Because of changes in the way the unemployment rate is calculated, the figures today are apple to oranges comparisons to the ones quoted for the Great Depression or even the 1970s. Further, changes in the economy (less manufacturing) and the labor force composition (more women) make comparisons equally difficult.

Nevertheless, it bears noting that the unemployment rate in the United States was 3.6% in April 1930, this after the Great Depression had ostensibly started. By October 1932, 30 months later, it was 24.8%. It peaked at 25.6% in May 1933. These are non-seasonally adjusted figures.

Fast forward today and you might use the comprehensive unemployment figure U-6 as a basis of comparisons, of course with the caveats I mentioned in the first paragraph in mind. The Labor department defines this figure as “total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.”

In September 2006, on the cusp of the Housing Bubble bursting, the U-6 unemployment figure was 7.6%. The latest non-seasonally adjusted figure is 16.2% (this is much higher than the 15.6% seasonally-adjusted figure making the rounds on the blogosphere).

The long and short of this comparison is that the crash in employment levels during the Great Depression was much worse than it is today. Nevertheless, the U-6 numbers are pretty frightening on their own and they are due to creep higher.

Here’s that comparison in graphical form.

Related posts:

• Employment situation report paints grim picture
• Massive U.S. job loss of 598,000 in January
• A note on government statistics and unemployment
• Unemployment rate climbs to 9.4%
• Payroll data mixed despite the bullish headline job loss figure

Has the bear market come to an end? It is certainly hard to say. In January, I called for 10% down in U.S. equities, which is basically where we are now (7900 on the Dow vs. the present 7776). My view has been that we would break through 2002 and 1998 lows to the down side before this was over and we have done so. But are we going lower still?

In thinking about that question, a historical parallel from 1914-1929 might make for an interesting comparison. Take a look at the graphs below for the Dow from 1914-1929 vs. 1982-1999.

The two charts are very similar. From 1914, the Dow rose from 55 to over 380, almost 7 times. From 1982 to 1999, the rise was even greater, from 800 to nearly 12,000, more than 14 times! Given the fact that the Dow collapsed by 90% after 1929, one would have thought that trouble was in store after 1999. However, looking at the charts below, one can see that the markets have held up rather well in comparison to the Great Depression.

In both cases, in 1937 and again in 2007, the markets collapsed again by 50% after the chart period graphed. However, clearly, the market action in the 1930s was of a different class, 1929-1932 having been much more severe.

In my view, the secular bear market began in 1999 for large cap stocks making 1999 analogous to 1929 and 2007 analogous to 1937 as opposed to 1929. The Dow reached the 1937 peak again only in 1945.

Related posts:

• Dow 4,000 still in the cards?
• Chart of the day: bear market history
• Chart of the day: medium-term returns
• Chart of the day: Dow 1928-1932
• Chart of the day: Buy and Hold?

This chart and the commentary both come from FT Alphaville:

A look at the Fed’s balance sheet currently will tell you it’s very much in the business of supporting liquidity/prices in assets other than Treasuries. The graph below is a month old, but the point still holds:

The purple and red lines show the declining number of treasurys and bills held by the Fed, replaced by securities accepted under the new open market liquidity ops (green and light blue lines).

Of course, all this implies a rather long term dependence by banks on the Fed’s new auction facilities and a complete transformation of the Fed’s role in the market.

Source
The parabolic Fed: divorcing monetary policy from money – FT Alphaville

Related posts:

• Understand the Fed’s balance sheet
• Chart of the day: Real GDP growth
• Fed is buying money market fund assets
• Credit conditions
• If the Fed were a commercial bank, it might be declared insolvent

Source
2008 Political Landscape Map – Washington Post

Related posts:

• Chart of the day: Japanese Yen
• Chart of the day: Fed Balance Sheet
• Chart of the day: Commodities
• Chart of the day: Dow 1914-1929 vs. 1982-1999

For the second day in a row we are basking in the glow of an up market (update: or at least we were until the last 12 minutes). Everyone’s happy. But, some people are happier than others. And the happiest amongst the bunch are those people who are long commodities.

Take a look at these charts from Bloomberg for commodities. The gains are mouth-watering. I will have more to say on this snapback rally in stocks, bonds, currencies and commodities later.

