Five Things You Need to Know: The Modern Stealth Depression
By Kevin Depew Jul 16, 2008 12:32 pm
Despite the seeming enormity of it in retrospect, the stock market crash of 1929 barely even registered for most Americans. Today, it is some kind of weird obsession.
Chaos and fear never sleep. This morning the first news story I read was a piece from the Los Angeles Daily News about police threatening to beat down and arrest any "disorderlies" trying to get their money out of a failed IndyMac (IMB) bank branch in Pasadena, CA. Apparently, after being turned away Monday, customers began lining up at 1:30 a.m. the next morning to take out any cash they had in excess of the $100,000 maximum insured by the Federal Deposit Insurance Corporation. The scene was reportedly emotional and tense. At another IndyMac branch in Encino, the police were called in after line jumpers threatened to turn an ordinary bank run into a full-on riot.
Yes, it's here. Welcome to the Depression. No, don't drop whatever it is you're doing. Don't get up. It's not going anywhere. It will wait. It's just going to sit over here in the corner and read a magazine while you do whatever it is you need to do.
A Depression doesn't run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality.
It's a hell of a thing to call this day and age the next Depression. It's dangerous tinfoil hat territory inhabited mostly by screeching lunatics and volatile nutjobs. But by the time they get squeezed out by reputable folks the whole gig will be up, the circus will have left town.
But how can this be? To understand the mechanics of this, the nature of it, let's look back at the last Great Depression.
Despite the seeming enormity of it in retrospect, the stock market crash of 1929 barely even registered for most Americans. The day before the crash, Time Magazine's Oct. 28, 1929 issue was business as usual; national stories, Washington stories, a review of the newest plays opening in Manhattan, a piece on a cat washing contest in Kingston, NC.
A week later, in the wake of the stock plunge, the cover story was as far from a piece on crashing share prices as you could 
get - a profile of a man named Samuel Insull, the "financial father of the Chicago opera." The crash did make the magazine, of course, second billing in the Business section in a piece titled, "Bankers v. Panic." The next piece, however, was about a $2.5 million investment by a Wall Street investment bank in orchids: "Last week, however, to the orchid industry went 2,500,000 Wall Street dollars, not squandered, but carefully invested."
Heh. Yes, the dream dies hard, doesn't it?
It took a little more than two full years, Dec. 11, 1931, before the New York Bank of the United States would collapse. Surely that would rattle a few cages. Well, no cover play, that was reserved for Dr. James Henry Breasted, "foremost Egyptologist of the U. S.", but the bank collapse did garner a story in the Business section, below a piece on Lorillard Co., then in the news as "the only major industrial concern in the U.S. to resume dividends in 1931."
Jesus, Mary and Joseph, what is wrong with these people? Haven't they even the vaguest sense of the impending doom they face? Someone should warn them. They're headed straight into a vicious buzz saw. It's like watching drunken sheep follow one another off the Cliffs of Moher.
On January 22, 1932 things turned desperate. The Reconstruction Finance Corporation was formed to dole out government aid to banks, railroads, farm mortgage associations and all manner of failed business enterprises. By any decent measure of journalistic standards, this deserved top billing in a weekly newsmagazine. So Time's cover story on playwright Philip Barry's 11th play, "The Animal Kingdom," comes as a sharp, kneecap-shattering nightstick blow.
By the end of the following year, 1933, President Franklin Delano Roosevelt had squeezed the Emergency Banking Act through Congress, signed the Economy Act, the Credit Act, the Reforestation Relief Act, the Agricultural Adjustment Act, the Farm Act, the Federal Securities Act, the National Cooperative Employment Service Act, the Home Owners' Loan Act, the Glass-Steagall Act, the National Industrial Recovery Act, the Emergency Railroad Transportation Act, created the Federal Emergency Relief Administration, the Federal Deposit Insurance Corporation and Civil Works Administration.
In short, everything in America was falling to pieces and going to hell. And yet I am staring right now at the cover of Time from August 7, 1933, just past the mid-point of that awful year, and Marie Dressler is on the cover in full character as a "a raffish, vigorous old woman whose generous heart thumps under sleazy clothes that do not fit her." 
Three months later, the November 13 cover is "Football."
The December 4 cover features Seton Porter of National Distillers, whom the magazine, with bald-faced envy, claims has "50% of all U.S. whiskey in his saddlebags."
