Posts Tagged ‘Depression’

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The Next Crash And Its Significance

Friday, January 6th, 2012

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

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Defining An Economic Depression

Wednesday, November 30th, 2011

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

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The Plight Of The Wealthy During Depressions

Friday, October 7th, 2011

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

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Recovery, Recession, Or Depression?

Friday, April 29th, 2011

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

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

Friday, April 8th, 2011

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

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“A S&P500 Target Of 100?” Revisited

Wednesday, July 14th, 2010

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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Is This A Depression?

Tuesday, June 29th, 2010

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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My Thoughts On Our Current Economic Situation

Friday, May 7th, 2010

On an intermittent basis I post a summary of my thoughts on our (U.S.) current economic situation.

My overall views have not changed since my last post on the subject, which can be found in the January 19 post.

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My Thoughts On Our Current Economic Situation

Tuesday, January 19th, 2010

I would like to provide an overall update as to my thoughts on our current economic situation.

My blog post of September 1, 2009 summarizes my current thoughts well.  It can be found here:

http://www.economicgreenfield.com/2009/09/01/are-we-going-into-a-depression/

Many of my concerns and reasons for such an outlook have been expressed in this blog. 

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.

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Are We Going Into A Depression?

Tuesday, September 1st, 2009

Please note – some might find this post disturbing

I would like to provide an overall update as to my thoughts on our current economic situation.

First, however, a brief recap of what others think of our current economic situation (details of which can be found under the “Economic Forecasts” and “Stock Market” categories on the right-hand side of the home page):

  • Practically all economists, federal officials, companies and investment professionals are confident that we have “seen the worst” of the economic damage, and are heading toward a gradual recovery
  • Only a small handful of economists think even a “double-dip” recession (further economic weakness before a lasting recovery) is possible.  None that I have seen are forecasting an economic dropoff that would lead into a Depression.
  • Corporate Earnings growth is projected to be robust through (at least) 2010
  • The stock market (as seen by the S&P500) is above 1000 – after having a very strong multi-month rally

Given the above, how likely is renewed economic weakness and how strong could it possibly be?  What is the potential downside?

My analysis and overall thoughts on our economic condition, and likely future outcome, has not changed.  Although I am an optimistic person by nature, my overall analysis of our current economic condition does not engender optimism.  I do not believe that we have even come close to having seen “the bottom” as far as economic weakness is concerned.  Furthermore, I see our future economic situation as one that holds great peril and rather severe potential downside.   I do believe we are heading into what will inarguably be classified as a Depression.

The reasons for my conclusions are many.  In general, we face an array of  complex and deeply embedded problems.  For those who want a more specific background of my thoughts on this matter, I would recommend reading the articles I have written, (which can be found listed under the “ProsperityByPen.com Directory” found on the right-hand side of the page  as well as at this link)

http://www.economicgreenfield.com/prosperitybypencom-directory/   

and the various blog posts on this site. 

In particular, I would like to call attention to my four-part Depression series that started with the June 22 post, which can be found at this link:

http://www.economicgreenfield.com/2009/06/22/are-we-in-a-depression/

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. 

Our current and future economic conditions are of great complexity.  As I have previously stated, I do not want further economic weakness to occur and I do hope that my analysis and conclusions regarding our economic course are completely incorrect.  My overall desire is for us to attain what would be considered Sustainable Prosperity.

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For those who haven’t yet read this site’s disclaimer, please see the “Special Note” here:

http://www.economicgreenfield.com/a-special-note/

 

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