No, this graph is NOT reassuring!

This week's edition of Barron's contains an article entitled, "Does Extreme Stress Signal an Economic Snapback?" the thesis of which is carried in the subtitle: "More than a decade's worth of equity gains has evaporated. But history suggests that stocks won't fall much further." The article includes the following graph offered in support of the main thesis:

We are supposed to all think that our 201k's (formerly 401k's) are undervalued now and will at least grow back to the historic norm.

Don't know about you, but I find that graph FAR from reassuring: in fact, it appears to support the opposing thesis.

Throughout the 1990's, pundits claiming that stocks were overvalued would frequently cite the Q (or Tobin's) ratio, a similar ratio of stock value to their replacement costs. Despite their entreaties, the value kept growing further and further away from the "norm" up until the 2000 top -- just as the graph above shows that stocks remained above their "average" level for the entire 1960s and 1990s.

As described in this article (which includes an updated graph) as of 2006 the "Q ratio" still hadn't reverted even to its historical long-term average!

Indeed, what the graph above tells me is that stocks will continue to decline until they reach the ratio of .4 to GDP. And, by the way, following both the 1929 and 1966 highs shown on the above graph, typically that .4 reading was reached initially during times of severe economic stress where the GDP had declined substantially!

So what the graph above tells me is that, some day in the not-too-distant-future, on a very bleak day when the GDP has declined perhaps 10% from today, the S&P will be worth only 4/10 of that GDP. In other words, the S&P 500 has perhaps another 40% to decline from here before it reaches its long-term bottom, at the end of the Slow Motion Bust.

Hardly reassuring.

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Comments

suckers rally/dead cat bounce?

The stock market correlating to GDP, what a concept!

NDD have you noticed the wild swings of the stock market are similar to the ones before the big Oct 28/29 crash which just kept going down for a month?

Dow Jones last 3 months:

Dow Jones Oct., Nov. 2008

This is a nice Wikipedia article which has tables of data showing 2008 has set records for intraday swings, percentage gains and losses. The dates you see for percentages and wild swings are now and the Great Depression.

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In case anyone needed a

In case anyone needed a reminder about the state of the economy, Jacques Villeneuve -- Canada's only Formula One/Indianapolis 500 champion -- brought it home in spades yesterday. The native of Saint-Jean-sur-Richelieu, Que., appeared at the Canadian Motorsports Expo at the International Centre and spelled out just how hard it has been for him to attract enough sponsorship dollars to get his newly minted NASCAR career back on track. "It's tough going," he said. "There are still a bunch of (NASCAR) teams that are looking at getting funding for 2009 and I am spending virtually all my time trying to get (a deal) done." The frustrating thing, of course, is that Villeneuve should be able to stand before any corporation in Canada, shake hands with a few company directors and come out with a wheel barrow full of cash to back any kind of racing venture that he wanted. After all, he has one of the most recognizable names in all of sports; his late father is worshipped on two continents and he is a two-time Canadian male athlete of the year. And at 37 years old, he still is young enough to drive at least five more seasons at the top of his game in NASCAR. All this, however, amounts to a hill of beans with the auto manufacturing world in a death spiral. "I am at my core an optimist," Villeneuve said.

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Anyone using NASCAR as an economic indicator

well, maybe that will fly over on freakonomics but it isn't much of a barometer on EP.

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Actually, though, there's a point to it

It's an interesting barometer to be sure. During the Great Depression, the one industry that actually succeeded was Hollywood- movie making. Entertainment for the depressed masses who had nothing better to do with their time, sold at a reasonable cost (back when going to the theater WAS reasonable- 5 cents admission, 5 cent popcorn, 5 cent coke, and for 15 cents you could forget that society was falling apart around you for a couple of hours).

However, NASCAR, unlike Hollywood, runs on a sponsorship model. The attendance in the seats & TV deals mean almost nothing- the pot for the winner and maybe a small profit for the track owner. The teams themselves are just a fancy form of advertising.

And in a downturn, advertising gets looked at first as a place to cut- especially a high ratio dollars-to-eyeballs advertising like NASCAR.

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Maximum jobs, not maximum profits.