What happens if the unthinkable happens?

[Ed_The_Gypsy]

Quote:
Originally Posted by Ed_The_Gypsy
Dividends will continue. Just like in the Great Depression. You do own stocks that pay dividends, don't you?

I keep seeing stuff like this, finally have to butt in refute this (at least to a certain extent). According to Value Line data, the DOW stocks had $12.8 in dividends in 1929. This dropped to $11.1 in 1930, $8.4 in 1931, $4.6 in 1932, and $3.4 in 1933. It wasn't until 1949 when dividends on the dow stocks returned to 1929 levels. In percentage terms, almost three quarters (73.4%) of the dividends were lost by 1933.

I own lot's of dividend stocks, but please don't believe that the dividends are sacrosanct.

(In comparison, the dow stocks earnings went from $19.9 in 1929 to a low of -0.5 in 1932, while book value didn't have nearly the same drop... $91.3 in 1929, $80.5 in 1933.)

This is interesting!

So, earnings declined steeply, as did the stocks themselves (share prices). The 30 Dow stocks paid out 56% of earnings as dividends in 1929, but went on to pay out dividends without earnings to support them in 1932. And in 1929, dividends were paid at the rate of 14% of book values that year? That seems odd to me. It seems high. What is it today?

Then in the doomsday scenario, stock prices decline to 'nothing', and so do dividends. But book value might go down only 12%.

I wonder how the broader market behaved over the same time? The Dow is just 30 stocks. The broader market was much smaller then, I know.

I do miss the significance of book value to those of us in the deep doo-doo. We can't sell at book value; we can only sell for what the market will pay. This is from the perspective of having to live off one's investments.

 

[Zoocat]

Lest we forget, there are obviously many people on this planet that would love to raise their living standard to that of a depression-level America. Those people are happy and are living their lives to the fullest. Our only problem as a nation is that we have lived the good life for so long that we will definitely be challenged to accept our new condition gracefully. However, we also happen to be a species that is virtually defined by its ability to adapt. And we will adapt.

Bottom line, enjoy the ride. I would suggest that no matter what, we aren't going to starve (although I could be wrong!) and we will always have our families and friends.

Cheers...
Steve

Traveled much in third world countries, Steve? There aren't many old people in Tanzania. By old, I mean over 50. Also, since we are on this cheerful topic, I suggest all cheerful people read "Collapse" by Jared Diamond. After you read it, you will be ready to study Buddhism. I suggest Pema Chodron.

 

[citrine]

If the unthinkable happens, I think we will all be fine.
Maybe we will learn as a society that the most important things are not money related......life will go on, the sun will still rise and set.....the world would not end, only a way of life.

 

[Dawg52]

No beer required!

That's a show stopper for me.

 

[copyright1997reloaded]

This is interesting!

I do miss the significance of book value to those of us in the deep doo-doo. We can't sell at book value; we can only sell for what the market will pay. This is from the perspective of having to live off one's investments.

I find myself looking at stocks as cheap by comparing them to book value. I mentioned book value as a reminder (mostly to myself) that when under severe stress, it may not be that good of a measure, and that stocks can easily trade way under book value. As I understand it, in the (last?) great depression, there were quite a few securities whose market caps were less than their holdings in cash/cash equivalents.

 

[sander06]

Traveled much in third world countries, Steve? There aren't many old people in Tanzania. By old, I mean over 50. Also, since we are on this cheerful topic, I suggest all cheerful people read "Collapse" by Jared Diamond. After you read it, you will be ready to study Buddhism. I suggest Pema Chodron.

Point taken.

I was in Tanzania last year to climb Kilimanjaro and noted the very young population. Average life-span roughly 48 years old! Lots of under/not employed men hanging around all day while the women sell tomatoes, etc. along the road. On the other hand, I was amazed at their happy, happy outlook on their lives, as short as it sometimes is!!

Loved the country and the people!!!!!!!!!!!!!!!!!!!

P.S. By the by, I've have, indeed , been to many, many third-world and, sometimes it would seem, fourth-world countries.

 

[Independent]

Back to the OP:

My apologies if this topic has been covered before.

I have been hearing some very dire predictions of where the market might find a bottom and I've been wondering about the real-life implications. Say, as some have predicted, the S&P 500 falls to 150; is the impact primarily to the "investment class" (which I believe is now about 60% of Americans), or is the impact more broadly felt? I believe it would have catastrophic results outside of people's investment portfolis, but maybe I am wrong and life just goes on as normal for most people.

