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When This Crisis Will End

By Dr. Steve Sjuggerud
Wednesday, February 3, 2010

We're out of the woods with this financial crisis... 
 
That's my best guess at least, based on a study of the major financial crises through history.
 
The recent book This Time is Different: Eight Centuries of Financial Folly, by Kenneth Rogoff and Carmen Reinhart, takes a look at the history of major financial crises...
 
Boiling the book down to its simplest conclusions, here's what happens after a banking crisis: 
  • Home prices and stock prices collapse dramatically over the course of several years.
  • The economy tanks and unemployment rises dramatically.
  • Government debts soar.
The book gives specific timelines based on history... It tells us how far things fall and how long these things last. And it gives us a pretty good idea of what to expect going forward.
 
Let's look at a few of their conclusions more specifically, starting with stocks...
 
Stock Prices

The authors found that real stock prices typically fall 56% over three and a half years, on average. In the current financial crisis, stocks already fell a bit more than that, in a much shorter period of time, bottoming in March 2009. Then they rallied dramatically.
 
Is the worst over in stocks? Or is another leg down coming? 
 
I personally believe the worst is over. 
 
At first, the crisis blindsided us, so the effect was dramatic. Now we're aware... more sober... So I think the lows we saw in March 2009 will be the ultimate lows for this crisis in stocks. 
 
Home Prices

The authors found real home prices typically fall 35% over six years. This time around, home prices (like stocks) fell a bit more than the authors' average in a much shorter period of time. 
 
Like stock prices, home prices have been recovering. 
 
Is the worst over? Or did the recent home-buyer tax credit prop prices up? 
 
I think the worst is over. I think we've seen the lows. But home prices may do basically nothing for many years. 
 
Unemployment

According to the authors, unemployment typically rises by seven percentage points in a banking crisis... and unemployment stays "bad" for four years. So far, unemployment has risen by about five percentage points, and we're two years into this thing. So if the authors are right, unemployment could hit 12% and last two more years. 
 
Government Debt

The authors state that government debt explodes by 86% above pre-crisis levels, on average. In the current crisis, quite frankly, I have no idea how much government debt has REALLY exploded. Nobody can know that answer... with all the creative things going on at the Federal Reserve and the Treasury Department. 
 
So where does that leave us? 
 
This crisis has been worse in magnitude than most, according to the authors' numbers. It's also been devastatingly quick. 
 
The good news here is that we may already be out of the woods... Stock prices and home prices have been recovering for months. And unemployment has leveled off in the 10% range. 
 
The bad news is the government's explosion in debts. But risks associated with that won't likely come home to roost in the next couple of years. That's a topic for another day. 
 
In short, based on past crises, it's easy to make an optimistic case that the worst is behind us in the economy. 
 
Good investing, 
 
Steve 




Further Reading:

A Big Lesson from Scott's Hard Trade

What the Government Should Do to Save America

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THE WORLD'S GREATEST OIL COMPANY IS ON SALE

Long-term investors take note: The world's best energy company is sporting an interesting share price.

Study the oil and gas industry for a while, and you're bound to realize ExxonMobil (XOM) is one of the best oil companies to ever turn a drill bit. The company is legendary for its efficiency and ability to value assets... which helps it generate high returns on capital for its shareholders.

Like most every stock, XOM shares were punished during the historic "stress test" of 2008. Shares fell from $94 per share to $62 in just five months. After a brief rally, shares traded back down to that low point in March 2009 and rebounded nicely. This mid-$60s area marks a price floor where seasoned investors will buy shares like crazy.

XOM is nearing the floor again. The company just made a huge natural gas acquisition, which most outsiders feel it paid too much for. This has sent shares down to the mid-$60s... down to that area of solid support.

Short-term considerations aside, ExxonMobil is a great company that lives and breathes "high long-term returns on capital invested." This is the mantra all investors should demand of their long-term holdings. Buying near "ultimate stress test" levels is a bonus. 
classics recent articles
  • The Great American Liquidation Sale
    By Tom Dyson Tuesday, February 2, 2010
    These companies based their business models on optimistic assumptions of the future. Conditions have changed, and now these businesses are basically giant portfolios of dud investments. They're going to have to liquidate these investments and slash the scale of their businesses.


  • How to "Bank" Dividends Whether or Not the Economy Recovers
    By Tom Dyson Monday, February 1, 2010
    One of the benefits of timberland is, if the price isn't right for timber, or if there isn't much demand, you don't have to cut your trees down. You just let them grow bigger and taller. As they say in the industry, you "bank it on the stump."


  • It's Time to Bet Against the Euro
    By Dr. Steve Sjuggerud Saturday, January 30, 2010
  • The Only Way to Buy Stocks for 500% Gains
    By Frank Curzio Friday, January 29, 2010
    Throw the gambling mentality in the garbage. Throw the mainstream advice in there as well. You see, I know you can make a lot of money with under $10 "swing for the fences" stocks. In today's essay, I'll show you how.

  • One of the Greatest Secrets to Making Money in Low-Priced Stocks
    By Frank Curzio Thursday, January 28, 2010
    A few trading sessions after the fall, Penny Stock Specialist grabbed the stock. Take-Two jumped like a coiled spring back over $10 in less than month.
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