This is quickly turning into some kind of preverse joke. These people deserve the Depression, dammit! No wonder the country has gone to hell; all anyone cares about is Tugboat Annie, football and whiskey.
Hahaha. Kind of like today. And there it is, finally, the point. We are slowly sidling up to The Fear. With wealth and lifestyles evaporating right before our eyes, The Fear is really the only tangible thing we can hold onto. The Fear is always worse than the actualization. The Fear feeds on potentiality, unimaginable potentiality.
Now, there are two ways to look at that. One is to despair over our misfortune at finding ourselves in the wrong place at the right time, taken along for a ride on this wave past the cresting point, and the other is to consider what adventures await on the other side. I'm in the second camp because I am an optimistic person by nature, or at least a defensive pessimist, and also because I understand that despite it all, we will continue to live our lives, raise children the best we can and find ways to make the best of whatever situation we are in.
During the first Great Depression, times were tough for many people, but even now the vast majority of us will adapt and continue on and soon take for granted the change in lifestyle that may (or for some may not) entail.
I read a piece in the New York Times several months ago by a woman consistently finding herself feeling humiliated by her parents' reckless disregard for money during the Depression - they didn't have much anyway, but her parents were intent on squandering what little they could accumulate on fancy clothes and cocktail parties. As I remember the story, she asked her mom, "Why on earth are you having a party with things the way they are?" Her mother, without missing a beat, said, "It's times like these when people need parties most of all."
Indeed. The time for preparations and battening down the hatches has passed. It's finally here. Let's party.
No positions in stocks mentioned.
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Reply
2008-07-16 12:31:41
that first depression
Actually, we are closer to 10% unemployment if you calculate the numbers like they did back in the day.
Kevin, great writing. I've really enjoyed the last couple of posts from you.
Keep up the good work.
JF
Kevin, great writing. I've really enjoyed the last couple of posts from you.
Keep up the good work.
JF
2008-07-16 12:35:42
Party Time
Well, having a good sense of humor is worth more than a gazillion toys. Watching reality slowly catch up with people who have long avoided it does have some entertainment value - as long as my tax dollars aren't used for extending their time of folly.
Feeding the deer, fox, raccoons, squirrel, wild turkeys, opposum, and skunk that stop by for victuals (and a kind word) rounds out my party time. As long as I have enough for red wine with a cork and a steak, I'm happy... just down the road a piece from Luckenbach, back to the basics of life.
Feeding the deer, fox, raccoons, squirrel, wild turkeys, opposum, and skunk that stop by for victuals (and a kind word) rounds out my party time. As long as I have enough for red wine with a cork and a steak, I'm happy... just down the road a piece from Luckenbach, back to the basics of life.
2008-07-16 12:41:04
that first depression
Indeed! Just when we thought it couldn't get any better, Prof Depew kicked it up a couple of notches!!
2008-07-16 13:00:17
We do have one last pleasure in these times
Schadenfreude is our last remaining reason to smile. Well, that and butterflies, little girls giggling at butterflies, pretty girls of all ages, and good conversation with good friends.
Who needs a functioning banking system after all?
Who needs a functioning banking system after all?
2008-07-16 13:05:08
Kevin The happy camper
So then what is O J Simpson and Britney Spears doing these days? Time frames changed but history has its simularities. The roaring twenties and living in excess of our means led us to the roaring Dot Commers and homes with more sq feet the the White House. Debt up to our ears. Not like debt on a farm that has equity or value but debt that we have nothing to show for at this point. Throw away cars, VCR's, TV's, vacations and living large. Debt on homes that are way overvalued for even good economic times. Things the bank won't even send the repo man out to get back. This debt was packaged up in cdo's and passed on as deposits to another bank which leveraged it to the hilt. The stealth here is that this started in 1987 and policy has hidden it through the dilutive split days of the dot com era and up to the false sense of wealth of price appreciation of homes. The grinch is here! Pay up. Those that can't follow the Pied Piper.
JPM
JPM
2008-07-16 13:47:18
that first depression
I think we're a long way from 20% unemployment (I've read where unofficial estimates were 30%+ unemployed). But I remember reading (can't say where) that when the WWII draft started, the Army had to reject 20% of the draftees for an unusual condition. The reason?
The effects of chronic malnutrition . . . .
The effects of chronic malnutrition . . . .