Related posts:

• Japanese stocks, Asian real estate and commodities
• Chart of the day: Japanese Yen
• Chart of the day: Dow 1914-1929 vs. 1982-1999
• Chart of the day: Dow 1928-1932
• Panic Time at the Fed

Although off its highs for the day, the Japanese Yen is still looking very strong against every major currency. Earlier, it pushed as high as 92 yen to the dollar. Jim Rogers was on Bloomberg saying it was headed much higher.

Below is the last month’s chart for the Yen against the U.S. Dollar, the British Pound, the Euro, and the Australian Dollar.

Source
Currency Charts – Forex Street

Related articles
Yen Rises to 13-Year High Versus Dollar as Carry Trade Unwinds – Bloomberg

Related posts:

• Chart of the day: US Dollar
• Chart of the day: Aussie – Yen cross
• Is the U.S. dollar carry trade replacing the one in Japanese yen?
• US Dollar rising dramatically
• The dollar is rising against floating currencies

The United States had been living beyond its means for a very long time before the credit crisis finally hit. The truth of the matter is that U.S. monetary and fiscal policy rewarded risk-taking and leverage at the expense of prudence and saving.

The goal of government it seemed was to avoid the pain of recession and keep the economy growing at all times. Every time the U.S. economy would hit a stumbling block, the Federal Reserve would lower interest rates and flood the economy with money. Market participants learned to trust in the Greenspan Put — an understanding that they would be bailed out by Fed policy at the first signs of trouble.

This irresponsible monetary stewardship seemed to work wonders as GDP in the U.S. continued to rise year after year. Yet, large macro imbalances increased steadily year after year. Foremost among critics of U.S. monetary and fiscal policy was Stephen Roach, Morgan Stanley’s former Chief Economist and now head of Morgan Stanley Asia. He has been warning since the bust of the Tech Bubble that “global re-balancing” needed to occur, whereby the overextended U.S. consumer passed the reigns as motor of the global economy to consumers in China, India or Japan and Europe (see article).

Below are a number of charts that I have compiled which should make abundantly clear what the disequilibria were and how large they had become. Presently, this re-balancing is being forced upon us by a deep recession. It is unfortunate we could not have had the foresight to avoid the worst of things by taking corrective action earlier, particularly after the tech bubble in 2001.

History books will look on this period of U.S. history as one dominated by hubris, where fiscal and monetary policy were particularly reckless, leading the United States into a long period of decline.

Debt and savings

Housing and stocks

Related articles
The Great Unraveling – Stephen Roach, Morgan Stanley, March 2007

Related posts:

• Barack Obama ushers in a new era in America
• Stephen Roach: Downturn in Asia less severe, but recovery later
• What’s different about 2008?
• The inflation-deflation debate
• Debtflation

Yesterday, I said that investors would begin to focus on the real economy now that the financial crisis has eased somewhat due to massive government intervention. Today, retail sales figures for September 2008 were released by the United States and they were much worse than expected. As a result, shares have dropped, with the S&P 500 down as much as 5%.

Reading the business press, one gets a very distorted view of reality though. Because journalists seem to focus on the meaningless month-to-month statistics at the exclusion of more meaningful data trends. For example, AP reports that retail sales fell 1.2%, the most since August 2005. How does that compare to last year? What do the figures look like on an inflation-adjusted basis? What is the trend? None of this is explained (see story here). This does us all a huge disservice.

I took a look at the retail sales data and adjusted it for inflation and compared it to the same period last year. Below is the chart.

As you can see from the data, real retail sales growth is deeply negative at -5.5% versus last September. And the trend is clearly down. However, retail sales data is very volatile from month-to-month. In September 2001, retail sales plunged 1.8% because of 9/11, only to rise 6.6% in October. Therefore, I have also charted a 3-month average sales growth chart which smooths out these month-to-month spikes. Here again, one can see that real retail sales are deeply negative and trending down.

Unlike in the last business cycle, where lowering interest rates to 1% kept consumers spending through an economic downturn, this time this is not likely to be the case.

Related post
Back to the real economy

Related posts:

• Retail Sales: a belated look at Friday’s ugly numbers
• Retail sales: don’t be fooled
• Germany: Inflation tames retail sales
• UK retail sales drop most in 22 years
• April U.S. retail sales: upside surprise?

The last time faced a recession and a Bear Market of such viciousness was 35 years ago in the recession of 1973-1975. In the UK, it was truly horrific as inflation shot up to 25% and stocks dropped more than 90% in inflation-adjusted terms.

