7.16.10thewrongdebate

8/9/2019 7.16.10TheWrongDebate

1/3

Continental Capital Advisors, LLC July 16, 2010

1

The Wrong Debate

There is an ongoing debate among investors and economists about whether the US economy is in the

midst of an economic recovery or at the edge of a double-dip recession. Both sides of the debate

seem too optimistic as even those who are cautious about the economy are only assigning a 50%chance to the double dip scenario. In our view, the economy is in a depression and, therefore, the

argument should be centered on how long it will take people to realize the extent of the economysproblems.

During the bear market rally that lasted from March 2009 through April 2010, many people believed

that the US was experiencing a strong economic recovery. However, since the stock market peak onApril 26, 2010, investors are now considering, but largely dismissing, the possibility of a double-dip

in the economy. In fact, Europes recent sovereign crises and Chinas decision to tighten lending

requirements on real estate purchases have been rationalized as temporary factors. Meanwhile, USeconomic and housing statistics have started to roll over, but the debate remains one about slow

versus strong growth.

This is not the first time a debate of this type has existed while the economy was in a depression.

Following the stock market crash in 1929 a rally in equities of nearly 50% took place from

November 1929 through April 1930. That market advance led investors and businessmen to thinkthat stocks had risen because the economy would resume its growth trajectory. Yet when the rally

ended in April 1930, equities fell another 86% through July 1932. However, despite falling stock

prices, people did not acknowledge that the economy was in a depression until the economiccollapse was well underway. We believe the economy and the stock market are at the same juncture

as they were in 1930. Figure 1 shows the initial stock market decline following the peak in April

1930, which correlates closely to the current Dow Jones Industrial Average shown in Figure 2.

Figure 1. 1928-1930 Dow Jones Industrial Average

0

50

100

150

200

250

300

350

400

450

10/28

11/28

12/28

1/29

2/29

3/29

4/29

5/29

6/29

7/29

8/29

9/29

10/29

11/29

12/29

1/30

2/30

3/30

4/30

5/30

6/30

Source: Yahoo! Finance, Continental Capital Advisors


2/3


2


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1/05

5/05

9/05

1/06

5/06

9/06

1/07

5/07

9/07

1/08

5/08

9/08

1/09

5/09

9/09

1/10

5/10


Figure 3 is the full bear market of the Great Depression.


0

50

100

150

200

250

300

350

400

450

10/28

1/29

4/29

7/29

10/29

1/30

4/30

7/30

10/30

1/31

4/31

7/31

10/31

1/32

4/32

7/32

10/32



3/3


3

Government stimulus has led to economic statistics that misrepresent the underlying state of the

economy. Although interest rates have been 0% for over a year and a halfand the Federal Reserve

has tripled the assets on its balance sheet, equity markets and economic statistics are deteriorating.Even more worrisome is that the US is more levered today than at any other time in its history.

Although optimists hope that further quantitative easing by the Federal Reserve will stimulate theeconomy, they are ignoring Japans historical example of how continuous quantitative easing has not

helped Japans troubled economy (see Quantitative Easing Does Not Guarantee Higher StockPrices). Eventually, when the Government has exhausted all means and the stock market has fallen

to new lows, people will realize the existing depression.

Daniel Aaronson [email protected] Markowitz, CFA [email protected]

http://www.continentalca.com

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text

should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their

broker and personal financial advisors before engaging in any trading activities. Certain statements included herein

may constitute "forward-looking statements" within the meaning of certain securities legislative measures. Such

forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the

actual results, performance or achievements of the above mentioned companies, and / or industry results, to be

materially different from any future results, performance or achievements expressed or implied by such forward-looking

statements. Any action taken as a result of reading this is solely the responsibility of the reader.
http://www.continentalca.com/home/June-18-2010http://www.continentalca.com/home/June-18-2010http://www.continentalca.com/home/June-18-2010http://www.continentalca.com/home/June-18-2010http://www.continentalca.com/home/June-18-2010

7.16.10thewrongdebate

Documents