2008-07-16 13:51:07
Depression "News" Stories
It was all about distraction. People knew and didn't want to be reminded. That's why they "needed" the parties. Denial takes many forms and avoidance through entertainment even in supposed news magazines is one of the easiest!
2008-07-16 13:54:13
Ha!
Interesting. Great column, as usual. But I have a question. You highlighted three Time covers from late 1933 to show non-Depression story coverage.
But did the Depression ever make the cover of Time? Because if they covered it, they would have to "move on" and cover something else the next issue. Ya know?
I guess I could look it up myself. But I just thought I would ask.
But did the Depression ever make the cover of Time? Because if they covered it, they would have to "move on" and cover something else the next issue. Ya know?
I guess I could look it up myself. But I just thought I would ask.
2008-07-16 13:59:50
that first depression
I agree, most people state that 25% unemployment from the period. That does not include the other 75% of the working age population with underemployment. Given you didn't loose your job, could you survive with losing 20, 30 or 50% of your household income?
2008-07-16 14:26:11
Thank you
I really didn't think you could top yesterday, I'm wrong.
Great job and just one question, when's the compliation coming out?
Great job and just one question, when's the compliation coming out?
2008-07-16 15:34:37
Party Time For DEO
Even more reason to stock up on Diageo PLC ADS (DEO). One of Vitaliy's faves. Man, I could go for a Captain Morgans and root beer right about now.
2008-07-16 16:32:49
Denial ain't just a state of mind
I'm in denial, apparently.
Are things bad? Yep. Are they horrendous? Haven't seen it yet. Even as Wall Street melted down in 1929, the signs of deterioration were evident on Main Street across the US - unemployment had been rising at a rapid rate and foreclosures were rising precipitously on REAL homes, not just primarily speculative properties.
We haven't seen this yet. Perhaps we will. I doubt it.
I recently did a review of stock prices from the low of 1932 - which we will call the "absolute bottom" of the market, because prices were so undervalued at that point. On April 1, 1932, the market closed at 42.8. I chose the next "bottom" on 1/2/1942 of 100 as the next point of the slope.
These 2 bottoms gave an annual growth rate of 8.79%, which seemed inordinately high seeing as both data points were "bottoms". At 8.79% per year, from the bottom of 4/1/1932, the Dow today should be at 25,925! YIKES! How could this possibly make sense?
What should the low be? Well, ASSUMING a 7% annual growth rate from 4/1/1932, the Dow should be at 7,321. So...it seems that a middle channel (let's say 8%) would be reasonable....and this would be 14,800.
Assuming we're "crashing", I'd venture a guess that the bottom is 7,500, since that correlates nicely with 1932 and 1942. In reality, it's still a huge undervaluation.
This is particularly true when you realize that the Dow components should, THEORETICALLY be outperforming the economy as a whole (which is why 7% is always what we're told the market grows at on an annualized basis versus the 3% long term average of the mature economy).
But remember...I chose BOTTOMS. The long term growth slope should be the same regardless of the starting point. Which means, in theory, the market is very undervalued at 11,000.
I won't debate reality versus theory because since I have my Masters in Econometrics, I'm familiar with differentiation between the two.
But it does stand to reason that at current levels the market is still at reasonable relative values, in relation to the depths of the Depression.
Sure, it's not a glaring "BUY" signal, but it's a bit of charting worth paying attention to when you see people losing their heads and panicking. No reason to jump up and down.
Doom and gloomers are always right at some point, just like stopped watches. I'd never say they are wrong, because sometimes (and eventually) they will be right (to a degree).
Are they right today? I don't know. I'm not in banking or finance. I am in the news industry though and I know journalists are the least trustworthy when it comes to opinion and analysis (though I do love this site since it is lacking in journalists).
As for "stealth" depressions - they are always stealth. In fact, so are recessions. We never "KNOW" we're in them until we're already out of them. We may feel the effects while we're in them, but usually we're too busy paying attention to other things (parties, for example) to really care much. Think about the late 70's and the long recessions we had then (well, there was growth, but at a cost), and how Studio 54 was just booming! We loved and laughed through the hard times. Just as they did in the 30's.
Max Factor made a killing in make up in the 1930's
http://www.freebeautytips.org/1930s-styles.html
because it's a small price to pay, when all else is going poorly, to be able to feel good about yourself.
Sometimes that price is to have a party, or to go to a movie, or to buy makeup or (thank you Sydney Pollack) go to a Dance Marathon!