I'd say that the S&P "can't" go to 150 without a severe recession in the real economy. The reason is that earnings and dividends have to fall to get prices that low. (If earnings and dividends stay up while prices fall, yields would be so much better than on anything else that prices would find a floor.)

Of course, this is all hypothetical, since the real economy is already in a severe recession. Shiller had S&P earnings at $26 last December, compared to $85 in '07 (that's a much bigger drop than I expected, I haven't tried to check his numbers). If that number is right, and I guess 7.5 as the practical low bound on P/E ratios, then I get a price of 195, with earnings still dropping.

 

[simple girl]

The funny thing is this: with all the talks about great-depression lately, I realized that I have been preparing for years for bad economic times.

When I was younger I learned from my great depression-era grandparents how to stretch resources and be self-reliant (recycle everything, grow food, make bread, etc...). I bought a plot of raw land with my first pay check on the advice of my grandparents: their thinking was that, with raw land you can farm, you can't go hungry.

This makes make think of a conversation I just had yesterday with a client of mine (I work with senior citizens). She was born in 1923, and was 6 years old when the crash of '29 occurred. She said her father had owned a lumber business, and eventually lost it. He agreed to go live in the Delta (in Mississippi), and they lived and worked on someone else's farm for a year or two. He was paid something crazy like $1 a day, and this was just enough to barely feed their family.

A few years later she said the government passed some kind of legislation that allowed people to borrow money for farming. She said her father was definitely NOT a farmer, but since it was the only way to get money, he took out this loan, bought land, cows, etc., and they made a living off of the land.

Fascinating to hear her story. She says she worries about her children/grandchildren if it turns out that we are in/going into a depression. She doesn't feel our generation is prepared to handle living on so little, sacrificing like they did to get by.

I think it would be a great struggle for many, but, somehow, we would pull through...it is human nature to survive.

 

[Gone4Good]

I own lot's of dividend stocks, but please don't believe that the dividends are sacrosanct.

Agree.

Dividends are paid out of earnings. If you don't believe earnings will hold up I'm not sure why you would be more optimistic about dividends.

 

[Gone4Good]

Shiller had S&P earnings at $26 last December, compared to $85 in '07 (that's a much bigger drop than I expected, I haven't tried to check his numbers).

The $26 in earnings includes all the massive writedowns and impairments that were taken recently. You can only write down an asset from 100% to 20% once, so I don't think the $26 December earnings figure is a good measure of "recurring" earnings. That is why Shiller averages earnings over 10 years. By that calculation earnings currently stand at $57.74, which would put S&P 150 at a 2.6x multiple - the lowest ever recorded by a long shot.

 

[M Paquette]

There are some goofy numbers being thrown about.

If one took the value of all banks and other financials in the S&P 500 (SPX) to zero, (share value of zero) the SPX would be at about 620 today. (Close was at 683.38) Yes, there would probably be a panic associated with that, but it would have some trouble driving the price down much further. The financial sector of the S&P 500 has already dropped some 80%.

Currently healthcare is up to 17% of the SPX, and technology stocks are the second largest area at just under 17%. All financials make up just 9.2% of the SPX.

The Shiller 10 year averaged earnings figure (E10) is probably the best number to use in figuring P/E valuations during a recession, as earnings are unpredictable with recession effects like one-time writedowns. Call it about $58 a year over the last 10 years, as ...Yrs to Go noted above.

The current index 'price' to 10 year average earnings ratio (P/E10) is pretty well correlated to market bottoms and subsequent long term rates of return. (Today's P/E10 is about 11.8) Over at Bob's Files, Odds and Ends, Bob has put some neat charts together to show the value of P/E10 over time, and real returns in the market over subsequent periods.

P/E10 doesn't dip below 10 very often. The most notable case, where it reached 5, was during the Panic of 1917 and the Great Pandemic of 1918-1919, where city centers were abandoned, businesses went bankrupt, and life insurance claims skyrocketed.

Bob found a really good correlation between P/E10 and stock market performance for the next 20 years, getting an R-squared value of 0.61. (That is, 61% of the stock market performance over the following 20 years is explained by the starting P/E10 ratio.)

