Tag Archives: Depression

Was A Depression Successfully Avoided?

One of the central tenets arising from the Financial Crisis and the various interventions taken during the period was that by enacting the various interventions, an economic depression was avoided.

Now, over five years after the Financial Crisis, many global stock markets have been booming, economic growth has been evident in many measures, and the overwhelming consensus among prominent economic forecasters is that the odds of a near-term recession are low, generally ranging from 0% to 15%.  The near-term odds of deflation, according to economic forecasters and models, is at or very near zero.

As I discussed in the February 24, 2014 post, titled “Economic Expansion, Recession Or Depression?“, while GDP and various other measures over the last five years indicate expansion, the expansion has been “subpar” – as well, many other measures are at (highly) disconcerting levels.  Regardless of how one chooses to categorize this economic situation, from a broader perspective, perhaps the main questions should be how “durable” and sustainable is this increase in economic activity?  Is the financial system and economy structurally more sound now than previously?  Is the financial system more or less susceptible to future major disruptions and upheaval?

As I explained in the September 18, 2013 post titled “Has The Financial System Strengthened Since The Financial Crisis?”, there are a broad array of underlying problems inherent in today’s financial system.  While various aspects of economic growth have occurred, the existence and continual propagation of these various problems is alarming.  Various aspects and manifestations of these problem areas are plainly evident, and have been highlighted throughout this site.  However, most lack recognition, especially compared to the recognition afforded to various statistics such as records achieved in the stock market.

While the overwhelming consensus believes that overall economic expansion will continue unabated, as will stock market gains, what seems ignored are the risks inherent in today’s underlying financial structure.  That many are unaware of these risks is not to say that such risks do not exist – in fact, not only do they exist, but they are growing, as I have explained in the “Building Financial Danger” posts.

Perhaps the central question with regard to these various risks and underlying structural frailties is what level of damage will result from them.  If one uses history as a guide, one might be led to believe that any resulting damage may be significant, but over the intermediate- and long-term, able to be overcome and transcended, such as (purportedly) experienced during the post-Financial Crisis period.

While I don’t believe that today’s economy and financial system are directly comparable to that of the Great Depression, I do believe that the two periods have similarities.  While no one likes to contemplate a future rife with economic adversity, I do believe that our current economy and financial system on an “all things considered” basis have vastly problematical working dynamics much more pernicious than those existent prior to and during The Great Depression.  As such, due to the magnitude and complexity of the economic problems inherent in today’s economy, my analyses continue to indicate that additional oncoming weakness will (unfortunately) not only be severe in nature, but also constitute what I have previously referred to as a “Super Depression,” whose main attribute will be problems of an intractable nature, with concomitant economic and societal ramifications.

The magnitude of these economic problems must be properly recognized and rectified if any true long-term economic vitality is to be realized.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1858.83 as this post is written

Economic Expansion, Recession Or Depression?

On April 29, 2011, I wrote a post titled “Recovery, Recession, Or Depression?” in which I highlighted the issue of whether the U.S. economy was then in an economic recovery, economic recession, or economic depression.

Now, almost three years since that post, and nearly five years since the end of June 2009 NBER Business Cycle Dating Committee’s (BCDC) “end of the recession,”  the issue of what part of the business cycle the U.S. economy is in still seems debatable.

While many will find the defining and classification of the business cycle to be semantics – figuring that economic activity “is what it is” – I believe that for many reasons the correct determination of where we are in the business cycle has important implications in understanding future economic activity.

Of course, many economic indicators – perhaps most notably real GDP growth – continues to show “economic expansion.” As well, many other economic indicators, including those that (purportedly) most influence the NBER BCDC’s official classification of the business cycle, support the current “economic expansion” classification.  Some indicators, including aggregate corporate profits are at all-time record highs and have performed strongly.  And, of course, various U.S. and international stock markets are very close to record highs, after having performed strongly in 2013.