I would suggest, it's better to not IGNORE what's happening. Certainly pay attention, aware, and alert of what's going on. But it's not worthwhile to revel in how we're fooling ourselves, or how it's so horrible, or how bad things are, or how bad they'll get.
If we do, we lose in total. Optimism (not Pollyannaism) is a force multiplier. Use it, be wise, be smart. Don't make fun of those in the 30's for "ignoring" problems. They didn't ignore them...you couldn't. But why revel in them?
Are things bad? Yep. Are they horrendous? Haven't seen it yet. Even as Wall Street melted down in 1929, the signs of deterioration were evident on Main Street across the US - unemployment had been rising at a rapid rate and foreclosures were rising precipitously on REAL homes, not just primarily speculative properties.
We haven't seen this yet. Perhaps we will. I doubt it.
I recently did a review of stock prices from the low of 1932 - which we will call the "absolute bottom" of the market, because prices were so undervalued at that point. On April 1, 1932, the market closed at 42.8. I chose the next "bottom" on 1/2/1942 of 100 as the next point of the slope.
These 2 bottoms gave an annual growth rate of 8.79%, which seemed inordinately high seeing as both data points were "bottoms". At 8.79% per year, from the bottom of 4/1/1932, the Dow today should be at 25,925! YIKES! How could this possibly make sense?
What should the low be? Well, ASSUMING a 7% annual growth rate from 4/1/1932, the Dow should be at 7,321. So...it seems that a middle channel (let's say 8%) would be reasonable....and this would be 14,800.
Assuming we're "crashing", I'd venture a guess that the bottom is 7,500, since that correlates nicely with 1932 and 1942. In reality, it's still a huge undervaluation.
This is particularly true when you realize that the Dow components should, THEORETICALLY be outperforming the economy as a whole (which is why 7% is always what we're told the market grows at on an annualized basis versus the 3% long term average of the mature economy).
But remember...I chose BOTTOMS. The long term growth slope should be the same regardless of the starting point. Which means, in theory, the market is very undervalued at 11,000.
I won't debate reality versus theory because since I have my Masters in Econometrics, I'm familiar with differentiation between the two.
But it does stand to reason that at current levels the market is still at reasonable relative values, in relation to the depths of the Depression.
Sure, it's not a glaring "BUY" signal, but it's a bit of charting worth paying attention to when you see people losing their heads and panicking. No reason to jump up and down.
Doom and gloomers are always right at some point, just like stopped watches. I'd never say they are wrong, because sometimes (and eventually) they will be right (to a degree).
Are they right today? I don't know. I'm not in banking or finance. I am in the news industry though and I know journalists are the least trustworthy when it comes to opinion and analysis (though I do love this site since it is lacking in journalists).
As for "stealth" depressions - they are always stealth. In fact, so are recessions. We never "KNOW" we're in them until we're already out of them. We may feel the effects while we're in them, but usually we're too busy paying attention to other things (parties, for example) to really care much. Think about the late 70's and the long recessions we had then (well, there was growth, but at a cost), and how Studio 54 was just booming! We loved and laughed through the hard times. Just as they did in the 30's.
Max Factor made a killing in make up in the 1930's
http://www.freebeautytips.org/1930s-styles.html
because it's a small price to pay, when all else is going poorly, to be able to feel good about yourself.
Sometimes that price is to have a party, or to go to a movie, or to buy makeup or (thank you Sydney Pollack) go to a Dance Marathon!
I would suggest, it's better to not IGNORE what's happening. Certainly pay attention, aware, and alert of what's going on. But it's not worthwhile to revel in how we're fooling ourselves, or how it's so horrible, or how bad things are, or how bad they'll get.
If we do, we lose in total. Optimism (not Pollyannaism) is a force multiplier. Use it, be wise, be smart. Don't make fun of those in the 30's for "ignoring" problems. They didn't ignore them...you couldn't. But why revel in them?
2008-07-16 16:48:12
depression, the great
they don't call it "depression" for nothing. It's the national holiday of the miserable.
lovers of malaise freely strut about. much to write about.
and then there are problem solvers.
it's no virtue to pen odes to malaise.
lovers of malaise freely strut about. much to write about.
and then there are problem solvers.
it's no virtue to pen odes to malaise.
2008-07-16 16:51:16
Professor Depew on Writing
I'm ready for that book.
"A Depression doesn't run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality."
