Of further concern is whether, and when, the above-mentioned problems might reach a point at which another (financial system) crash occurs.  I am particularly concerned about the prospects of the next crash for a number of reasons, of which I will elaborate upon shortly.

“The next crash” is a topic of great importance.  In the October 13, 2010 post (“Comments On The Next Crash“) I stated:

In the past I have commented that I view a future crash as certain.  Like that of 2008, such a crash would include not only equity markets but many others as well.

also:

…this next crash should be accorded great importance as it is likely to be severe, i.e. outsized by historical standards.

I also mentioned similar aspects in point #9 of “10 ‘Front and Center’ Problem Areas That Pose a Threat to the Economy.”  Also from point #9:

Have we, as a nation, taken appropriate steps to avoid further financial and economic “crashes?” I would argue we have not, unfortunately.

Perhaps the main reason this next crash should be of paramount importance is its capability to usher in severe economic weakness, i.e. what would widely be considered a Depression.  History has shown that stock market (and overall financial market crashes) often precede periods of pronounced economic weakness.

For many reasons, a Depression at this point would present inordinate challenges and hardships.

The economy needs a certain level of momentum, a level which it must maintain in order to function properly.  If it doesn’t maintain such a level, many different ill-effects are felt, not only from a strict economic sense but from a societal one as well.  Some of these societal impacts were mentioned in a February 15 2010 post titled “America’s Economic Future.”

Due to the enormity and complexity of our economic problems, there is a high likelihood that we would go into what I have termed a “Super Depression.”  As defined in my June 23, 2009 post (“The Concept Of A “Super Depression“), a Super Depression is :

…a severe Depression embedded with highly complex, difficult-to-solve problems.

While no one likes to contemplate an economic future rife with adversity, the resolution of our current economic problems should be feared and respected.  Absent proper economic policy, one shouldn’t underestimate the downside of the resolution of our economic problems, especially given both apparent and unapparent evidence.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1281.06 as this post is written

There is a section discussing depressions on The NBER’s Business Cycle Dating Procedure:  Frequently Asked Questions page.  As seen in the discussion, it says:

The term depression is often used to refer to a particularly severe period of economic weakness. Some economists use it to refer only to the portion of these periods when economic activity is declining. The more common use, however, also encompasses the time until economic activity has returned to close to normal levels. The most recent episode in the United States that is generally regarded as a depression occurred in the 1930s.

also:

However, just as the NBER does not define the term depression or identify depressions, there is no formal NBER definition or dating of the Great Depression.

A January 14, 2009 article in Forbes, titled “What Is A Depression, Anyway?” also examines the issue as to how a depression is defined, and finds “While there’s a fairly standard definition for a recession (two quarters of shrinking gross domestic product), there isn’t one for a depression.”  However, the article later states with regard to a depression:

… a 10% contraction is often cited as the tipping point.

A March 10, 2009 CalculatedRisk blog post titled “What is a depression?” also examines the issue.  An excerpt:

Although there is no formal definition, most economists agree it is a prolonged slump with a 10% or more decline in real GDP.

As well, other sources confirm the lack of a standardized definition, although the 10% decline in economic activity (measured via real GDP) is most commonly cited.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1195.19 as this post is written

One question that may arise is how the wealthy and ultra-wealthy will be ultimately impacted in severe economic weakness, i.e. conditions most will label a Depression.  Of course, in the last 100 years or so, The Great Depression is the only episode of such an environment in the United States.  While to my knowledge there is no definitive study of loss of wealth among the most affluent during The Great Depression, it appears as if many of the wealthiest Americans during the period experienced a pronounced reduction in wealth.  Some, including the most wealthy and influential of the day, “lost everything.”  One documentary of the period that illustrated this facet was “The Crash of 1929” that I highlighted in the July 8 post.

This current economic and investment environment is one in which large percentages of wealth can be quickly lost.  I base this statement on many factors, one being the existence of many asset bubbles, which I have written of extensively.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1164.97 as this post is written

Along those lines, I have always found the American Experience documentary titled “The Crash of 1929″ to be of great interest.  Although it is less than an hour long, it does a great job of not only explaining various aspects of what happened in 1929, but also provides a tangible “feel” of the “atmosphere” surrounding the period.

