The Psychological Profile of a Downturn. Markets for the week ending 9-Jan-09

Economy:
The U.S. Economy Lost 524,000 Jobs in Dec 2008,
Unemployment Jumps to 7.2% Jan 9, 2009
Non Farm Payrolls declined by -524,000 in Dec 2008. Oct and Nov job losses revised up to -584k and -423k.
Unemployment rate rose from 6.8% to 7.2% (15-yr high).
Total 2.6 mn jobs were lost in 2008 (most since World War II).
Households Survey: 806,000 jobs lost in Dec; 3 mn in 2008 (most since 1945)
Continued job losses in manufacturing (-149k), construction (-101k), residential construction (-87k), services (-273k), finance (-14k), retail (-67k), business&professional services (-113k), leisure services (-22k), temporary help (-81k). Job gains in govt. (+7k), education & health (+45k)

Psychological Profile of a Downturn
The massive debt accumulation that drives up prices of assets means, that when the downturn comes, previously optimistic investors are forced to sell assets to raise money. That factor tends to make the downward spiral steeper than the upturn that preceded it. Over the past 60 years, nine of the 10 biggest one-day percentage moves in the S&P 500 were down.


Market participants hoard and protect wealth as they pay down the accumulated debt. This reduces economic transaction velocity, restraining demand for the bubble asset, further increasing the inventory oversupply. And so it goes until the inventories decline near sustainable levels, giving market participants confidence to put their money to work.


Investors look ahead to an improved segment of the economic cycle and begin to adjust asset valuations. More participants enter the fray, seeking higher returns for their cash hoards, and economic activity returns.