That is SUCH good writing, it makes me green with envy. Never stop.
"A Depression doesn't run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality."
That is SUCH good writing, it makes me green with envy. Never stop.
2008-07-16 17:14:13
The Party is Over
Hello Kevin.
A very well written article. Thank you.
My brother just recently retired...or I should say he was offered early retirement as a cost cutting measure by his employer. Thankfully, he took it. I have at least another 10 years to go before I can even think about retirement.
I posed the following question to my brother who is happily enjoying the start of his retirement: After faithfully and slavishing working for 30 years and surviving one budget crisis after another, you can finally retire and you can expect live for at least another 30+ years. During the next 30+ years, you won't even have to lift a pencil and, saints be praised, you will receive 70% of your full-time gross salary plus cost-of-living adjustment, full medical, full dental, and even eye glasses will be covered. At age 62, social security will kick-in...maybe...and then Medicare. Wow! Does that sound too good to be true? You work for 30 years so that you can retire for 30+ years...is that too good to be true?
What shocked me was that my brother had never really thought about it in those terms. He readily acknowledged that the terms of his retirement did, in fact, sound too good to be true. I told him that his acknowledgement of the situation was at least a start because we have all been lied to for all these years. The promise of that pension allowed each of us to keep our mouths shut and not clamor for that deserved pay raise (compensation for a rise in productivity...any of you MBAs remeber that from your vaulted MBA curriculum?). What should have been given to the employees, or at least given as dividends to shareholders, was squandered on obtuse executive compensation and stock by-backs which have covered-up bad business decisions and reckless gambling.
Going back to the great debate between Thomas Jefferson and Alexander Hamilton, there has always been a feeling that America was a place where the individual got ahead through hard work and sacrifice and not through some aristrocratic priviledge. But here we are again, same old story.
When my brother and the many, many thousands just like him are eventually confronted with the reality of the lies and deceit, there will be more than a bunch of angry people lined up at the bank's front door. How we as a people meet that challenge will show the rest of the world, who have also been lied to, what America is really about. I hope we are up to the challenge. If we can meet the challenge properly...with dignity, intelligence and wisdom, then we will be much stronger for it. There is simply no where to run and hide. But in any event, all of the ill-gotten gain will be returned...one way or another.
Gary G
A very well written article. Thank you.
My brother just recently retired...or I should say he was offered early retirement as a cost cutting measure by his employer. Thankfully, he took it. I have at least another 10 years to go before I can even think about retirement.
I posed the following question to my brother who is happily enjoying the start of his retirement: After faithfully and slavishing working for 30 years and surviving one budget crisis after another, you can finally retire and you can expect live for at least another 30+ years. During the next 30+ years, you won't even have to lift a pencil and, saints be praised, you will receive 70% of your full-time gross salary plus cost-of-living adjustment, full medical, full dental, and even eye glasses will be covered. At age 62, social security will kick-in...maybe...and then Medicare. Wow! Does that sound too good to be true? You work for 30 years so that you can retire for 30+ years...is that too good to be true?
What shocked me was that my brother had never really thought about it in those terms. He readily acknowledged that the terms of his retirement did, in fact, sound too good to be true. I told him that his acknowledgement of the situation was at least a start because we have all been lied to for all these years. The promise of that pension allowed each of us to keep our mouths shut and not clamor for that deserved pay raise (compensation for a rise in productivity...any of you MBAs remeber that from your vaulted MBA curriculum?). What should have been given to the employees, or at least given as dividends to shareholders, was squandered on obtuse executive compensation and stock by-backs which have covered-up bad business decisions and reckless gambling.
Going back to the great debate between Thomas Jefferson and Alexander Hamilton, there has always been a feeling that America was a place where the individual got ahead through hard work and sacrifice and not through some aristrocratic priviledge. But here we are again, same old story.
When my brother and the many, many thousands just like him are eventually confronted with the reality of the lies and deceit, there will be more than a bunch of angry people lined up at the bank's front door. How we as a people meet that challenge will show the rest of the world, who have also been lied to, what America is really about. I hope we are up to the challenge. If we can meet the challenge properly...with dignity, intelligence and wisdom, then we will be much stronger for it. There is simply no where to run and hide. But in any event, all of the ill-gotten gain will be returned...one way or another.
Gary G
2008-07-16 19:10:43
A few things are different today. I predict stagflation of "reciflation"
Good article, but a few things are different these days.
