I agree that the last time we hit 11,900, we were at the beginning of the end of this financial crisis. While the balance sheets of the major investment firms are very highly leveraged (and that's very risky), it appears that we dodged a bullet. While in the depression, bank failures resulted in a 12-25% unemployment rate (depending on when in the depression you were), the bank failures of the late 1980s, early 1990s didn't affect the market. I think we are in the latter type of market.
If you combine the effects of the 1974 recession, 1991 recession, 2001 and 2002 slow market economies, and the current slow-market economy/recession, than maybe you get a Japan of 1989. There's one ingredient that you need for a depression, like we had in 1929 besides these four recessions being combined into one since they all affected the market differently, and the key word is protectionism.
I am a major proponent of believing that protectionism is dangerous. Sometimes, recessions are just what the doctor ordered because growth occurred too fast. I think by having a recession, you prevent from having a massive downturn like we had in 1929 or that Japan had in 1989. If China realizes the capital it can get from investing in U.S. capital instead of holding our debt, the interest rates on US Treasury debt would increase substantially.
The 1981 recession was mainly caused by inflation, while the other
recessions were deflationary in which the effect of inflation was
lightened. In 1974, the recession was caused by an oil crisis and
widespread panic like we have today, 1991 was due to a housing crisis
in which homes had risen too rapidly in price, 20001 was due to
irrational exuberance in the market(s) especially in regards to tech
& biotech, and the current market is due to housing prices rising
too fast and what I believe to be a false fear that the economy will
crumble. The fundamentals truly don't support that hypothesis since
most companies maintain very low inventories and a lot of cash on hand.
I think because it's only the financial sector that's highly leveraged,
companies borrow for opportunity to reinvest at a higher rate but
whereby they don't need to borrow; it's merely a preference instead. In
other words, if interest rates on borrowing rose, these firms would
likely be able to pay more cash for things and not be forced into the
higher interest rate.
On the other hand, it's hard to find bargains in the market. SLB, AAPL, CELG, MON, TROW, EXC, or even PRU are well off their lows. If you buy a retail stock or a financial, you would have to wait till the end of the crisis to cash in on this. However, if retail is a dying industry like manufacturing was in the early 1980s, it might become a dying industry whose assets can only go lower. In other words, retail wouldn't explode like what happens in a bankruptcy, but instead implode from slower growth year after year after year.
Aqua