The Bear market of 1973-1974 simply does not get enough press. As you can see from the chart below, in the U.S. we saw a 40% drop before inflation. With the S&P down 40% from its high right now, our decline is of the same magnitude thus far.

Let’s hope 1973-1974 is a better comparison than the Great Depression or Japan in the 1990s.

This post is part of my chart of the day series.

Related posts
Chart of the day: Japan 1984-2004
Chart of the day: Dow 1928-1932

Related posts:

• Dow 4,000 still in the cards?
• Chart of the day: bear market history
• Chart of the day: Buy and Hold?
• Chart of the day: Dow 1914-1929 vs. 1982-1999
• Chart of the day: FTSE 1800-2007

If the huge sell-off on Wall Street, the gaping up of LIBOR, the halt of credit liquidity everywhere, the nationalisation of financial institutions and the enormous TED spread are not enough to convince you that we are headed for a deflationary world, then the sell off in commodity currencies should!

Just two months ago, mining giant Rio Tinto’s CEO Tom Albanese said:

“There is no question that we are living in an era of unprecedented demand for minerals and metals.”

Well, look at this chart of the Australian dollar.

A move of this size in a few days is unheard of. The Australian Dollar has absolutely collapsed. The same goes for the South African Rand, another commodity currency (see data). I think the market is telling us something… and it’s not demand for commodities through the roof.

Related posts
China’s skyscrapers will be ten times New York

Sources
U.S. Dollar – Australian Dollar cross – Exchange-Rates.org
Chinese skyscraper builders to put up equivalent of 10 New Yorks, says Rio Tinto – Guardian
Rio Tinto expects post-Olympic Chinese boom – Times Online
David Prosser’s Outlook: That 20-year commodities super-cycle is in need of a puncture repair kit - Independent

Related posts:

• Chart of the day: Aussie – Yen cross
• China detains Rio executive on suspicion of espionage
• Has anyone noticed the Dollar has gone into freefall?
• The dollar is rising against floating currencies
• The Dollar Carry Trade

Is the U.S. in recession or not?

Well, the U.S. printed a 3.3% number for growth in the second quarter according to the data released last week. Since then, I have been asking myself why we shouldn’t believe the U.S. is in an expansion right now. After all, the economy does not normally grow 3.3% during recessions.

But as I looked at all the other data outside of the GDP number, it all pointed to recession. In particular, the employment data paint a recessionary picture.

We are pretty fortunate to have nearly 80 years of monthly data on unemployment to use as a historical backdrop. So I have put together the U.S. unemployment data in charts by decade to see what happens to unemployment before, during and after recessions and what type of employment picture characterizes expansion.

Change in unemployment is the right indicator
First, let me make just a few points to explain the graphs.

First point: in the charts, I don’t measure the unemployment rate itself, but rather the year-on-year change in the unemployment rate, because the change in the unemployment rate has been a flawless indicator of recession in every downturn since 1929.

Two other points: the shaded portions of the graphs in gray represent recessions, the portions in white are expansions. The dotted red line is my recession indicator (see post): when the change in unemployment rises 1% or more, we have always had a recession.

Looking at the first chart from 1998-2008, we can see that the y-o-y change in the unemployment rate is 1.4%. Translation? Recession.

But, then again, how do we know that the recession isn’t already over? After all, we just grew 3.3% in Q2. Maybe we had a recession that ended in April, when the second quarter began.

That’s where the historical data come into play. What you should notice from the historical charts is that the change in the unemployment rate does not rise for more than a few months after the recession ends.* The unemployment rate itself may go up, but the year-on-year change does not go up significantly.

For example, March 1991 marked the end of a recession, with unemployment at 6.8%, a full 1.6% higher than March 1990’s 5.2%. However, unemployment continued to rise for 15 months to June 1992 when it reached 7.8%. Nevertheless, year-on-year comparisons never exceeded 1.6% during that time.

It makes sense. After all, the change in the unemployment rate is essentially measuring how much better (or worse) the employment situation has become in the last year. That is not only a good measure for the job market, it is also a very good measure for the overall economy.

So, getting back to my question about the recession ending in April and being behind us, that conclusion doesn’t fit the data. Not only is the unemployment rate still rising, but so is the change in the rate. Comparisons to 2007 show a 1.4% change now. Back in April the number was only 0.5. That’s not a sign that recession has ended.

