The elephant in the front parlor was proving too costly to feed as some loveable house pet to ignore...

VHeadline commentarist and money market expert Fred Cederholm writes: I've been thinking about D.R.O.P.s ... Depressions, Recessions, Oversellings/ Overbuyings, Panics, and 7,140 to 8,568. The (choice of) word games from Washington D.C. and other financial capitols of the planet continue in the ongoing effort to placate the general public investing subclass. It took the major downturns at the world's stock exchanges last week finally to get the politicos and poobahs to come clean that the global financial systems are in crisis and how the elephant in the front parlor needs to be acknowledged and dealt with promptly.

While the hearts of the storms center in the USA.

They have their roots in OUR profligate borrowing and spending in recent decades. It is now a crisis threatening to take down the economies and financial systems everywhere. The financial economic gurus of the G-7 (G-8, or G-9) met in DC last Friday and put forth a united "happy face" on how they would control and fix the problems. I am not so optimistic re: their solution.

You see it was only grudging that "the powers that be" would even admit how we are now in a recession – much less acknowledge that the situation that "IT" was descending to the "Depression" level. Until only very recently, we were advised how "if something wasn't done and affirmative action taken, we could descend into a step back in growth (aka a recession) in the coming year." We were not told if the coming year was 2007, 2008, or 2009? Spinmeisters are conveniently vague in their definitional use of the words and time frames chosen!

When I was a U of I undergrad, Dr. Janet L. Weston, used a parable to explain the definitions (and perceptions) of the various downturns by the public. She said: "When you come home at night and see on the NEWS or read in the paper, that somebody elsewhere has lost their job, the economy is cooling. When you come and learn how a family member, friend, or neighbor has lost their job; the economy is in recession. When you come home and reveal that you have lost your job, it is a depression!" How close to home an economic or financial situation hits really defines everything!

Until the Great Depression of 1929, such widespread downturns were called "Panics." These were periodic retrenchments of the natural economic cycle. They varied in severity and duration. The "Big One" of the 1930's was perceived as different beast. Steps were taken to manipulate growth and economies to forestall such a global catastrophe from re-occuring. The wild west of unrestricted (and free) functioning of economic forces gave rise to regulation and various governmental stimuli. This worked up to a point since WWII. If the policies of "crystal ballers" with their hands on the throttle (or the brake) missed in their prophetic/ "profitic" actions; mistakes were panned off as a mere correction. Most recently, the fixing stimulus to any bubble in growth (or prosperity) was to maneuver an even bigger one to take its place. Borrowing and spending was the panacea for everything. Printing money and cutting interest rates would "always" prove a wonder-cure and prosperity would once again follow. We are now seeing that eventually such a misguide policy has its own problems, too!

Last week the vultures finally came home to roost. The elephant in the front parlor was proving too costly to feed as some loveable house pet to ignore. In 1929, Wall Street fell by 23%. Last week leading market indexes fell by 18%. Elsewhere in the world, major exchanges declined even more. Trading was suspended at several of them for a few hours to provide a "catch-a-breath break."

Earlier in Spring, I responded to readers' emails asking where I thought the bottom would come? Then … I responded that the major bottom would only come when the Dow Ind was somewhere between 7,140 and 8,568. This marks a 50% to 40% drop from the all time high of 14,280 – ditto for other indexes. Most responded at the time that I was absolutely crazy. This has been the historical norm in almost all earlier panics, depressions, and recessions.

We are told how the markets eventually recover – but…it took 29 years for the markets to recover from 1929!

Do you have that much time to wait in this go around?

Fred Cederholm
asklet@rochelle.net

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