There is much that is noteworthy in the documentary.

The Crash of 1929 serves as a reminder of how devastating epic “crashes” – and their aftermaths – can be.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1353.22 as this post is written

This observation is supported by a number of factors, including that of a Gallup poll released yesterday.  The poll is titled “More Than Half Still Say U.S. Is in Recession or Depression.”

The poll displays a variety of information, but the main finding is that currently 27% of the respondents indicate the economy is “growing”, 16% say it is “slowing down”, 26% think it is “in a recession,” and 29% think it is “in a depression.”

Also of note from the poll, “Although economists announced that the recession ended in mid-2009, more than half of Americans still don’t agree. These ratings are consistent with Gallup’s mid-April findings that 47% of Americans rate the economy “poor” and 19.2% report being underemployed.”

As well, from the poll’s Press Release:  ”In another possible disconnect with monetary policymakers, many Americans may not see the trade-off Bernanke suggests between promoting a stronger economy and experiencing higher inflation. Right now, prices are soaring, yet the latest Gallup Daily tracking data show that 67% of Americans say the economy is “getting worse.”

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1359.01 as this post is written

I view this speech as highly noteworthy – epochal, even – especially in relation to the efforts made to “bring the economy back” from the depths of the Financial Crisis.

Here are some excerpts that I find particularly relevant:

“I draw four relevant lessons from the financial collapse of the 1930s; I will first list these lessons, then briefly elaborate. First, economic prosperity depends on financial stability; second, policymakers must respond forcefully, creatively, and decisively to severe financial crises; third, crises that are international in scope require an international response; and fourth, unfortunately, history is never a perfect guide.”

also:

“In the current episode, in contrast to the 1930s, policymakers around the world worked assiduously to stabilize the financial system. As a result, although the economic consequences of the financial crisis have been painfully severe, the world was spared an even worse cataclysm that could have rivaled or surpassed the Great Depression.”

also:

“That lesson brings me to the second one–policymakers must respond forcefully, creatively, and decisively to severe financial crises.”

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my comments: In June of 2009, I wrote a four-part “Depression” series.  One part, posted June 22, was titled “Are We Avoiding a Depression?” In that post I discuss  the issue from a logical perspective.  It addresses many of the points Ben Bernanke spoke of in his aforementioned speech.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1333.51 as this post is written

From time to time I plan on commenting on various material contained therein as much of it is highly relevant to issues we are currently encountering.

In Volume 9 there are a couple of comments made, at roughly the 40:36 mark and 42:40 mark, by Congressman Clarence J. Brown and moderator Robert McKenzie, respectively.  In essence, they are commenting upon how the experience of The Great Depression has had a great psychological impact upon the country, and as such drives many of our economic fears and actions.  This commentary is especially notable as the series was filmed in 1980.

This mindfulness of The Great Depression seems highly elevated in current times as well.  This is seen in numerous ways.

For example, Ben Bernanke’s background includes being considered a foremost scholar of The Great Depression.

Furthermore, during and after “The Financial Crisis” there were innumerable mentions and comparisons to The Great Depression, many by policy makers.  I have highlighted many of these instances in past posts.

A Special Note concerning our economic situation is found here

SPX at 1273.72 as this post is written

I found this comment to be especially noteworthy:

“The newfound interest in the likes of Keynes and Hayek makes sense, too—their ideas were shaped by the Great Depression, which is the last time things were worse than they are now (for the U.S., anyway).”

Ever since the onset of the “Financial Crisis” there have been many prominent people who have indicated that they believe our current economic situation similar to that of  The Great Depression.  I have written of these comparisons on numerous occasions.  As I said in the July 13, 2009 post, “…although our current period of economic weakness does have similarities to that of The Great Depression, there are notable differences as well.  To believe that both situations are very similar, and by acting accordingly, imperils our economic situation.”

A Special Note concerning our economic situation is found here

SPX at 1283.35 as this post is written

During this interview, he said:

“[The] typical error most countries make coming out of a financial crisis is they shift too quickly to premature restraint. You saw that in the United States in the 30s, you saw that in Japan in the 90s. It is very important for us to avoid that mistake. If the government does nothing going forward, then the impact of policy in Washington will shift from supporting economic growth to hurting economic growth.”