However, against this backdrop of indicators that (strongly) support the U.S. “economic expansion” classification are many other indicators that indicate (very) problematical economic conditions.  The list is long.  One area that is notable is that of consumer confidence and consumer sentiment, which continue to show subdued levels relative to that of past periods of economic expansions.  I find the long-term chart depicting the Bloomberg Consumer Comfort Index to be particularly interesting.  Here is a recent chart (updated through February 21, 2014) from the SentimenTrader site, showing the Index (which was formerly called the “ABC News Consumer Comfort Index”) compared against the S&P500:

ABC News Consumer Comfort Index

Also supporting these various subdued consumer confidence readings are various surveys that continually indicate that respondents don’t seem to believe that the U.S. economy is in an expansion.  One of these was the Marist Poll results of February 5, in which 61% of respondents believe that the U.S. economy is in a recession.

Interestingly, despite the various economic indicators, surveys, and other factors that support a “recession” classification, very few prominent economic forecasters or economic models indicate such a “recession” classification.  In fact, not only do these various economic forecasters and models affirm that the U.S. economy is not in a recession, but they also indicate that the probability of the U.S. economy entering a recession in the near-term is low, if not very much so.  One notable exception is ECRI, which has repeatedly reaffirmed that the U.S. continues to be in a recession.

As to whether the U.S. economy is in an economic depression is a complex topic.  One of the issues, as I explain in the “Defining An Economic Depression” post, is that the NBER BCDC does not define an economic depression, nor does it use the term as a classification.

While I am not aware of any prominent parties who believe that the U.S. is currently experiencing an economic depression, if one believes that the U.S. is not experiencing an economic expansion, the question as to whether we are experiencing an economic depression should (at least) be contemplated.

As I mentioned in the “Defining An Economic Depression” post mentioned above, perhaps the main “unofficial” guidepost of an economic depression is a 10% decline in economic output.  While the U.S. certainly has not experienced such a decline, if one takes a longer-term view of the economic history, and includes a broad list of economic indicators, factors, and surveys, one can make an argument that there is a protracted period of economic weakness in various indicators, as well as many other highly disturbing signs that should reside outside of even a “recession” classification.  I discuss my continuing view on how I interpret the ongoing economic situation in the “A Special Note On Our Economic Situation” page.

Of course, the paramount question is “what happens next?” Will the U.S. economy continue to avoid (as almost universally forecast) widespread economic weakness – or will widespread economic weakness occur?

I continue to believe, based upon various analyses, that various underlying “unresolved issues” – including many exceedingly large asset bubbles – and trends both in the economy and financial system continue to be vastly problematical.  On an “all things considered” basis, the underlying dynamics bode very poorly for the future economic situation.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1847.71 as this post is written

The Next Crash And Its Significance

In the October 17 post (“Danger Signs In The Stock Market, Financial System And Economy“) I wrote the following:

Of further concern is whether, and when, the above-mentioned problems might reach a point at which another (financial system) crash occurs.  I am particularly concerned about the prospects of the next crash for a number of reasons, of which I will elaborate upon shortly.

“The next crash” is a topic of great importance.  In the October 13, 2010 post (“Comments On The Next Crash“) I stated:

In the past I have commented that I view a future crash as certain.  Like that of 2008, such a crash would include not only equity markets but many others as well.

also:

…this next crash should be accorded great importance as it is likely to be severe, i.e. outsized by historical standards.

I also mentioned similar aspects in point #9 of “10 ‘Front and Center’ Problem Areas That Pose a Threat to the Economy.”  Also from point #9:

Have we, as a nation, taken appropriate steps to avoid further financial and economic “crashes?” I would argue we have not, unfortunately.

Perhaps the main reason this next crash should be of paramount importance is its capability to usher in severe economic weakness, i.e. what would widely be considered a Depression.  History has shown that stock market (and overall financial market crashes) often precede periods of pronounced economic weakness.

For many reasons, a Depression at this point would present inordinate challenges and hardships.

