2020: The Great Depression of 1929 All Over Again?

Following the governments' responses to the threat posed by COVID-19, stock markets around the world have collapsed rapidly and entered bear markets. How does the 3-week drop compare to historical events in 1929 and 1987? Here's how

Source: ZeroHedge

As of March 20, the drop is faster and deeper than for the first 40 days of the crash of 1929, and faster, but not quite as bad (yet) that the crash of 1987. The October 1987 crash was a one-time event that did not affect the economy that much, but analysts expect some serious repercussions in the real economy with expectations of a 24% GDP contraction in the US and up to 12% worldwide in Q2 2020,

That's worse than the great depression, so we may expect similar results, especially we also started with an overvalued stock market. There's one important difference though: the policy response is now much different with central banks and government throwing money around like there's no tomorrow. This will likely not prevent deflation in the short term, but a long period of deflation is unlikely. With that out of the way, let's have a look at the chart of the Dow Jones index during 1929 and 1932 courtesy of MacroTrends.

I've marked the tops and bottom with respectively green and red dots. Bear in mind, this is a monthly chart so the data represents the end of month value, not the absolute tops or bottoms. The Dow Jones topped at 5686.69 in August 1929 before falling to 3572.79 points in November 1929, or a 37% drop in 3 months. It was followed by a bear market rally that topped at 4379.05 in March 1930, a 22.5% increase. Then the market "slowly" collapsed to 814.82 over the course of 2 years a massive collapse of around 82%. If counted from the top of 1929, the stock market dropped by 85.6%.

While I don't believe the exact same scenario will happen, let's see how low the Dow Jones would have to fall to match the same pattern as in 1929.

The Dow Jones reached a top of 29,551.42 in February 2020. A 37% drop over three months would mean a Dow Jones valued at around 18,600 in May 2020. We are almost there though after a little over three weeks with 19,173.98 points. So we may not have to wait that long for a dead cat bounce. With a percentage gain of 22.5% that would bring us to around 22,800 points in the next three to four months or May/June considering a rebound starting as early as March. Under our scenario, it may stay at this level for a while, and then for whatever reason (second wave of COVID-19?) collapse to depression levels by May/June 2022: That would be 4,104 points, even lower than the market low of 6,469.95 reached on March 6, 2009. Put it that way it does not seem as impossible. Is it likely? Maybe not, as it would mean all that money created out of thin air would go in other assets than the stock market. Charles Nenner has been forecasting a market bottom at 5,000 points based on his work on cycles so it's not so far off.

So I've created a virtual chart of the Dow Jones with the data points above, and a slightly compressed schedule with the bottoming occurring in December 2021.

Dow Jones Simulation - Jan 2020 - Dec 2021

 It's not a prediction, just a simulation of what the next two years would look like if the Global Great Depression of 2020 had indeed started, and would take a path similar to the great depression of 1929. Hopefully, it's all wrong. Note that during market bottoms, the Gold price historically happens to match the Dow Jones price, so it would be at over $4,000 per ounce in our scenario.

The Case for Investing in Chinese Commodity Producers

Many asset classes around the world are overvalued right now, but I recently watched a video with Mike Maloney and Ronald-Peter Stöferle (of Incrementum AG) with the latter showing a chart we may be back to 2000 valuations for commodities.

The chart above represents the ratio between the SPGSCITR commodity index (aka S&P GSCI) against the S&P 500. It just shows stocks are really expensive compared to commodities.

And if we look at the long term chart of the GSCI commodity index courtesy of trading economics, commodities are indeed back to price not seen since the end of the 90's.

Great! Let's find a GSCI ETF tracker and we should get a nice return you may think. But not so fast, as you may remember commodity ETFs are usually terrible investments due to the contango effect. But let's double-check as in the US, there are two ETF's tracking GSCI: GSP and GSG.

Those are down around 70% since May 2016. The GSCI index is also down since that time, but only about 60%, It's not that bad considering the ~15 years time frame.

However, my brokers won't let me invest directly in ETF's in the US. So instead, I looked at mining stocks like BHP and Rio Tinto listed in the US.

While both stocks are well below their peals in 2006 or 2011, they have recovered a lot since the bottom in early 2016.

So I went looking for other opportunities in the Hong Kong stock market (Hang Seng). There aren't any commodity ETFs anymore apart from Gold based ones. So we can look at the charts, earnings, dividends and P/E of some of the commodity producers. It's always more risky to selecting individual stocks, especially those depressed, as they may go bankrupt, so I personally prefer to focus on larger companies.

Petrochina 0857.HK

We are back to the year 2014 price. The company is still making profits (0.33 HKD EPS), and paid a 4.6% dividend last September. With a one trillion market capitalization, it's one of the biggest companies in the world. There may be more downside, but patient investors will be rewarded by the dividend and potentially higher price in a few years.

Sinopec Shanghai Petrochemical Company Limited (0338.HK)

Sinopec is another large Chinese oil company back to 2014's prices. The dividend yield stands at 13.49% according to Yahoo (I suppose this will be revised down), and the company is still making a healthy 0.561 HKD profit per share. Market capitalization: 37.30 billion HKD.

China Coal Energy Company Limited (1898.HK)

Still a large (57 billion HKD) profitable (0.387 HKD per share) company, but probably more risky if the Chinese government really decides to scale down on coal-powered power plants. The company also pays a 3.28% dividend. The share price is really depressed well under the IPO price in 2006.

Sinofert Holdings Limited (0297.HK)

If you believe in the long term potential of agriculture, Sinofert looks promising. The company specializes in Potash which shot up in 2007/2008, and came down hard since then. The stock is really depressed at 0.80 HKD. But Sinofert is one of the largest fertilizer producers in China, is still making money (.075 HKD per share), and pays a dividend of 2.8%. The same could have been said in 2012 however, but the longer the undervaluation remains, the more the stock may gain when the market reassesses.

All those companies also have a price-to-book and price-to-sales well below 1, and they are very unlikely to go bankrupt. In the worst-case scenario, the stock price goes nowhere, but you still get paid to wait thanks to the dividend.

Do you know of any other HK listed commodity stocks that are paying dividends, depressed, and profitable? Let us know in the comments.