Recession or Depression?
Recession or Depression?
There's an interesting piece in today's Wall Street Journal titled Tomorrow's Recession Recovery Is Today's History Lesson (you need to be a subscriber to read it). The WSJ interviewed 52 economists and the consensus view was that the economy would 'begin growing again by August'. Only five saw GDP contracting throughout 2009.
They might be right but, as the author pointed out, no one had the faintest idea at the start of the Great Depression that it was going to be a great depression. Herbert Hoover told the people in 1930 'I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover.' The recovery was still three years away.
Then there's Reactions of the Wall Street Slump published by The Economist on 23 November 1929 (the article is available to all and sundry). It's a fascinating insight into the mood at the time: 'If we are justified in assuming that the setback in American industry will only be temporary, we may look forward to steady development in 1930, free from the incubus that has of late been hampering world conditions.'
What today's economists should be telling you is that they don't have the faintest idea. The quantum of fiscal and monetary stimulus is unprecedented, the level of government involvement is unprecedented and the consequences of the attempted rescue are unknown. They should also tell you that, being human and full of hope like the rest of us, they are likely to err on the optimistic side.
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Your last paragraph puts it very succinctly. None of us has a clue how and when we will get out of this mess.
We need to be mindful that a high proportion of public comment comes from the representatives of financial institutions and brokers. These organisations have a vested interest in a positive spin on the economy and investment markets. Their representatives, (barrackers), usually do not let them down.
We should also be very wary of the success that is being expected from stimulus packages world wide, particularly when such success is being touted by that other set of "barrackers" - politicians.
At the core, much of our economic and investment woe can be traced to excess debt. No amount of stimulus can actually make people spend, particularly when many have to reduce debt. And, those who don't have to reduce debt will continue to cut their consumption anyway.
Thanks for this. I have learned 3 great lessons out of this financial crisis.
1/ We have uncoupled from Wall St (NOT!)
2/ We know the lessons from 1929 and will move quickly to counter the present crisis (We still know Jack Sh..)
3/ People lie, stocks don't!
Your article confirms my second point.
Regards
These days, whenever I read or hear economists, brokers, analysts, bankers, journalists, commentators, bureaucrats or politicians use any of the words "predict", "estimate", "forecast" , "expect" or even "think", I mentally substitute the word "guess", and suddenly, like magic, the commentary takes on its true relationship to reality.
When I hear these people speak, it just reminds me that when it comes to success in politics, economics and probably most anything else (except investment, over the long haul), self confidence is really all you need.
Excellent blog Steve. It is all the so called experts and gurus that got us into this mess and despite all the pain we have already experienced I am convinced it is going to get a whole lot uglier before it improves. Governments around the world are throwing money around like drunken sailors for short term relief which will only magnify the grief in a few year's time. Where inflation, interest rates and oil and gold prices will be in 5 years time is harder to pick than the Lotto numbers.
Mick - where inflation, interest rates and oil / gold prices will be in 5 years time HAS ALWAYS BEEN THAT WAY ! Bad times like no, or not.
Fundamentally, nothing has changed. The pundits are no better than soothsayers.
Create for yourself a mental image of them reading the tealeaves - in good times or bad - to formulate their predictions. Remember - it's their job to predict, and predict they will. They're just modern versions of palm readers and astrologers.
The elliott wave people predict the S&P 500 to bottom at around 350-400. Which equates to a P/E ratio of about 7!! They expect the current rally may last into May and then down we go to the blood on the streets scenario.
If they are right, and they have been so far, we are no where near the bottom yet, so be careful.
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