 

[dex]

Fascinating to hear her story. She says she worries about her children/grandchildren if it turns out that we are in/going into a depression. She doesn't feel our generation is prepared to handle living on so little, sacrificing like they did to get by.

No way could today's generation live through what she experienced.
1st - today's population is 310m vs 122m - so all of us running out and establishing subsistence farms is out.
1930 United States Census - Wikipedia, the free encyclopedia
2nd - a large percentage of the population was working in farm related occupations - more than 60%
3rd - people's expectations were different
- didn't expect help from the Federal Gov't.
- were used to hard work
- didn't have many of what we would call the basics of today

So people behaving similar to the 1930s is very doubtful.

I think it would be a great struggle for many, but, somehow, we would pull through...it is human nature to survive.

The question is not if but how. What would that "pull through" look like?
If we get to that point, it will not be pretty - don't expect a rerun of "The Waltons". Most people do not have the support structure of the past - extended families or even families that live near eachother.
Expect people to vote for the person who promises gives them hope and the belief that they can get out of the situation without pain. That is wasn't the people's fault but others - who will be brought to trial.

Expect increases in: crime, drug use - legal and illegal, spousal abuse, homelessness, prison population, racial tension, isolationism, mental depression, disparities in income, extremist groups.

As in the past the government will spend now and say it will be paid off. This will all end with inflation - see the end of the USSR.

- My hope - a rally in the stock market - to get out of it. A rally in home prices - to get out. I will then reset from there. Hope along with me.

 

[simple girl]

No way could today's generation live through what she experienced.
1st - today's population is 310m vs 122m - so all of us running out and establishing subsistence farms is out.
1930 United States Census - Wikipedia, the free encyclopedia
2nd - a large percentage of the population was working in farm related occupations - more than 60%
3rd - people's expectations were different
- didn't expect help from the Federal Gov't.
- were used to hard work
- didn't have many of what we would call the basics of today

So people behaving similar to the 1930s is very doubtful.



The question is not if but how. What would that "pull through" look like?
If we get to that point, it will not be pretty - don't expect a rerun of "The Waltons". Most people do not have the support structure of the past - extended families or even families that live near eachother.
Expect people to vote for the person who promises gives them hope and the belief that they can get out of the situation without pain. That is wasn't the people's fault but others - who will be brought to trial.

Expect increases in: crime, drug use - legal and illegal, spousal abuse, homelessness, prison population, racial tension, isolationism, mental depression, disparities in income, extremist groups.

As in the past the government will spend now and say it will be paid off. This will all end with inflation - see the end of the USSR.

- My hope - a rally in the stock market - to get out of it. A rally in home prices - to get out. I will then reset from there. Hope along with me.

You certainly pointed out some things that I hadn't thought of. I will hope right along with you for a rally in the stock market and in home prices. These surely are some scary times.

 

[bbbamI]

.....and to think all along I've been happy....guess this shows me a thing or two...

 

[Martha]

No way could today's generation live through what she experienced.
1st - today's population is 310m vs 122m - so all of us running out and establishing subsistence farms is out.
1930 United States Census - Wikipedia, the free encyclopedia
2nd - a large percentage of the population was working in farm related occupations - more than 60%
3rd - people's expectations were different
- didn't expect help from the Federal Gov't.
- were used to hard work
- didn't have many of what we would call the basics of today

So people behaving similar to the 1930s is very doubtful.



The question is not if but how. What would that "pull through" look like?
If we get to that point, it will not be pretty - don't expect a rerun of "The Waltons". Most people do not have the support structure of the past - extended families or even families that live near eachother.
Expect people to vote for the person who promises gives them hope and the belief that they can get out of the situation without pain. That is wasn't the people's fault but others - who will be brought to trial.

Expect increases in: crime, drug use - legal and illegal, spousal abuse, homelessness, prison population, racial tension, isolationism, mental depression, disparities in income, extremist groups.

As in the past the government will spend now and say it will be paid off. This will all end with inflation - see the end of the USSR.

- My hope - a rally in the stock market - to get out of it. A rally in home prices - to get out. I will then reset from there. Hope along with me.

But we also have things that would make it easier. For example, transportation is dramatically different, we can get food around the country.

I read some about the CCC this past summer when we were campground hosts at a campground built by the CCC. I no longer remember percentages, but a good number of the young men went AWOL. Problems with liquor, problems with the very hard work, problems with authority. People weren't supermen or women back then either.