Expansions
Another thing you should notice from the charts is that the change in unemployment levels really falls off quickly when the economy starts expanding. Look at the shortest expansion in the data series from 1980-1982. Even then, you can see the numbers plummeting from +2.0% to -0.6% in a year’s time. That inverted V-shape in this data series occurs in every business cycle.

This helps us know whether we have left recession. If we don’t see a rapid falloff in the year-on-year numbers, we are probably not in expansion.

The unemployment rate in December 2007 was 5.0%, so treading water compared to right now would mean 6.4% in December 2008 (1.4% y-o-y change). It would be even better if we saw something like 5.9% to confirm the inverted-V pattern that typifies the beginning of an expansion.

Conclusion
Having looked at the historical data and keeping in mind that Q2 GDP was measured from April to June, it is hard to use the GDP numbers to confirm an end to or lack of recession.

The employment numbers and other data like industrial production, retail sales, and personal income all point to a recession that began in January 2008 or earlier. And ultimately, the sooner it began, the sooner it may end.

Change in unemployment rate by decade from the 1930s to present

Source
Bureau of Labor Statistics
Business Cycle Expansions and Contractions – NBER

Related reading
Ahead of the Curve – Joseph Ellis

*The one and only time that the year’s change in the unemployment rate continued to rise more than a few months after the recession had ended was in 1945-1946. In October 1945 the change in the unemployment rate was 2.4%. But it kept rising to 3.2% in May 1946 even though the recession officially ended in October. Unfortunately, we don’t have GDP statistics to find out why, because the quarterly GDP data only dates back to 1947.

Related posts:

• Chart of the day: change in unemployment
• US unemployment claims way up: consistent with recession
• Data point of the day: actual unemployment rates
• US unemployment rate jumps to 6.5%
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.

For every business cycle since 1929, when U.S. unemployment data was first calculated, when the unemployment rate has gone up more than 1% in one year’s time, this has spelled recession. Moreover, the unemployment rate has never risen 1.0% in a year’s time without a recession (no false positives). The unemployment rate, therefore, is a perfect indicator of recessions. Where are we in this business cycle?

Well, the unemployment rate is up 1.4% over August 2007’s rate. Take a look at the chart below with the red line as the 1% cutoff.

From here, one can see that the U.S. is clearly in recession. This morning, I heard an economist on the radio from Wachovia saying we are not in recession. But, having seen the data, if you hear this kind of happy talk, you too have the right to be skeptical. What have you been hearing?

Related posts:

• A note on government statistics and unemployment
• Unemployment rate to 9.7%, 216,000 jobs lost
• Chart of the day: unemployment as a recession indicator
• Are jobless claims pointing to structurally high unemployment?
• Irish unemployment gaps up by most in 40 years

The global economy is in the relatively unique but unenviable position of being bullied by both recession and inflation at the same time. This leaves central banks in a bit of bind. The Federal Reserve has thrown all caution to the wind and cut rates in a reflationary ploy rivaling its actions during the last downturn. On the other hand, commodities-rich countries like Brazil, Norway, and Australia are at the top of the list for raising rates as the are not suffering anywhere near the difficulties that one sees in the United States. Fair enough.

The only question I have about all of this, as one can see on the chart below is: what the devil is commodity-rich Canada doing?

Source
Benchmark interest rates, The Economist

Related posts:

• Chart of the day: low ARM rates
• Norway makes three
• Don Kohn says Fed policy has kept rates down 100 basis points
• Chart of the day: Total US Debt
• Why should central banks cut interest rates?

Back in May, I showed you a chart of Total U.S. Debt which demonstrated that the United States was an increasingly indebted country. This chart was for all domestic debt minus financials and it topped out at about 225% of GDP.

Below is the same chart for the U.S., except this time I have added domestic financial and foreign debt, so it represents all debt outstanding in the United States.

The U.S. Debt to GDP ratio starts out just below 125% in 1952 and rises steadily to an enormous 333.8% by 2008. Needless to say, this is one major problem hampering the deleveraging we are now seeing in the financial sector.

By the way, if you are wondering what the debt total for Q1 2008 was in dollars, it was $47.4 trillion.