1. During the Depression very few people, other than the rich, owned stock. So it probably was not a news story most cared about.
(almost everyone owns stock either outright, or through 401K plans)
2. There were no such things as credit cards, personal debt, or a global economy.
3. Home ownership was nowhere near what it is today.
So I still think that as the debt is being reduced, the government will be creating as much inflation as possible (Bernanke says he is concerned about inflation, because he will try to create it).
So we will have bad stagflation or even "reciflation" (I just made this term up? It's a recession in conventional terms, with items related to oil maintaining a relatively high price, as there will still be people in the global economy who will be able to purchase the oil)
Of course corrective forces may become too large, and then we get the Depression you describe.
1. During the Depression very few people, other than the rich, owned stock. So it probably was not a news story most cared about.
(almost everyone owns stock either outright, or through 401K plans)
2. There were no such things as credit cards, personal debt, or a global economy.
3. Home ownership was nowhere near what it is today.
So I still think that as the debt is being reduced, the government will be creating as much inflation as possible (Bernanke says he is concerned about inflation, because he will try to create it).
So we will have bad stagflation or even "reciflation" (I just made this term up? It's a recession in conventional terms, with items related to oil maintaining a relatively high price, as there will still be people in the global economy who will be able to purchase the oil)
Of course corrective forces may become too large, and then we get the Depression you describe.
2008-07-16 19:14:00
Cause and Effect
The stock market crash didn't cause the Depression. It was an inappropriate gov't response that was the culprit - namely the Fed raising rates in 1931 - thereby killing investment.
We may be about to maket he same mistake with the housing crash. Just when we need to make sure the last remaining providers of mortgages - Fannie and Freddie - need to remain open, a few members of Congress may well make them close.
Herbert Hoover went down as one of the main architects of the Depression. This time around it could well be Jim Bunning.
We may be about to maket he same mistake with the housing crash. Just when we need to make sure the last remaining providers of mortgages - Fannie and Freddie - need to remain open, a few members of Congress may well make them close.
Herbert Hoover went down as one of the main architects of the Depression. This time around it could well be Jim Bunning.
2008-07-16 19:25:13
A few things are different today. I predict stagflation of "reciflation"
That's stagflation or "reciflation" or "recessiflation"
With relatively (key word) high prices for key industrial commodities.
I also don't know how the dollar will survive. If we get into a dollar crisis, and the FED is forced to raise interest rates, then again the risk for Depresssion goes up.
But there will be global growth in a few key countries so maybe we can squeak by.
By the way have you heard about several bankers leaving the country (insert joke about rats and ship)?
With relatively (key word) high prices for key industrial commodities.
I also don't know how the dollar will survive. If we get into a dollar crisis, and the FED is forced to raise interest rates, then again the risk for Depresssion goes up.
But there will be global growth in a few key countries so maybe we can squeak by.
By the way have you heard about several bankers leaving the country (insert joke about rats and ship)?
2008-07-16 22:15:31
Pepe, you're priceless; this is why MV is light-years ahead of the pack. Now if I can just figure out when to check out of the merchandise I picked up last week (at least I'm even now).
2008-07-16 23:35:36
Mentors in unlikely places...
After looking for a mentor in the investment business for over thirty years (I'll be 60 this Oct), I feel that you and the MV community fit the bill. I was one of Ross Perot's ex-military stockbrokers in 1973 starting out with the then third largest brokerage firm Dupont Walston. Our training was in LA (as far from Wall Street as far from Wall Street as possible per Ross) until it went bankrupt in Jan of 74. I landed with E. F. Hutton in Atl, where I believe Jeff Saut worked as well. (I remember a young broker named Jeff who looks like JS, but can't remember his last name). Being an inntrovert didn't enhance my salesmanship skills so I moved to Reynolds Securities (before they became Dean Witter Reynolds). I can identify with your description of the Dean Witter mojo when you discussed the Morgan merger with them. I ended up with Thomson McKinnon until I got bingo'd by an NYA naked strangle in the crash of '87. I was protected for 15% move in either direction but not a 27% and an increase in margin rqts fro 5% to 100%. Why don't they try that with the oil guys today and let's find out who's a real speculator. The bottom line is that I appreciate your honesty and humility, two traits that are rare in the investment business. I would have like to have met your grandfather to tell him what a great job he did in teaching you character. I have a 12 yr old grandson who I spend a significant amount of time with (he's an excellent pitgher and can already beat me at golf) that I'm trying to provide a positive influence. Anyway I just wanted say thanks for an excellent job in providing a first class service and also I'm trying to balance out the probable emails from crazies that come out of the woodwork during significant market turns. Hope to meet you and guys like Pepe, Jeff, Mish and Bennet during one of the MV gatherings.
