monday, monday...

Here is the second version of the email I wrote for my clients today.

The first version, which the world will sadly never see, started with: "The House of Representatives put political considerations aside today and approved a bill that is widely unpopular with voters because it is the right thing to do in this time of crisis."

Um, yeah.  Not so much.

So, here's the version that went out:

"As part of our efforts to apprise you of ongoing events as they unfold, here is the latest on what’s happened over the past few days.

 

Today, equity markets suffered their worst declines in 20 years as they reacted to the stunning news that the US House of Representatives had voted against the Rescue package negotiated over the weekend. In Toronto, the TSX declined by 841 points, almost 7% of its value. In New York, the Dow Jones Industrial Average suffered its worse day ever (in terms of point decline), it dropped by 777 points, or 7%. The S&P 500  fared worse than the Dow, declining by almost 9% and yet, the NASDAQ managed an even worse decline of 9.14%. The Rescue package that was widely assumed would pass was rejected by lawmakers afraid to face angry voters in the upcoming November elections. Almost immediately, Congressional leaders talked about putting the motion to another vote but the earliest this could happen is Wednesday or Thursday.  Gold prices and US Treasuries shot up following the defeat of the bailout package, while oil prices declined sharply as fears of a greater global slowdown gripped traders around the world.

 

The Bush Administration announced last night the so-called Rescue package legislation, delayed last week, would be introduced to the House of Representatives today. The legislation, which has been very unpopular with consumers (and more importantly, soon-to-be voters), would have created a $700 billion fund and would have empowered Treasury Secretary Henry Paulson to acquire sub-prime mortgage debt from distressed financial institutions. It was defeated by a 228-205 count. The fact remains these funds are necessary to inject much-needed liquidity into the system which has virtually ground to a halt the past few weeks. It is no exaggeration to say that without these additional measures, the viability of the financial system could be in question. That said, while the situation is very serious, comparisons to the 1929 stock market crash and subsequent depression are hyperbole and should be regarded as such. 

 

Events are moving so quickly it can be a difficult for the average consumer to keep track. For example, late last week Washington Mutual, one of the largest banks in the US, failed and was acquired by JP Morgan Chase and just this morning, it was announced that Citigroup has acquired Wachovia, the fourth largest bank in the US, in an all-stock deal valued at $2.2 billion.  We are pleased to confirm our client accounts had no exposure to Wachovia or Washington Mutual. Throughout this entire period, we have not seen a signle company in which our clients’ had invested funds either seek bankruptcy protection or be taken over in a bailout fashion. Our clients assets have been invested in firms such as Wells Fargo, Manulife, RBC Financial & TD Bank which, due to their strong balance sheets, have all been rumoured to be acquiring distressed competitors to take advantage of low prices.

 

This is not to say the market turmoil has had no effect but it certainly has a domino effect on everyone. This morning, Manulife released a statement indicating it has approximately $600 million in exposure to Wachovia but while such announcements are not good news, the fact is they are minimal in comparison to Manulife’s reserves and capital.

 

So, if your savings and insurance are with Manulife, rest assured, these remain safe.

 

During periods of volatility and uncertainty, it is important to maintain perspective and not give in to outlandish hyperbole such as “we are entering a new depression”. The Great Depression took place almost 80 years ago and the world is a very different place that it was back then. While recent events have certainly heightened fears about stability, we must not lose sight of the fact the US economy grew at a rate of 2.8% last quarter. Granted, that number was somewhat boosted by the tax rebates of the stimulus package however comparisons to the Great Depression border on the ludicrous.

 

The global economy is slowing, this much is obvious. The US economy is probably in recession and there is great uncertainty at the moment, but another Great Depression?  Very unlikely.

 

If you look at the data, you will see more differences than similarities between the 1930s and today:

• In the crash of 1929 the Dow Jones industrials plunged 40% in two months; this time around it has taken a year to fall 22%.
• The jobless rate jumped to 25% by 1933; it is little more than 6% in the US today. In Canada, it is 6.1%.
• GDP shrank by 25% during the early 1930s; it is up over 3% in the US over the past year and positive, .67%, in Canada as well.
• Consumer prices fell by about 30% from 1929 to 1933; while inflation is 3.5% in August in Canada, higher by 5.4% in the US.
• Home prices dropped more than 30% during the Depression versus about a 16% decline in the US today. In Canada, housing prices have softened but have not experienced any significant declines.
• In the US, almost 40% of all mortgages were delinquent by 1934 compared with 4% today.  Keeping in mind that half of US households have no mortgage, that means that 2% of mortgages are in arrears in the US at the moment. In Canada, where lending practices have always been tighter, the mortgage business has remained reasonably strong.
• In the 1930s, more than 9,000 banks failed in the US compared with fewer than 20 over the couple of years. In Canada, there have been no major failures of any financial firms.

In fact, the stock market crash of 1929 did not cause the Great Depression but was caused by it. Poor government policies caused the Depression, for example:

• Instead of increasing the money supply, the Federal Reserve of that era reduced it by   one-third. Today, central banks around the world are pouring hundreds of billions into the system.
• Instead of lowering taxes during the crisis to promote growth, President Herbert Hoover raised them.     
• A wave of protectionism caused trade barriers to go up and further slowed international trade.

Furthermore, today the financial system has stabilizers in place, such as unemployment insurance, retirement pensions such as CPP and Social Security, government insurance plans such as CDIC and FDIC to protect bank deposits, and even circuit breakers to keep stocks from falling too far or too quickly. This is obviously a very serious, potentially dramatic situation but US lawmakers will pass a Rescue bill this week, because they simply must do so and with time, the situation will improve. (Some clever people may even find a way to make lemonade from these lemons)

 

We will continue to monitor events and keep you informed as always. In the meantime, please call us if you have any questions or concerns."

Comments

[Rick]

Nicely done Robert...

I have a related post with two YouTube videos that though lengthy, tell quite the story...

True or false?

I report, you conclude.

[Mark Petersen]

Thanks Robert for these thoughts... I've linked to them on my blog. I'm a friend of Mike's.

Cheers!

[Anj]

Thanks Robert - I have been trying to explain to friends and family why this is serious but not necessarily indicative of another great Depression. Do you mind if I forward your letter to them? It really makes it clear. The biggest problem I have had is trying to explain clearly why the liquidity issue will impact their day to day.