Surviving A Global Depression

A Chinese curse states: “may you live in interesting times” and the times ahead could definitely be interesting. However, no one knows exactly how interesting. It is impossible to gauge today how hard the recession / depression is going to hit. It may be widespread but very mild, or it may be localized to a particular geographical area. In the other extreme it could ravage every country in the world impoverishing hundreds of millions of people.

The true “bottom line” is that the global economy has developed significantly from the last major worldwide depression almost a century ago, thus very little guidance can be derived from history. No one today can truly and thorougly comprehend how an interconnected speed-of-light global economy will fare under worldwide depression conditions. In such an unprecedented global catastrophe, the best computer models are inadequate and the most insightful Wall Street guru’s opinion is barely worth more than anyone else’s so these recommendations are best taken with a grain of salt.

Stock and bond prices go up and down every minute of every day to reflect the perception of how well a company is doing. In actual fact, there seems to be no precise correlation between real tangible asset values and valuations based on market sentiment. That’s why a company like Siemens that is the world's largest non-automotive manufacturing corporation which owns dozens of multibillion-dollar plants all over the world, has hundreds of thousands of employees, and has indisputable tangible worth, has a lower overall value on the stock market than a company like Google that effectively is nothing more than an ethereal website that points to other websites. So irrational is this system that the current market value of Google is almost three times that of Siemens.

Remember the various booms such as the “dot com” bubble where millionaires were being made overnight? The Dow Jones Industrial Average, the world’s leading index, was rising like a helium balloon. Some financial soothsayers were predicting 20,000, 30,000 or even six-figure levels in the near future. Then came the subprime shock which made the Dow Jones flatline at around 8,000 and it hasn’t budged significantly since.

How would the Dow, FTSE, All Ordinaries and other indexes react to a true worldwide catastrophe? Most analysts look back to 1929 to determine the structure of a market crash, but so much has changed since that time that it is an unreliable model. There is no hard and fast forecast for what could happen during a modern global depression.

Therefore, the best way to analyze this situation is to envision three separate scenarios:

• Low: Dow Jones at 6,000.
• Medium: Dow Jones at 2,000.
• High: Stock Markets Closed.

Now, let’s look at how the stock markets would react to the Low and Medium scenarios to show how various equities would perform in these situations. The High scenario is too apocalyptically devastating to consider at this juncture as there won't even be a stock market at that level... or commerce and business in any form. Let's deal with Low and Medium first... leave High for later.

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