The economy needs a certain level of momentum, a level which it must maintain in order to function properly.  If it doesn’t maintain such a level, many different ill-effects are felt, not only from a strict economic sense but from a societal one as well.  Some of these societal impacts were mentioned in a February 15 2010 post titled “America’s Economic Future.”

Due to the enormity and complexity of our economic problems, there is a high likelihood that we would go into what I have termed a “Super Depression.”  As defined in my June 23, 2009 post (“The Concept Of A “Super Depression“), a Super Depression is :

…a severe Depression embedded with highly complex, difficult-to-solve problems.

While no one likes to contemplate an economic future rife with adversity, the resolution of our current economic problems should be feared and respected.  Absent proper economic policy, one shouldn’t underestimate the downside of the resolution of our economic problems, especially given both apparent and unapparent evidence.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1281.06 as this post is written

Defining An Economic Depression

What is the official definition of an (economic) depression? Although the term is often heard, the term seems to lack a well-structured definition.

There is a section discussing depressions on The NBER’s Business Cycle Dating Procedure:  Frequently Asked Questions page.  As seen in the discussion, it says:

The term depression is often used to refer to a particularly severe period of economic weakness. Some economists use it to refer only to the portion of these periods when economic activity is declining. The more common use, however, also encompasses the time until economic activity has returned to close to normal levels. The most recent episode in the United States that is generally regarded as a depression occurred in the 1930s.

also:

However, just as the NBER does not define the term depression or identify depressions, there is no formal NBER definition or dating of the Great Depression.

A January 14, 2009 article in Forbes, titled “What Is A Depression, Anyway?” also examines the issue as to how a depression is defined, and finds “While there’s a fairly standard definition for a recession (two quarters of shrinking gross domestic product), there isn’t one for a depression.”  However, the article later states with regard to a depression:

… a 10% contraction is often cited as the tipping point.

A March 10, 2009 CalculatedRisk blog post titled “What is a depression?” also examines the issue.  An excerpt:

Although there is no formal definition, most economists agree it is a prolonged slump with a 10% or more decline in real GDP.

As well, other sources confirm the lack of a standardized definition, although the 10% decline in economic activity (measured via real GDP) is most commonly cited.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1195.19 as this post is written

The Plight Of The Wealthy During Depressions

As seen in the September 15 post (“September 13 Gallup Poll On Upper-Income Americans’ Economic Confidence“) lately there appears to be a significant lessening of economic confidence among “upper-income” Americans; and, as seen in the poll, “This is the first month since the financial crisis of late 2008 and early 2009 that upper-income Americans are more pessimistic about the future direction of the U.S. economy than other Americans.”

One question that may arise is how the wealthy and ultra-wealthy will be ultimately impacted in severe economic weakness, i.e. conditions most will label a Depression.  Of course, in the last 100 years or so, The Great Depression is the only episode of such an environment in the United States.  While to my knowledge there is no definitive study of loss of wealth among the most affluent during The Great Depression, it appears as if many of the wealthiest Americans during the period experienced a pronounced reduction in wealth.  Some, including the most wealthy and influential of the day, “lost everything.”  One documentary of the period that illustrated this facet was “The Crash of 1929” that I highlighted in the July 8 post.

This current economic and investment environment is one in which large percentages of wealth can be quickly lost.  I base this statement on many factors, one being the existence of many asset bubbles, which I have written of extensively.

 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1164.97 as this post is written

Recovery, Recession, Or Depression?

One of the more interesting facets of our current economic situation is that a case can be made that the economy is in a recovery (or expansion), recession, or depression.

This observation is supported by a number of factors, including that of a Gallup poll released yesterday.  The poll is titled “More Than Half Still Say U.S. Is in Recession or Depression.”

The poll displays a variety of information, but the main finding is that currently 27% of the respondents indicate the economy is “growing”, 16% say it is “slowing down”, 26% think it is “in a recession,” and 29% think it is “in a depression.”

