The SaxMan Stock Market Report

The global economy is facing the prospect of the second Great Depression, due to excesses in the stock, real estate and commodity markets during the last decade.  The government is attempting to salvage companies with flawed business models using tax payer money.  At this point, the economy is falling into an abyss.  The deeper it goes, the longer the depression.  Here are comparisons and contrasts to the Great Depression and the current crisis. 

1929 - The stock market crashes after a huge mania in the industrial and transportation sectors, and rampant use of credit to buy shares.

2000 - The stock market crashes after a huge mania in the technology and Internet sector, and rampant use of credit to buy shares.

1930 - Stocks recovered most losses.  Business and government spending rebounds.  Consumer spending stalls due to 1929 stock market losses.

2003 - Business recovery begins after bankruptcies of Enron and WorldCom, and passage of Sarbanes-Oxley Act overhauling and strengthening accounting laws.

1930 - Smoot-Hawley Act enacted, raising U.S. tariffs on imports.  Global trade decimated.

1993 - NAFTA enacted.  Manufacturing jobs begin transference to Mexico where labor is cheap.  Imports from Asia begin flooding consumer markets.  Wal-Mart becomes a national force, resulting in economic ruin for many small, locally owned stores.

1932 - Excessive debt, primarily due to a loss of equity value purchased on margin, decimates buying power.

2008 - Excessive consumer debt, created during home equity loans of 2003-2006, subsequent equity losses and bank credit tightening, destroys consumer demand.

During the Great Depression, once loans were repaid money was hoarded due to fear.  Corporate profits plunged, resulting in rampant unemployment.

In 2008, corporations that have survived on flawed business models, highlighted by benefit obligations to former employees whose life expectancies continue lengthening, are being pumped with capital by Washington simply to maintain their role in the macroeconomic model.  Labor unions’ refusals to allow benefit restructuring and reduction exacerbates the impact of flawed models.  This potentially is the key which will cause the next Great Depression.

Unless economic conditions improve and capital is circulated, companies simply will deplete the cash infusion.  Those loans will not be repaid and corporate value will continue declining.   Layoffs will be necessary to preserve cash, resulting in further foreclosures, despite the government bail out of borrowers.  Those wasted funds will exacerbate the debt.  Losses will be reflected in the stock market, which will not attract capital, resulting in monetary deflation.  Capital value is predicated on its use to create growth.

Factors to watch:  (1) The structure of any loans to the auto industry; (2) Airlines asking the government for a bail out; (3) Further bankruptcies of retail and restaurant chains; (4)  Government inability to control its debt; (5) Tax increases that further weaken consumer spending; (6) The willingness of the new Democratic administration to continue using tax dollars to support failing companies; (7) Creation of new, expansive social programs; (8) States become desperate for cash due to reduced tax revenue; (9) Psychology.  Economic strife creates despair and destroys families.  Suicides will plague many victims, especially among the long-term unemployed.

The Great Depression was ended by World War II, not the social nets that were President Franklin Roosevelt’s New Deal.  In fact, many of those burdensome New Deal programs created the modern entitlement mentality partly responsible for the problems existing today.

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