Market Talk

As that gaudy rally from last March to May recedes further into the past, the market is finding new preoccupations. The market’s favorite letter back then was V, as in the V-shaped recovery. But now it’s most dread letter (no pun intended) is D, as in demand, as in deflation, as in deleveraging, as in as in double-dip, as in depression.

That flashy rally got a lot of people thinking the worst was over. It had to be, because the market is a leading indicator, the stock market is a discounting mechanism that’s always ahead of the economy. If the market is rallying, it means the smart money is betting on a recovery, and the smart money is never wrong (if it was, it wouldn’t be the smart money, now, would it?)

Yet, and we’ve made the point several times but it’s worth repeating: they thought the worst was over in 1930, too. And in 1931. And in 1932.

One of my favorite websites is the Joliet, Ill., library’s site. They have this great page with business headlines from the local papers from the early years of the Depression. All the leading lights of the day, from President Hoover to Irving Fisher to John Jacob Raskob, thought the “worst was over,” and some bright, shiny recovery was just on the horizon. They were all wrong.

I wonder if our leading lights today may be similarly mistaken. It’s amazing that for as much as the current Fed Chairman made his bones as a student of the Depression, the Fed today finds itself stuck, unable to figure out a realistic path for monetary policy that can alleviate the economy’s biggest problem, which is that nobody’s hiring (at least, in any great numbers.)  The Fed was supposed to be managing its exit from the markets by this point, but instead all the conversation is about what it needs to do next to prevent the economy from sliding backwards. Which it’s doing on its own regardless.

So let the sell-side blather on about bond bubbles. It’s amazing that the same end of the spectrum that couldn’t see the dot-com bubble or the housing bubble somehow suddenly has crystal clarity on the subject. What the bond market is really saying is that the recession never really ended. Sure, part of what’s going on in the bond market has to do with the Fed nailing interest rates to the floor, with plans to keep them there until the economy improves or pigs fly, whichever comes first.

Because even the Fed’s action are telling the same story as the bond market. Really, when the central bank is doing things that at any other time would be considered dangerously irresponsible, when it’s doing things that are manifestly destabilizing in the long run, and it’s held to that course for more than a year, without any material effect, why would anybody think the recession ever ended?

One of the D words I cited was depression, and it’s worth wondering if “Great Recession” is just a polite way of avoiding the ultimate D word. Maybe it’s too early to make that call. But Gluskin Sheff’s David Rosenberg doesn’t think so:

Now we’ll tell you why this is a depression, and not just some garden-variety recession. For all the chatter about whether the recession that started in December 2007 ended sometime last year, here is what you should know about the historical record. The 1930s depression was not marked by declining quarterly GDP data every single quarter. In fact, the technical recessionary aspect to the initial period following the asset and credit shock goes from the third quarter of 1929 to the third quarter of 1933.

There was another deep downturn in 1937-38, but the initial recession lasted four years and if you read the Benjamin Roth diary, you will see the euphoric response to any piece of good news — as brief as they may have been. Such is human nature and nobody can be blamed for trying to be optimistic; however, in the money management business, we have a fiduciary responsibility to be as realistic as possible about the outlook for the economy and the markets at all times.

What is important to know is this. In that initial four-year economic downturn, from 1929 to 1933, there were no fewer than six — six! — quarterly bounces in the GDP data. The average gain in these up-quarters was 8% at an annual rate! But because they proved not to be sustainable, the National Bureau of Economic Research (NBER) refused to declare that the recession officially ended, even though the stock market rallied 50% in the opening months of 1930 on the belief that the downturn was about to end. False premise. And guess what? We may well be reliving history here. If you’re keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%.

It wasn’t really until we could put together a string of very solid GDP data in 1934, 1935, and well into 1936 that the recession definitely had come to a close and at least an intermittent period of solid growth took hold. That is, until the policy mis-steps of 1937. All that second recession of the decade proved was just how fragile the post-bubble recovery really was.

Image: Brooklyn Museum, via Wikimedia Commons)