RP
RP
2008-07-17 09:08:41
No one is ever held responsible for the looting of our government
Why are the criminals not paying to bailout Bear Sterns and your pension fund losses from Wall Street's repackaged mortgage toxic waste? Thing is the folks who caused the new depression have names. The big ones drove repeal of 1930s laws put in place to prevent a recurrence of crimes which were the root cause of the 1930s depression! Those folks in the revolving doors between the Securities and Exchange Commission and Wall Street have names; those who authorized naked short selling for privileged traders just last year too; those that made sure to remove the Commodities Futures Trading Commission authority to regulate derivatives contracts (values which now approach $1.0 quadrillion and all weapons of mass destruction according to Warren Buffett no less); those who organized repeal the Glass-Steagall Act in Congress have names! Some of these were involved with Enron or tied to the Savings and Loan banking collapse and bailout. Take away is: the public purse is looted, the taxpayer gets the bill for all the criminality and no one is ever held responsible. It is because we have the attention span of a fruit fly; it is so easy to distract us with celebrity scandals and big screen TV. Nothing changes.
2008-07-17 11:26:25
The Party is Over
Interesting viewpoint.
I'd disagree, though. I was never promised anything. Not a pension (well one company I worked for had them, but they were just sold and I haven't been there in 3 years), not a promise of raises for productivity, nothing. I abhor making promises or getting them.
I can't tell you how many times a young person has left a job with me to go somewhere else for "a promise". It never worked out, of course, and I always hear the grousing about it.
There have been no lies, no deceit, to those of us who recognize the lies when they are made. We read between the lines, see the trends and move in a different direction.
I fail to see what the point of your post is because it seems like it is very typical of the young people I work with today who complain about everything because they FEEL like they can't get ahead. Yet each one is in a better position today than I was at their age.
And this is the problem - the FEELING. We FEEL like we should be doing better. Well, I try not to think that way. Because when I do, I realize perhaps I should be doing better, or things should be better, but I can't really explain why. I AM better at my job than most other people in the field. I do more, and do it better. I make good calls with regard to the pricing and direction of the sales market because I don't rely on my feelings, but rather on the available data. I pay attention to key points.
While I FEEL bad for people who took out silly loans, I still will tell you that the ones I know who did it were stupid. They did it AGAINST everyone's best advice. Not because they had to. Because they felt like speculating. These are not rich people, they are people who were doing well, but wanted to do better.
I recognize that many others took out mortgages from groups that engaged in predatory behavior. These people are the ones who deserve help. They didn't know any better because they were misled.
But I still don't see them as the majority in the current situation.
As for a "Depression"...most people will "feel" it before they "know" it. But today some people....NO MOST PEOPLE....will claim that a Recession is a Depression. Why? Because many of us haven't ever really felt a TRUE Recession. 2001? Barely a blip. 1992? Boring. These are the 2 most recent, and they were very soft recessions.
I doubt we'll have a Depression. If we do, it will only be due to self-fulfilling prophecy. If people want one, they'll get it.
I'd disagree, though. I was never promised anything. Not a pension (well one company I worked for had them, but they were just sold and I haven't been there in 3 years), not a promise of raises for productivity, nothing. I abhor making promises or getting them.
I can't tell you how many times a young person has left a job with me to go somewhere else for "a promise". It never worked out, of course, and I always hear the grousing about it.
There have been no lies, no deceit, to those of us who recognize the lies when they are made. We read between the lines, see the trends and move in a different direction.
I fail to see what the point of your post is because it seems like it is very typical of the young people I work with today who complain about everything because they FEEL like they can't get ahead. Yet each one is in a better position today than I was at their age.
And this is the problem - the FEELING. We FEEL like we should be doing better. Well, I try not to think that way. Because when I do, I realize perhaps I should be doing better, or things should be better, but I can't really explain why. I AM better at my job than most other people in the field. I do more, and do it better. I make good calls with regard to the pricing and direction of the sales market because I don't rely on my feelings, but rather on the available data. I pay attention to key points.
