Why The Pols Need To Listen to Richard Koo

I am currently reading Richard Koo's "Balance Sheet Recession" which has fascinating and illuminating parallels to the current economic environment. Today I came across a video (via ZeroHedge) of Koo discussing precisely this:



The concept of a "Balance Sheet Recession" is one investors and, more importantly, politicians must currently take into serious consideration.

Saturday Night Live: Obama - Hu Press Conference

The Biggest Earnings Crash in History...

...or "A Tale of Two Charts, Part Deux"

Here are a couple of other charts I've been working on that I find pretty fascinating. First, is the S&P 500 earnings and price for the 40 years ending in 1932, the crash the precipitated the Great Depression:


From 1929 to 1932 earnings declined 75% and the stock market crash resulted in a price-to-earnings ratio, shown beneath, of 5 (two standard deviations below the historical average for the index).

This next chart shows the earnings decline from 2007 to today:


Earnings declined over 90% during this time, even more dramatic than the 1929 crash! However, stocks have held up much better than the 1929 crash. In fact, rather than becoming dramatically undervalued, stocks are right back to overvalued on a level nearly equal to the 1972 and 1987 peaks!!

A Tale of Two Charts

I recently demonstrated that after the recent and massive rally in the stock market, stocks are no longer cheap relative to their earnings. Today, I came across the chart below (via The Big Picture) which looks at stock market valuation in a different way.

It compares the total value of all publicly-traded stocks to the country's Gross Domestic Product. This is, in fact, Warren Buffett's preferred method of evaluating the attractiveness of stocks, in general.


As is clearly evident, the stock market can't be called "cheap" at present and didn't even reach historically "cheap" levels back at the lows last March, or 65% ago.

That's the fundamental picture. However, I try to always marry the fundamental picture with the technical. I've been eyeing this next chart for the past couple weeks or so. It delineates the 50% time and price retracement of the bear market decline that began in 2007 (50% retracement is a popular technical measure among traders, especially Elliott Wave enthusiasts). 1121 on 11/21, ironically, is the line in the sand here:


1121 in price is the half-way point between the top (1576) and the bottom (666) of the bear market decline. 257 days is half the time of the decline; November 21st will mark the 257th day from the March 9th bottom. Hence, 1121 on 11/21. Interestingly, this projection lines up nearly perfectly with the bear market downtrend line.

This is not to say this rally will come to an end tomorrow (Saturday, the 21st, is not a trading day). My point is simply that both the fundamentals and technicals are lining up here to suggest caution is warranted.