 

[dex]

But we also have things that would make it easier. For example, transportation is dramatically different, we can get food around the country.

The infra - structure is better. The intra - structure is not. And that is the key.
The people in the '30 survived because:
1. they had the family, and social support structure that helped to keep them going during difficult times. This can not be minimalism.
2. Their work experience was primarily physical labor - hard work - the transition to survival mode was easier.
3. They knew how to do many things for themselves - from baking to fishing
4. Their expectations before the depression were simple, work, food and maybe a radio.
5. Expectations from the government minimal.
6. No 24HR cable news.
Compare all those things with today - all are the opposite and to an extreme.

I read some about the CCC this past summer when we were campground hosts at a campground built by the CCC. I no longer remember percentages, but a good number of the young men went AWOL. Problems with liquor, problems with the very hard work, problems with authority. People weren't supermen or women back then either.

Agree with that. Sometimes how painful a situation is not determined by where you are but how far you have fallen. Today's expectations are a job with promotions, house, cars, cable TV, LCDs and getting better every year. To fall from those expectations would be greater than from the expectations of those who grew up in the 1920s. So given the same situation as the 1930s today, I would expect greater social disruptions, less social cooperation and greater pain than the 1930s.

 

[bubba]

1. they had the family, and social support structure that helped to keep them going during difficult times. This can not be minimalism.
2. Their work experience was primarily physical labor - hard work - the transition to survival mode was easier.
3. They knew how to do many things for themselves - from baking to fishing
4. Their expectations before the depression were simple, work, food and maybe a radio.
5. Expectations from the government minimal.
6. No 24HR cable news.
Compare all those things with today - all are the opposite and to an extreme.

I think Dex nailed it and I can't think of one thing to add.

 

[REWahoo]

Yep. Looks like we're doomed. Might as well end it all now.

Dex, can I have your plasma TV since you aren't going to need it any more?

 

[Helen]

3. They knew how to do many things for themselves - from baking to fishing

I've thought about this in regards to a worst case scenario. We've got a paid off house and three acres of land with a trout stream in the back yard. However, we don't know how to garden (successfully), can the produce or bake. I suppose we would be motivated to learn in a hurry though.

We do know raising chickens is easy and we can worm a hook.

In some ways, living like this might be better than sitting in a cubicle.

When I was growing up, my parents had a log cabin on 120 acres with a trout stream. We spent weekends there and didn't have running water or electricity. I know I could live like this and enjoy it for the short term. There would be plenty to do to stay busy.

 

[haha]

There are some goofy numbers being thrown about.

If one took the value of all banks and other financials in the S&P 500 (SPX) to zero, (share value of zero) the SPX would be at about 620 today. (Close was at 683.38) Yes, there would probably be a panic associated with that, but it would have some trouble driving the price down much further. The financial sector of the S&P 500 has already dropped some 80%.

Currently healthcare is up to 17% of the SPX, and technology stocks are the second largest area at just under 17%. All financials make up just 9.2% of the SPX.

The Shiller 10 year averaged earnings figure (E10) is probably the best number to use in figuring P/E valuations during a recession, as earnings are unpredictable with recession effects like one-time writedowns. Call it about $58 a year over the last 10 years, as ...Yrs to Go noted above.

The current index 'price' to 10 year average earnings ratio (P/E10) is pretty well correlated to market bottoms and subsequent long term rates of return. (Today's P/E10 is about 11.8) Over at Bob's Files, Odds and Ends, Bob has put some neat charts together to show the value of P/E10 over time, and real returns in the market over subsequent periods.



P/E10 doesn't dip below 10 very often. The most notable case, where it reached 5, was during the Panic of 1917 and the Great Pandemic of 1918-1919, where city centers were abandoned, businesses went bankrupt, and life insurance claims skyrocketed.

Bob found a really good correlation between P/E10 and stock market performance for the next 20 years, getting an R-squared value of 0.61. (That is, 61% of the stock market performance over the following 20 years is explained by the starting P/E10 ratio.)

Excellent post.

We had these discussions early in the life of this board. The consensus was that this kind of thinking was silly. Our all time high count poster pointed out that Shiller was such an idiot that following his ideas would have caused one to miss the whole mega-bull of the mid and late 90s.

How things change! Now people are talking (seriously I guess) about S&P of 150. Folks, this is flat out insane. This board can be dangerous to your mental and fiscal health.

