growth of credit. Today's system has had no equivalent limit to credit growth. Credit-market exposures today exceed GDP - in the United States by 50 percent, estimates Liaquat, in the UK by four times, and in Iceland by eight times GDP.

- In the world's second-largest economy, Japan, the stock market has fallen 81 percent from its peak at the end of 1989. Its 20-year decline raises questions about how quickly the world's current mess can be cleaned up.