Source
Federal Reserve Flow of Funds

Related posts:

• Chart of the day: Debt to GDP
• Chart of the day: household debt vs. savings
• Chart of the day: US Household debt
• Chart of the day: consumer credit growth
• Chart of the day: UK inflation

Yesterday, I presented a chart of the Dow’s (CPI) inflation-adjusted rolling 10-year return (the long-term), the point being that returns revert to the mean and then overshoot in long secular bull and bear waves. Today, I want to show you the same chart for 5-year returns (the medium-term).

My overall point?

Five-year returns almost never exceed 100% (denoted by the dotted red line in the chart). There are three notable bubble periods in stocks above 100%: pre-1929, pre-1987 and pre-1999*. This is not one of those periods.

Another factoid speaks against a precipitous drop. Interestingly, the 5-year return in September 2007 was 58.9%. By June 2008, it was 6.1%. That 52.8% drop is the largest 9-month drop in the Real 5-year Dow return since June 1988, exactly twenty years earlier. There has been no other drop of that magnitude in the Dow’s real 5-year return since 1938.

These data points should mean that, while stock market may decline, losses are likely to be somewhat contained. Whether the massive decline in return to June means the correction is behind us remains to be seen (I’m on record for believing the opposite). I found the data surprising and contrary to what my gut had been saying. Overall, the data are somewhat comforting for the market as a whole.

Financial stocks are another story.

Footnote:
*Note: the returns for the Dow during the Tech bubble topped out very early in June 1999 at 169.5%. This supports my thesis that the secular bear really began in 1998.

Related posts:

• Chart of the day: long-term returns
• Chart of the day: Dow Jones vs. Treasuries
• Chart of the day: Buy and Hold?
• Chart of the day: Dow 1973-1974
• Confirmation bias

‘Buy and hold’ is a myth that I hope dies an ugly death just like the Efficient Market Hypothesis. When one looks at the numbers, it is as plain as day that the stock market moves in sweeping trends that take decades to unfold.

A long uptrend is followed by a long downtrend. We happen to be in a long downtrend, right now. As far as the Dow is concerned, I have argued for some time that 1998 is actually when this bear began (see my red highlighting on the chart above). In the end, these patterns take so long to unwind that the average investor in a secular bear market is simply beaten down by the preponderance of evidence. Few can resist becoming bearish in the face of the drip-drip of days and weeks of negative feedback. ‘Buy and Hold’ is poison in a secular bear market.

I have had a six-year debate about ‘buy and hold’ with my brother-in-law, who is a very smart guy. My argument is the one I just posited: secular bear markets last so long and returns are so low that the average investor is best served by avoiding ‘buy and hold’ strategies which leave one open to the psychology of the bear and selling at the worst possible time. Basically, even the most independent thinkers eventually are beaten down by the bear and eventually sell, usually after having surrendered significant opportunity costs in alternative investments.

My brother-in-law’s argument is simple but equally compelling: The average investor doesn’t know a rolling ten-year dow return from a hole in the wall. If these investors don’t buy and hold, where are they to go?

Good question. My answer: perhaps they should leave the market altogether and save their money. Many do, but at significant cost once the bear market has already eaten into their returns.

The chart above suggests that we still have a was to go on the downside. If you’re counting on outsized returns in the market, you are going to be disappointed. This is yet another reason that the savings rate is going to go up significantly over the next few years. I would start saving those pennies sooner rather than later. Dan, are you listening?

Related posts:

• Chart of the day: medium-term returns
• Chart of the day: Buy and Hold?
• Chart of the day: Dow Jones vs. Treasuries
• Confirmation bias
• Chart of the day: S&P vs. nominal GDP

This chart from the New York Times demonstrates visually what happens when the Fed lowers interest rates too much: it skews simple economic decisions like what type of mortgage product to use, often with unintended consequences.

Similarly low rates on adjustable rate mortgages enticed buyers into the housing bubble.

This post is part of my chart of the day series.

Related posts:

• Chart of the day: interest rates
• Chart of the day: Dow 1973-1974
• Chart of the day: Total US Debt
• Chart of the day: Continuing Claims
• Chart of the day: US Federal government spending

Now that we are practically guaranteed to add the Fannie and Freddie debt to the already robust debt levels of the U.S. Government, its a good time to look at what the Government’s accountant (GAO) says about its fiscal position going forward.

In two words: not good.

Maybe Bill Ackman’s plan would be the best for not making this look any worse.