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My comment:

I find this comment noteworthy as it is yet another reference to the 1930s.  Ever since the onset of the “Financial Crisis” there has been a continual flow of comparisons of our current economic situation to that of  The Great Depression.

I have written about these comparisons on numerous occasions.  As I said in the July 13, 2009 post, “…although our current period of economic weakness does have similarities to that of The Great Depression, there are notable differences as well.  To believe that both situations are very similar, and by acting accordingly, imperils our economic situation.”

A Special Note concerning our economic situation is found here

SPX at 1121.1 as this post is written

I am sure that the mere idea of such a target seems impossible to many.  However, for a variety of reasons, many indicated in the aforementioned article, I believe that such a target is not only possible but increasing in likelihood.

I would like to provide an update on the ideas originally presented in that article, given that much has happened since that article was written.  In this update I will divide my comments into two areas, technical and fundamental analysis, as I did in that original article.  In order to avoid repetition, I will assume that one has already read the aforementioned original article.

Technical Analysis

Here is a chart of the S&P500 and Dow Jones Industrials on a monthly basis since 1980: (chart courtesy of StockCharts.com)

(click on chart to enlarge image):

As one can see, in 1982 the S&P500 price of 101.44  roughly corresponded to a Dow Jones Industrials price of 770.

From a technical analysis perspective, it remains difficult to derive any meaningful “support” between current S&P500 levels and that of the 100 price region.

Additionally, there are a variety of other technical measures that are worrisome, both from a long-term and short-term perspective.

One other item that should be considered is that of time.  As I wrote in the March 2009 article, “Should the stock market fall to the 100 area, what might be the timing?  Again, this is a difficult question.  If one were to casually answer, one might think such a decline from the October 2007 highs might occur in a 3-5 year timeframe, perhaps longer.”  Of course, we are rapidly approaching the 3rd anniversary of the October 2007 high, which is significant.

Fundamental Analysis

The fundamental argument for an S&P500 target of 100 is complex.  Many would vigorously argue against such given the current economic environment of strong corporate earnings, robust financial markets, optimistic consensus economic forecasts, and various statistics showing sustained growth.

Perhaps the easiest way to envision a S&P500 level of 100 is in a “negative earnings” environment.  When the original article was written, this “negative earnings” (i.e. a loss) for the S&P500 seemed like a possibility.  Now, with consensus 2010 earnings (on an “operating basis”) estimates of $80-$85/share, with increases projected for 2011, such a “loss” scenario would seem highly improbable.

However, as I noted in the original article, “…since the financial crisis began, outliers and other “odd occurrences” have propagated on a vast scale.  The mere existence of such an array of outliers would seem to argue that one should be open to possibilities that normally one wouldn’t, or shouldn’t seriously consider possible. “  Many have ignored these outliers and “odd occurrences,” which I believe is a critical mistake.  These outliers and “odd occurrences” are numerous, and many have been mentioned in this blog; perhaps most noticeable among these outliers is outsized unemployment that is proving rather intractable.

As I wrote in the June 29 post, “it behooves us to at least condider whether instead we are in a continuing Depression, as I have previously written.”  If one does believe this is a Depression – in which current economic strength is of a transitory manner – the ramifications of such are important, as it would indicate that not only is more weakness coming, but most likely of a more (vs. the trough of 2009) severe nature.

My analysis indicates that our current and future economic conditions are of great complexity.  At the core of any current economic analysis and forecast should be the question “Are our current national actions to improve our economic condition leading to that of sustainable prosperity?”  From an “all things considered basis” I do not believe so, unfortunately.

As to whether a S&P500 level of 100 is forthcoming – I continue to believe in the following, which I stated in a September 1, 2009 post:  “Since I wrote the article “A S&P500 Target of 100?” discussed in the last post of that Depression series I have used the S&P500 price of 100 as a type of potential endpost, and have been thinking of what type of probabilities to assign to its likelihood of occurring in the near future (a  two-year window since it was written).  Most people would think that such a price target is simply impossible.  However, since I wrote the article in early March, the probabilities I have assigned to it have increased, unfortunately.”

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