Also of note from the poll, “Although economists announced that the recession ended in mid-2009, more than half of Americans still don’t agree. These ratings are consistent with Gallup’s mid-April findings that 47% of Americans rate the economy “poor” and 19.2% report being underemployed.”

As well, from the poll’s Press Release:  “In another possible disconnect with monetary policymakers, many Americans may not see the trade-off Bernanke suggests between promoting a stronger economy and experiencing higher inflation. Right now, prices are soaring, yet the latest Gallup Daily tracking data show that 67% of Americans say the economy is “getting worse.”

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1359.01 as this post is written

A Look Back – Bernanke’s “Lessons from History” Speech

One year ago, Ben Bernanke presented a speech titled “Economic Policy: Lessons from History.”

I view this speech as highly noteworthy – epochal, even – especially in relation to the efforts made to “bring the economy back” from the depths of the Financial Crisis.

Here are some excerpts that I find particularly relevant:

“I draw four relevant lessons from the financial collapse of the 1930s; I will first list these lessons, then briefly elaborate. First, economic prosperity depends on financial stability; second, policymakers must respond forcefully, creatively, and decisively to severe financial crises; third, crises that are international in scope require an international response; and fourth, unfortunately, history is never a perfect guide.”

also:

“In the current episode, in contrast to the 1930s, policymakers around the world worked assiduously to stabilize the financial system. As a result, although the economic consequences of the financial crisis have been painfully severe, the world was spared an even worse cataclysm that could have rivaled or surpassed the Great Depression.”

also:

“That lesson brings me to the second one–policymakers must respond forcefully, creatively, and decisively to severe financial crises.”

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my comments: In June of 2009, I wrote a four-part “Depression” series.  One part, posted June 22, was titled “Are We Avoiding a Depression?” In that post I discuss  the issue from a logical perspective.  It addresses many of the points Ben Bernanke spoke of in his aforementioned speech.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1333.51 as this post is written

“A S&P500 Target Of 100?” Revisited

In March of 2009 I wrote an article titled “A S&P500 Target of 100?”

I am sure that the mere idea of such a target seems impossible to many.  However, for a variety of reasons, many indicated in the aforementioned article, I believe that such a target is not only possible but increasing in likelihood.

I would like to provide an update on the ideas originally presented in that article, given that much has happened since that article was written.  In this update I will divide my comments into two areas, technical and fundamental analysis, as I did in that original article.  In order to avoid repetition, I will assume that one has already read the aforementioned original article.

Technical Analysis

Here is a chart of the S&P500 and Dow Jones Industrials on a monthly basis since 1980: (chart courtesy of StockCharts.com)

(click on chart to enlarge image):

As one can see, in 1982 the S&P500 price of 101.44  roughly corresponded to a Dow Jones Industrials price of 770.

From a technical analysis perspective, it remains difficult to derive any meaningful “support” between current S&P500 levels and that of the 100 price region.

Additionally, there are a variety of other technical measures that are worrisome, both from a long-term and short-term perspective.

One other item that should be considered is that of time.  As I wrote in the March 2009 article, “Should the stock market fall to the 100 area, what might be the timing?  Again, this is a difficult question.  If one were to casually answer, one might think such a decline from the October 2007 highs might occur in a 3-5 year timeframe, perhaps longer.”  Of course, we are rapidly approaching the 3rd anniversary of the October 2007 high, which is significant.

Fundamental Analysis

The fundamental argument for an S&P500 target of 100 is complex.  Many would vigorously argue against such given the current economic environment of strong corporate earnings, robust financial markets, optimistic consensus economic forecasts, and various statistics showing sustained growth.

Perhaps the easiest way to envision a S&P500 level of 100 is in a “negative earnings” environment.  When the original article was written, this “negative earnings” (i.e. a loss) for the S&P500 seemed like a possibility.  Now, with consensus 2010 earnings (on an “operating basis”) estimates of $80-$85/share, with increases projected for 2011, such a “loss” scenario would seem highly improbable.

