Michael Lewis, former Salomon Brothers bond trader turned famous author (Liar’s Poker, Moneyball), published a new article on the collapse of Wall Street investment banks about a week ago. The title of the article is “The End”. It doesn’t paint a very good picture of Wall Street, to say the least. If you can stomach some vulgar language and behavior, please read it. Among other things, Michael visits his former boss, ex Salomon CEO John Geutfreund, for the first time in 20 years. Perhaps our commercial banks should be private.
This has officially become the worst year for the markets since 1931. In 1932 the markets declined another 46%. Could that happen this time? David Rosenburg, Merrill Lynch’s bearish Chief Economist, doesn’t think so, but says that half that downside or a flat five years going forward could still be possible based on an analysis of annualized rates of returns from bear market to successive bear market lows. The key differences between then and now are the levels of unemployment and GDP, both of which were substantially higher in the Great Depression.
In recent research, Dave Rosenburg and economist Art Laffer also caution us against the false notion that the government can save us from our current troubles. In President Bush’s address of G20 nations last week, he admonished us “to recognize that government intervention is not a cure-all. History has shown that the greater threat to economic prosperity is not too little government involvement in the market, but too much.” With the Treasury Department backing away from the need for a full $700 billion in bailout funding, perhaps the good news is that a budding belief in the system’s ability to work things out on its own may be gaining traction. Many good books argue that the Great Depression was prolonged by too much government involvement rather than too little. In observing the actions of Congress in recent weeks, I for one would take no comfort in their ability to run private enterprise or make basic business decisions.
Obviously, this is not a typical recession. Already, many economists are projecting Q4 GDP to decline 5% after being up for most of the year. Unemployment is also expected to peak at 9% from current levels of 6.5%. Ruling out the possibility of another Great Depression based on policy errors, the good news would be that the S&P 500 has typically started to increase in the middle of past recessions in spite of continued rising rates of unemployment. As hard as it may be to stomach, this is one reason to be encouraged by the fact that the S&P 500 has managed to bounce off the 820’s level on several occasions in the last few weeks, including dramatically so yesterday. Hopefully, we’ve seen the worst of things in the stock market even though the economic fundamentals are likely to get worse.
From a fund flows perspective, equity funds generated record net redemptions during the month of October across both equity, fixed income and international asset classes. Where did all the money go? Into record sales of money market funds. The only month that comes close to the $64 billion pulled out of equity funds in October was the $42 billion that was pulled out in July of 2002. International funds only saw half the redemptions of domestic equity funds, perhaps giving additional credibility to the view that the U.S. was the first to enter and might be the first to exit from this mess.