Source: Perotcharts.com

Related posts:

• Congress does need to act on the Economic Patriot Act
• Chart of the day: US Federal Deficit
• The Paulson plan is not going to make it
• Chart of the day: Total US Debt
• Means of deficit reduction: Medicare and Social Security

One reason many pundits feel this particular downturn will be quite nasty is the level of debt consumers have versus their savings. Since July 1982, when the stock market bottomed, Americans have been dis-saving and leveraging up like nobody’s business.

Since Alan Greenspan became Federal Reserve Chairman in 1987, the Federal Reserve has always supplied easy money when the economy hit the skids. As a result, Americans were never forced to retrench by reducing debt and rebuilding savings in anticipation of economic upswings. The result has been an ever increasing debt load and a low savings rate not seen since the Great Depression.

If you remember my separate charts of the day on savings and on household debt, you’ll know that Americans have never been so indebted and have never saved so little since record-keeping began after World War II.

However, looking at these two factors together on the same chart really fixes the mind on the magnitude of the problem.

Source
National Income and Product Accounts, U.S. Bureau of Economic Analysis

Related posts:

• Chart of the day: Savings Rate
• Low savings, high debt and interest rate policy
• Americans are not increasing savings
• Savings in America hit 5%, up from nil last year
• Chart of the day: Debt to GDP

Here are some charts from the latest issue of Barron’s. They have a readable article on bear markets (for those of you subscribed to it) as the Dow was down over 20% last week. That’s supposed to mark the beginning of a bear market as the chart below suggests.

First off, I have no clue why 20% is the official gauge of a bear market. It strikes me as kind of arbitrary. 10% down is a correction and 20% down is a bear market. Why? Isn’t 19.1% down a bear market?

It’s sort of like 2 quarters of negative GDP ‘growth’ is supposed to be a recession. Since when is negative growth a term?

I do think we are in a bear market… except it started in 2000. What we experienced after 2002 was the mother of all bear market rallies. It was a sucker’s rally induced by easy money. What I find aggravating about bear market rallies is that people buy into them. Everyone is looking for the bottom, so they can put the same trades on again. But, the drugs won’t work.

Take a look at my charts on the Nikkei and the Dow if you want to know what I mean by bear market allies.

What investors should be concerned about is preserving capital. A word to the wise.

Source
The Bear’s Back, Barron’s (paid site), 7 Jul 2008

Related posts:

• Chart of the day: Dow 1928-1932
• Chart of the day: long-term returns
• Overbought?
• Rosenberg: Still a bear market rally
• An amazing market rally. What’s next?

Japan suffered one of the most horrific market meltdowns in history from 1984-2004. Only four years after the last market bottom and on the verge of another global market downturn, it even may be too early to use the past tense to describe the bubble.

Yet, Japan offers a remarkable lesson regarding easy money and its affect on asset prices. These graphs are a sobering reminder that prudent monetary and regulatory policies are the correct prevention for asset market busts.

The charts show the market taking off from 1984-1987 when Japan suffered a major decline of 20% in the crash. The markets soon recovered due to an ultra easy money policy by the Bank of Japan and it was off to the races. When the Nikkei reached the top of 38, 916 at the end of the decade, the 5-year return was a massive 237%.

At that point the bottom dropped out through to the beginning of the property crash in 1992. Temporarily, the damage in the stock market was over. A false bottom held for six full years as the Nikkei oscillated between roughly 15,000 and 21,000 despite a massive earthquake in Kobe and a Sarin gas attack in 1995 and the eventual onset of deflation.

When the collapse of the Thai Baht in May 1997 precipitated the Asian crisis, it led to a depression in Asia and to other emerging market turmoil. The Russians devalued and defaulted and Long-Term Capital caused a panic in 1998. Japan breached its previous 1995 low but pulled out for a last bear market rally through to the end of the tech bubble.

That’s when the bottom really fell out for Japan: a massive 63% loss from April 2000 to the eventual bottom in May 2003, a full 14 years after the market had peaked.

The moral of the Japanese adventure is this: purging the bad debt, shutting down bankrupt financial institutions and liquidating zombie companies is painful but necessary. Attempts to prop up the economy falsely with Keynesian proposals, piling on massive government debt as Bill Gross proposes is a recipe for disaster.

Update – 2009 01 16: you should note that I would qualify this statement more now. While I do not believe stimulus is the answer and the answer is very much liquidating bankrupt, zombie enterprises, I do believe that stimulus will be necessary to prevent an entire collapse of the banking system. Therefore, you could say my position has changed from one of ideological opposition to stimulus to one of practical acceptance of a necessary evil.