However, as I noted in the original article, “…since the financial crisis began, outliers and other “odd occurrences” have propagated on a vast scale.  The mere existence of such an array of outliers would seem to argue that one should be open to possibilities that normally one wouldn’t, or shouldn’t seriously consider possible. ”  Many have ignored these outliers and “odd occurrences,” which I believe is a critical mistake.  These outliers and “odd occurrences” are numerous, and many have been mentioned in this blog; perhaps most noticeable among these outliers is outsized unemployment that is proving rather intractable.

As I wrote in the June 29 post, “it behooves us to at least condider whether instead we are in a continuing Depression, as I have previously written.”  If one does believe this is a Depression – in which current economic strength is of a transitory manner – the ramifications of such are important, as it would indicate that not only is more weakness coming, but most likely of a more (vs. the trough of 2009) severe nature.

My analysis indicates that our current and future economic conditions are of great complexity.  At the core of any current economic analysis and forecast should be the question “Are our current national actions to improve our economic condition leading to that of sustainable prosperity?”  From an “all things considered basis” I do not believe so, unfortunately.

As to whether a S&P500 level of 100 is forthcoming – I continue to believe in the following, which I stated in a September 1, 2009 post:  “Since I wrote the article “A S&P500 Target of 100?” discussed in the last post of that Depression series I have used the S&P500 price of 100 as a type of potential endpost, and have been thinking of what type of probabilities to assign to its likelihood of occurring in the near future (a  two-year window since it was written).  Most people would think that such a price target is simply impossible.  However, since I wrote the article in early March, the probabilities I have assigned to it have increased, unfortunately.”

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SPX at 1095.34 as this post is written

Is This A Depression?

Although almost everyone believes we are in an economic recovery, it behooves us to at least consider whether instead we are in a continuing Depression, as I have previously written.  Beginning on June 22, 2009, I wrote a series of four blog posts that examined various aspects of our economic situation and whether we were in, or heading into, a Depression.

As I wrote on January 19, “Of course, over the last few months there have been signs of economic recovery – or at least a lessening of economic weakness.  However, I believe that these signs represent the type of intermittent economic strength that is often seen during periods of prolonged economic weakness.”

Let’s assume, for a moment, that we are in a continuing Depression, as opposed to an economic recovery as almost everyone believes.  How could virtually everyone be wrong on such a prominent issue?

I believe the answer is complex and lengthy.  However, there are at least three basic underpinnings of such a mistaken belief.

First, judging the sustainability of economic strength after a steep economic decline seems challenging.  During the 1930’s, there were many prominent people who believed that the Depression was over, only to have the economy relapse into further weakness.

Second, since the late 1920s, this country has had very few periods of Depressions or prolonged recessions, as defined.  Due to this lack of “experience,” it may be very difficult to discriminate between continual Depression characteristics, during which intermittent economic strength manifests, and that of a new economic recovery that follows a definite end of economic weakness.  As well – and this is of critical importance – how should government, business and citizens act during a Depression?  Needless to say, how these parties should act during a continual Depression will vary greatly as opposed to that of an economic recovery.   Acting as if one is in a sustainable recovery, when in fact one is in a continuing Depression, would prove devastating.

Third, as I have written of previously, do we, as a nation (and by extension the world) really understand our present economic environment?  We, as a nation, failed (some examples are found here) to predict  the severe economic weakness of late ’08 and early ’09.  Was this failure a “one-time” event – i.e. a fluke not to worry about – or the early “innings” of what will prove to be a colossal, long-running economic misinterpretation?  Before one can flippantly dismiss this concern – as I’m sure most will be tempted to do – one should heed the existence (often mentioned in this blog) of many negative “outliers” during this purported sustainable economic recovery.  Perhaps most noticeable among these outliers is unemployment issues that are proving rather intractable.

Of course, the hope is that we are avoiding a Depression.  However, if we are actually in one, it would strongly behoove us to acknowledge such and act accordingly.

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SPX at 1047.61 as this post is written