Finance Weblog: Is this crisis like 29´s or is it going to get worse?: The Armageddon!

Abril 28, 2008

Is this crisis like 29´s or is it going to get worse?: The Armageddon!

Antonio Rivela

This is the main title of my beloved "El Pais de los Negocios" yesterday, as of 27 April 2008.
I have added "The Armageddon!" satirically to make it even more dramatic.

I understand they are trying to sell newspapers but I reckon I got a little bit frustrated when I first read it.

This is what happened that Black Tuesday...

On Black Tuesday, the Dow Jones Industrial Average fell 38 points to 260, a drop of 12.8%. The deluge of selling overwhelmed the ticker tape system that normally gave investors the current prices of their shares. Telephone lines and telegraphs were clogged and were unable to cope. This information vacuum only led to more fear and panic. The technology of the New Era, much celebrated by investors previously, now served to deepen their suffering.
Black Tuesday was a day of chaos. Forced to liquidate their stocks because of margin calls, overextended investors flooded the exchange with sell orders. The glamour stocks of the age saw their values plummet. Across the two days, the Dow Jones Industrial Average fell 23%.
By the end of the week of November 11, the index stood at 228, a cumulative drop of 40 percent from the September high. The markets rallied in succeeding months but it would be a false recovery that led unsuspecting investors into the worst economic crisis of modern times.
Although it is popularly believed that the Crash inflicted heavy financial loss on investors during this period, the Great Depression which followed was far more terrible. While the Crash dealt a severe blow to many a stockholder's portfolio, the Great Depression brought obliteration and bankruptcy. Before it was over, the Dow Jones Industrial Average would lose 89% of its value before finally bottoming out in July 1932.

Have you guys lost your mind?: How come can you compare the crisis of 1929... the mother of all the crisis with this one?

I am going to show 3 graphs to prove my point so this article will not be too long I guess.

First of all the equities market, the market that even "men on the street" follow... Neither the US Dow Jones (10% down since last year´s maximum) nor the European version Eurostoxx (8% down since last year´s maximum) would be even close to a 1929 situation.

Touch link to see Equity indexes. Source: Bloomberg

Secondly the credit markets depicted by ITRAXX in Europe and its US counterpart: The CDX. Credit spreads have just moved to a much more logical and fundamental level. It did not make any sense that ITRAXX (the index that measures the level at which European BBB companies fund their loans and bonds was trading at EURIBOR+0.20%! ).

Now, as we can see in the picture ITRAXX is trading at EURIBOR+0.79% much more in line with fundamentals and common sense (the least common of the senses!).

Touch link to see Credit indexes. Source: Markit

Finally the dollar market... Is it a surprise that dollar has weakened consistently for the last years? Categorically NO!... Every "white collar" financial analyst has been talking about the implications of the US "twin deficit" so We knew this was coming... and in fact it is a good thing for the US.

The level of exports will rocketeer and sooner rather than later they will be leading the world economy.

Touch link to see Currencies. Source: Bloomberg

Now... let´s think about it again.... are We in the 29´s?

Touch link to learn about Great Depression. Source: Wikipedia

Posted on 28 Abril 2008

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Comments

Couldn't agree more. We haven't seen nearly as much turmoil these days as what was observed in the dirty thirties... We likely won't either - but the media may continue to lead us to believe that we're in for the worst. Let's just hope that people don't write their own history by reading the newspaper.

Posted by: Canadian Mortgage Broker at Mayo 9, 2008 02:53 AM

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