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Sunday, February 28, 2010

What If...... Some Speculative Thoughts


 What If The History Repeats Itself?
 Some Speculative Thoughts...

The Chinese sometimes say "May you live in interesting times..."
Even though the origin of the proverb may be disputed, what does it mean ?
 
Well it doesn't mean that they are expressing best wishes !
It is actually a curse !!!  And the proverb is sometimes called the "Chinese Curse." 

It seems that  we have been living through "very interesting times" for the past few years.  The bubbles in the all the asset, credit and currency markets burst in the past two years and we are supposed to be well on a recovery. Since something like the recent synchronized bursting of bubbles in different markets happened only in the 1930s let us look at the charts of Dow Jones Industrial Average  (DJIA) from those distant pasts.

Dow Jones Industrial Average - Weekly - Years 1929 - 1930     

Chart 1


The above chart shows the weekly data of the DJIA for the period between Oct, 1928 to March, 1930 in which period the initial crash occurred.  The chart also shows the initial recovery. Now, let us examine the current DJIA weekly chart.
Dow Jones Industrial Average - Weekly - Years 2008 - 2010

Chart 2 

The current chart also shows the crash and the recovery so far. The difference between the periods is that the monetary policy was kept very tight in the Nineteen Thirty's, but at present,  not only we
have a near zero percent interest regime in the USA but also all problem assets or private losses have been transferred to the sovereign states extending their balance sheets and thereby affecting their borrowing capacities. New acronyms like 'PIIGS', meaning the group of sovereign states of Portugal, Ireland, Italy, Greece and Spain who may have over extended their borrowings, are heard all over the places raising questions about the sustainability of the recovery so far. Now let us try to answer our big what if question by examining the chart of the DJIA from the Nineteen Thirty's where we let off.
 
Dow Jones Industrial Average - Weekly - Years 1929 - 1930   

  Chart 3

The rectangle in the Chart 3 covers the time period of the Chart 1.  Since a picture speaks a thousand times better than the words, the answer to our big what if  question  is left to the imagination of the readers. 

However some nagging questions may remain with us after sometime. Example : Is it possible to have another crash or an extended period of non growth leading to a road nowhere?  Now let us examine the long term chart of the Nikkei 225 to see whether the above feared outcomes are possible.

Nikkei 225  - Years 1985 - 2010 

Chart 4

The above is perfect example of the effects of unwinding of big speculative bubbles in the long term.
Since a picture speaks a thousand times better than the words, the answer to our big what if  question  is left to the imagination of the readers. 

May we live in uninteresting  times.....!



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