The Drawn-Out Downtrend phase of the Crisis begins

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Humankind cannot bear very much reality” TS Eliot, 4 Quartets, 1936

Who now remembers the stock market rally that followed 1929’s initial collapse? By November 1929, the US Dow Jones Index had fallen to 195 from its September high of 386. But by April it had rallied 52% to 297.
At the time, this seemed as sensational as the Dow’s recent rally, which took it up 74% from March 2009’s low of 6469, to peak a year later at 11258. And it occurred without any co-ordinated G-20 stimulus packages around the world. It just happened.
But when the famous English poet (and former bank clerk) TS Eliot published in 1936 the first part of his major work ‘The Four Quartets’, quoted above, his tone reflects the weariness of the subsequent Downtrend, not the euphoria felt during the Rebound.
The chart above captures the textbook path of a major financial crisis, as first described by Merrill Lynch’s guru, Bob Farrell. There is an initial Sharp Decline, as seen this time from September 2008. Then there is a Rebound. And finally, the Drawn-out Downtrend.
The chart also adds the ‘Paradigm of Loss’ model developed by famous psychologist Elizabeth Kübler-Ross. As first noted by the Financial Times last year, her model is potentially an excellent guide to the stages through which the current Crisis will likely pass.
The FT suggested that the world was slowly moving from Denial into Anger. Clearly some policy makers, and many bankers, still remain in the Denial phase. But the rise of the Tea Party protest movement in the USA, as well as the riots in Greece and elsewhere, supports the FT’s argument.
This emphasises that after 2 years, we are still towards the beginning of the Crisis. Only a relatively few consumers or companies have moved towards the Bargaining phase, to focus on saving rather than borrowing. Most are convinced any cutbacks will impact others, and not themselves.
Equally, we are nowhere near the Depression and Acceptance stages, which would indicate that the world was getting ready to move on to accept the world in its post-Crisis form.
The blog hopes that its analysis is wrong, and that in a year’s time it will be able to eat humble pie and admit it was too pessimistic. But if it was still running a major chemical business, it would by now have ensured that a detailed contingency plan was ready, in case its fears come true.

1 thought on “The Drawn-Out Downtrend phase of the Crisis begins”

  1. Hi Pierpaolo
    Thanks for your note and the interesting question.
    I try not to be optimistic or pessimistic in the blog, but rather to analyse things as I see them. The critical indicators that I would cite in response to your question are:
    A. From a chemical industry perspective:
    – The worrying trends in consumer spending and confidence in the West – as you know, I follow key areas such as housing and autos very closely, and these are just not showing any resilience as the stimulus programmes come to an end. The theory was that consumer confidence would return, but instead consumers seem to be even more worried now about the level of government borrowing that has been incurred to finance the stimulus.
    – The growing signs of government-induced slowdown in China. Having put people back to work last year via unprecedented bank lending (1/3rd of GDP in 2009), the government is now having to cool down a super-heated property market. Also, it seems to recognise that the c20 year ‘free ride’ period in terms of the Lewis curve, where unproductive agricultural labour can be transferred to the cities to boost a growing manufacturing sector, is now coming to an end. Not only is the West less able and willing to buy China’s manufactured goods, but the economy needs to diversify to focus more on growing domestic consumption – and this implies not only slower growth rates, but also a change in approach to focus on items required by China’s lower GDP/capita.
    B. From a financial market perspective.
    – The drop in global bond yields is really very worrying, as it indicates companies are finding very few areas in which to invest for profitable future growth. I will look at this in more detail on Wednesday.
    – The trend over the past year for companies to meet earnings targets by firing people, in turn meaning that revenue growth is very weak (and hence leading to the effects cited above for consumer spending). This is a situation where what works for an individual company is very bad from an overall perspective – Company A’s ex-employees are then less able to buy products and services from companies B, C and D, hence leading them to reduce their workforces and causing a downturn in Company A’s sales – hence a vicious circle.
    On top of this, we have GDP growth forecasts being revised down more or less around the world – whilst EU and other governments are starting to pursue major austerity programmes, which will further reduce demand and employment.
    These are therefore the factors that I will continue to watch very closely over the next few weeks, as leading indicators for chemical industry demand in Q4 and 2011.
    Hope this helps to answer your question – I wish the outlook was more positive!

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