Related posts:

• Japan: stimulus without reform leads to a policy cul de sac
• The Japanese Problem is now ours
• Nikkei down 8% at open
• Chart of the day: bear market history
• Japan does not demonstrate the failure of stimulus

As we prepare for another week in the markets, it bears remembering that Bear markets are not an orgy of pain with indices going straight down. Along the way, there are always brief rallies which bring optimism that the worst is over. But, the indices then resume their downtrend until capitulation is reached and almost everyone is bearish.

This certainly was the pattern in the Bear market from 1929-1932 during the Great Depression. There were six separate bear market rallies during that brief 3-year span. Below are the charts for the Dow Jones from 1928-1932.

Related posts:

• Chart of the day: Dow 1914-1929 vs. 1982-1999
• Chart of the day: bear market history
• Chart of the day: Dow 1973-1974
• Chart of the day: Buy and Hold?
• Dow 4,000 still in the cards?

The chart below is yet another from Perot Charts. I have no particular message in mind with this chart except to inform my readers how the government gets and uses tax monies.

One issue to note is the outsize proportion of taxes that come from individuals despite the U.S. having a relatively high corporate tax rate. Certainly, part of this has to do with tax loopholes making effective tax rates for favored industries lower. However, that issue is a debate into which I won’t wade.

Below is a related post on taxation from Amity Shlaes, taking the low tax side of the debate.

Related articles
McCain’s Tax Plan Would Block a Democrat Katrina: Amity Shlaes, Bloomberg News, 25 Jun 2008

This post is part of my chart of the day series.

Related posts:

• Chart of the day: US Federal government spending
• Chart of the day: Continuing Claims
• Chart of the day: Dow 1973-1974
• Chart of the day: Total US Debt
• Chart of the day: Jobless Claims

Perot Charts is Ross Perot’s attempt to reintroduce himself into politics in the US. From his standpoint, the U.S. is running an irresponsible fiscal policy that will only lead to ruin. His chart on the U.S. national debt, now over $9 trillion, starts with an introduction from Richard Fisher, the head of the Dallas Fed.

Storms on the Horizon
Remarks before the Commonwealth Club of California

by Richard W. Fisher
San Francisco, California
May 28, 2008

Richard W. Fisher is the President and CEO of the Federal Reserve Bank of Dallas, one of the twelve Federal Reserve Banks of the Federal Reserve System. Mr. Fisher currently serves as a member of the Federal Open Market Committee, which is the most important monetary policymaking body of the Federal Reserve System. It is responsible for formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. In this presentation, Mr. Fisher steps outside his role as a central banker to focus on fiscal policy.

An excerpt of the speech is set forth below. For the complete speech, click here.

I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.

You might wonder why a central banker would be concerned with fiscal matters. Fiscal policy is, after all, the responsibility of the Congress, not the Federal Reserve. Congress, and Congress alone, has the power to tax and spend. From this monetary policymaker’s point of view, though, deficits matter for what we do at the Fed. There are many reasons why. Economists have found that structural deficits raise long-run interest rates, complicating the Fed’s dual mandate to develop a monetary policy that promotes sustainable, noninflationary growth. The even more disturbing dark and dirty secret about deficits—especially when they careen out of control—is that they create political pressure on central bankers to adopt looser monetary policy down the road.

This post is part of my chart of the day series.

Related posts:

• Is the Fed just jawboning?
• It’s the debt, stupid
• Chart of the day: Debt to GDP
• Chart of the day: household debt vs. savings
• Should the Fed have a dual mandate?

At 8:30 EDT this morning, the Labor department released its jobless claims numbers. The numbers are not appreciably different than a week ago. But they are largely consistent with recession: 384,000 jobless claims and 3,139,000 continuing claims.

Year-on-year changes:

• 4-week Average jobless claims: +62,250 (at 378,250 claims)
• 4-week Average continuing claims: +592,500 (at 3,103,250 claims)

Below are the charts for the last year of jobless claims and continuing claims.

This post is part of my chart of the day series.

Related posts:

• Average U.S. jobless claims top 600,000
• Chart of the day: Jobless Claims
• U.S. initial jobless claims fall 21,000 to 554,000
• Jobless claims data tell a mixed story
• U.S. jobless claims: Claims rise 62,000 to 589,000