Are we at the bottom yet?

Yesterday (March 2, 2009), the DOW dipped to a new low. It closed at 6,763.29, down 299.64 points or 4.24%, the lowest since 1997. The stocks traveled back in time for 12 years. “Are we at the bottom yet?” everyone keeps asking.

My answer is “no”, because, if history is of any indication, I find the chart comparing the four great bear markets at dshort.com may provide the answer. On the chart, we do not look at red line (the 1973 oil crisis recession) and the green line (the tech bubble recession in 2000) because we’re talking about depression. We only look at the grey line (GD I) and the blue line (GD II, the current depression). When I looked at the graph of these depressions, I found some striking similarities.

The chart below is a reproduction of the chart, with annotations added by me. I marked the corresponding highs and lows of GD I and GD II with the same circled number (but of their respective colors. One can find that the two curves are of quite similar shape, only that the GD II curve is stretched.

GD II similar to GD I but stretched
(Click on the chart to see a larger image)

The point 6 on the GD I curve is about 9.5 months after the depression started (the thin green vertical line). The corresponding point 6 on the GD II curve is where we are today, and it’s 16.8 months into the current depression. It took 34.2 months for GD I to bottom out. If we assume that our current depression is on a similar path to GD I (i.e., the GD II curve is of a similar shape to the GD I curve but stretched), we can extrapolate by proportion the duration from start to bottom out. By my calculation, it’s about 60.5 months, or just about five years.

In other words, the current depression GD II will bottom out in about October, 2012. GD I bottomed out at almost -90%. And if GD II is of the same severity as, if not greater than GD I, then the DOW could be at as low as 1347 points when it bottoms out in October, 2012. Oooh! Scary thoughts!

Of course only time will tell if this is true. Meanwhile, we can check whether our assumption (that the GD II curve is of a similar shape to the GD I curve but stretched) is true when more data become available as we falter further into the current depression.

Note: This post is a republish from Are we at the bottom yet? on wordpress and has been back-dated to refelct the original date of publish.

Welcome to the Great Depression Episode 2

With the financial situations getting worse and worse every day, everyone now admits that we’re already in recession. But not everyone, certainly not the governments, will admit that we’re in a depression.

The textbook definition of a recession is that when a nation’s economic outputs shrinks for two consecutive quarters, the nation is said to be in recession. This is a clear-cut criterion. Once when the GDP figures for the previous two quarters are available, it can easily be determined whether the country is, or is not, in recession.

For depression, that’s not so clear-cut because there is no straight-forward definition of depression. Generally speaking, a depression is a prolonged and severe recession. But there are no objective statistical figures that enable one to say with certainty that whether it is, or it is not, a depression.

While there were many recessions littered throughout recent economic history, there was only one depression – the Great Depression that started in 1929 and lasted for decades. Many economists quote figures from the period of the Great Depression (such as 25% unemployment rate) in order to characterize a recession as a depression. The unemployment figure is 7.6% (as of January 2009), so we’re not in a depression. When the Great Depression began, the unemployment rate was 8.7%, and eventually reached its peak of 25% a few years later.
My take is that we're in a depression – just the early stage of it. However, “depression” is a taboo word for governments. Governments would try to do anything but to declare depression because that will not only weaken the government’s reputation, it may also cause people to panic, and society may become unrest.

Some (I, for one) believe that we are sliding into a depression. Our current economy does not exhibit those figures – yet, because we are still early in the depression cycle. However, given the magnitude and the coverage of the current financial crises, I believe this depression will be even “greater” (read: longer and deeper) than the first one, the Great Depression of the 1930s, which I call the Great Depression I. Logically I call the depression we’re in now the Great Depression Epsiode 2.

Note: This post is a republish from Welcome to Great Depression II on wordpress and has been back-dated to refelct the original date of publish.