“Why This Is NOT the Great Depression”: A Reader Writes..

12 Oct 7:13am
Posted by ToddSullivan
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Received this from reader Justin and thought it put some thingd in perspective..

Over the past few months, the media has discovered another story to strike fear into the hearts of America, and incidentally to sell newspapers and airtime. This time it’s not SARS, terrorists, or once-in-a-lifetime hurricanes (which seem to happen every year or so), it’s the Great Depression. I do not want to make light of the current economic situation because it is serious, and likely the most serious of our lifetime. However, as part of justifying my continued buying into the current market, I did some research to understand if perhaps this time the world was really coming to an end. Here’s what I’ve found regarding the Great Depression:

* S&P 500 PE multiple over 30
* 25% unemployment
* 5000+ bank failures with numerous panicked bank runs resulting in $140 billion lost by depositors (no FDIC insurance)
* 30% GNP contraction
* 50% duties on imports
* Huge drought that led to the Dustbowl in an economy heavily dependent upon agriculture
* No unemployment benefits
* No social security
* Severely delayed government interventions

Where are we today?

* Current S&P 500 PE 18
* 6.1% unemployment
* Under 20 bank failures with not a penny lost by depositors and an increased FDIC insurance
* 2008 GDP is up
* No Smoot-Hawley
* More diversified economy
* Increased unemployment benefits, which means they are spending money even if they aren’t working
* Numerous, ongoing domestic and international initiatives

Math of current situation:

Financial loss estimates (Jan Hatzius, Goldman Sachs; Nouriel Roubini, NYU) - -$2 trillion

US Govt. intervention (stimulus pkg, “bailout”, AIG loan) - +$1trillion

Private sector (SOV funds, Hedge Funds, Buffet, etc.) - +500 billion

___________

Potential Unrealized Losses -$500 billion

Actual losses (US Stocks $8 trillion; US Home Equity $4 trillion) ($12 trillion)

The $12 trillion loss appears to be an overshoot to the downside. How do I explain it? There are 2 answers I’ve come up with. First, in my opinion, the majority of these are paper losses, which will be “written up” over time, which is why I’m buying equities. I think the market will soon realize that companies are reporting solid earnings, and that there is pent up, quality consumer demand for cars and homes, albeit at lower levels than 2007. Second, it’s pure irrational fear, ie the best time to buy. Here’s a simple analogy to drive home my perspective. Someone yells “fire!” at the local movie theater. You have 2 choices. You can follow Jim Cramer and run for the exit, or you can sneak in with Warren Buffet and watch the movie for free in an empty theater. I think I’ll stay for the double feature.


Disclosure ("none" means no position):None
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About

ToddSullivan

A Massachusetts based value investor, I look for companies whose current valuation is at a discount to their true value. When I purchase a stock, my typical holding period is several years. I consider buying a stock purchasing a piece of a business. I am confident once I make a decision to buy that eventually the market as a whole will recognize the true value of the business and value it accordingly. It may take 1 month, 6 months or a year, but if I buy it at enough of a discount to its true value my results will be (and have been) superior to the market as a whole. Of all the disparate investing disciplines, value investing has stood the test of time. The great investors of have all been value investors. Warren Buffett, Ben Graham, Bill Ruane (Sequoia Fund), Bill Miller and Wally Weitz, all have consistently outperformed the market for decades by using various forms of value investing. Currently I am a contributing writer to Seeking Alpha, Vinvesting.com, The Stock Masters and Value Investing News. Posts have been reprinted in The Wall St. Journal, Yahoo Finance, Google Alerts, Google Finance, TheStreet.com. 24/7 Wall St. and Topix.net.

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