The hobby du jour, here and elsewhere, is to see how much further we might fall if we were to reach earlier bear market lows. I just did this, using Shiller's data, and his P/E10 as the value metric.

Fraidy-cats best not look. I went back only as far as the July 1932 bottom. P/E10 was 5.84. To equal that we would have to lose another 50%, down to 332. Long rates were 3.5%. Next notable bottom was December 1974. P/E10 was 8.29. We'd lose another 30% to equal this, at S&P 472. Long rates were 7.43%. Worse than '74 was August 1982, where S&P bottomed at P/E10 of 6.64. Down 44% more from today would get us there, at 378. Long rates were 13.06.

Now this is really bearish sounding stuff. On the other hand, we might note that at all of these bottoms treasury interest rates were higher. Except for 1932, much higher.

Another thing that jumps out is that episodes of p/E10 lower than today's value are actually pretty rare. The last time we equalled today's value of 11.77 was almost 25 years ago, in January 1986. Interst rates were still quite high at 9.19%. Most of WW2 was spent at P/E10 above 10. It bottomed out at 8.51 in May of 1942, when any of our Victory at Sea fans could testify that it looked like the allies were toast in the Pacific, and before it became evident that Jerry was going to lose his way in Russia.

Otherwise, the decade of WW1 and the flu pandemic, as well as late '74 to mid 80s were the only long periods of low valuations. Much of the 30s was spent with high values.

All this and much more can be seen by anybody who wants to look at Professor Shiller's website at Yale.

I believe ideas that are gaining currency that we will go down to a very low level and just stay there are not the way the world works. When it turns, it will be violent and many cash-heads will be frightened and wait for another chance that may well not come.

If it were not for the new administration gunning for business scapegoats and scaring the hell out of the monied class we would have turned the corner already.

Ha

 

[Koolau]

Both parents lived through the depression. Their stories were quite different, even though they lived perhaps a hundred miles apart at the time. Mother's family was primarily farm based with good educational background and deep family/community roots. Father's family was mining based with little family and not much community support. Mother's family weathered the storm with difficulty. Father's family was broken by it. My dad wrote an autobiography which my mother never shared with me after he died. Upon her death I found it and tried to read it. I've never been able to read more than a page or two without becoming overwhelmed with what my dad, his family, his community and his part of the "world" went through. His life story (as much as I've been able to read) haunts me. He shared very little of it while he was alive, but when he was in the final stages of Alzheimers, some of it came out in little bits and pieces as he regressed to a man of perhaps 20 in the throes of the GD. Putting together what I learned from him with his autobiography tells me that we don't have a clue what hard times are.

I will join Dex in hoping (even praying) that we never (that our children) never face such a time.

 

[newporttony]

I offer the below in support of the "it's not going to get that awful" thesis. I have not independently verified the info.

The only other 2 times that saw the S&P or DJIA at 12-year lows over the past century were 1932 and 1974. In hindsight, both instances turned out to be the “buying opportunity of a lifetime.”

The last 2 months saw the worst Jan-Feb market decline in the S&P’s 80-year history (-18.6%). The second worst Jan-Feb decline was in 1933 - which then saw a 78% gain from March through year-end. And of the biggest 7 Jan-Feb losses, only 1 saw the market continue declining through the end of the year (ironically, that was 2008, last year). Of the other 6, the average March-through-year-end gain was +32%.

 

[Zoocat]

Sometimes how painful a situation is not determined by where you are but how far you have fallen. Today's expectations are a job with promotions, house, cars, cable TV, LCDs and getting better every year. To fall from those expectations would be greater than from the expectations of those who grew up in the 1920s. So given the same situation as the 1930s today, I would expect greater social disruptions, less social cooperation and greater pain than the 1930s.

Dex, this is very wise. Also I think that falling expectations could result in violence. There is so much hatred and blame going around. Hatred for the financial CEOs and blame against the Obama administration for raising taxes and other policies.

 

[Helen]

There is so much hatred and blame going around. Hatred for the financial CEOs and blame against the Obama administration for raising taxes and other policies.

At some point there is going to be a backlash against Government employees as well. With layoffs, lack of pensions and lack of health care in private industry things are getting too out of whack.

 

[Steve O]

I hate to say it but all of this negative news is starting to make me think that we might literally see "Blood in the streets" soon