While I FEEL bad for people who took out silly loans, I still will tell you that the ones I know who did it were stupid. They did it AGAINST everyone's best advice. Not because they had to. Because they felt like speculating. These are not rich people, they are people who were doing well, but wanted to do better.
I recognize that many others took out mortgages from groups that engaged in predatory behavior. These people are the ones who deserve help. They didn't know any better because they were misled.
But I still don't see them as the majority in the current situation.
As for a "Depression"...most people will "feel" it before they "know" it. But today some people....NO MOST PEOPLE....will claim that a Recession is a Depression. Why? Because many of us haven't ever really felt a TRUE Recession. 2001? Barely a blip. 1992? Boring. These are the 2 most recent, and they were very soft recessions.
I doubt we'll have a Depression. If we do, it will only be due to self-fulfilling prophecy. If people want one, they'll get it.
2008-07-17 11:38:37
Interesting side note
My neighbor is in the shipping business, logistics to be exact. He knows where all containers are, what they have, where they are going, etc.
He says business has never been better and exports are booming due to the lower dollar. Originally, he was concerned because most exports were food. Lately, he states that has shifted to more manufactured goods (lately being the last 3 months) as US manufactured high quality goods are suddenly worthwhile. This trend may continue for some time to come as the dollar remains cheap.
Another trend he's noticed is a bottleneck at the ports. Seems most shippers have contracts with truckers. These contracts are currently worthless as the price of diesel has led most to park their trucks.
As a result, the cost of intermediary shipping from port to store has risen dramatically - which means they are using independent truckers, far fewer in number and thus preventing goods from reaching shelves quickly.
In most cases, this isn't a horrible thing because perishable goods go out first. However, he points out that orders still remain strong - which means demand remains relatively high. And these are futures, not necessarily current, shipping orders.
My years in grad school taught me that shipping is THE key indicator of future economic direction (stuff has to get from point A to point B) as is packaging (always paying attention to cardboard box sales).
If things are so tight, why all the activity, I asked him. He shrugged and said he doesn't think things are really all that tight except in a few sectors where he has little business.
He did point out there is a squeeze on profits at his company, though, which will effect his bonus. This is primarily due to diesel prices and the cost of independent trucking, however.
My uncle was an independent trucker in the 70's. I remember going for short hauls with him. Things were tough on those guys back then, he fought for a living. It's the contract guys who are getting beat up right now.
He says business has never been better and exports are booming due to the lower dollar. Originally, he was concerned because most exports were food. Lately, he states that has shifted to more manufactured goods (lately being the last 3 months) as US manufactured high quality goods are suddenly worthwhile. This trend may continue for some time to come as the dollar remains cheap.
Another trend he's noticed is a bottleneck at the ports. Seems most shippers have contracts with truckers. These contracts are currently worthless as the price of diesel has led most to park their trucks.
As a result, the cost of intermediary shipping from port to store has risen dramatically - which means they are using independent truckers, far fewer in number and thus preventing goods from reaching shelves quickly.
In most cases, this isn't a horrible thing because perishable goods go out first. However, he points out that orders still remain strong - which means demand remains relatively high. And these are futures, not necessarily current, shipping orders.
My years in grad school taught me that shipping is THE key indicator of future economic direction (stuff has to get from point A to point B) as is packaging (always paying attention to cardboard box sales).
If things are so tight, why all the activity, I asked him. He shrugged and said he doesn't think things are really all that tight except in a few sectors where he has little business.
He did point out there is a squeeze on profits at his company, though, which will effect his bonus. This is primarily due to diesel prices and the cost of independent trucking, however.
My uncle was an independent trucker in the 70's. I remember going for short hauls with him. Things were tough on those guys back then, he fought for a living. It's the contract guys who are getting beat up right now.
2008-07-17 12:48:05
The Party is Over
Hello Richard.
Thanks for your thoughtful comments. But if I may be permitted to say, you sound like a doctor, in perfect health, talking to someone suffering from hypochondria. Kevin talked about people lining up at the bank to withdraw their money and the police getting ready for any violence. Is that hypochondria? Why did those people line up to withdraw their money? Because they felt bad? or was it because the bank was under federal supervision and they were scared to death that their meager savings would be lost? Those bank officers, how much did they get paid? What was their education, training, and experience? Didn't they know that making a $500k no document 100% loan was way too risky for the bank's depositors...for the stock holders...for the community they served? Your point about the sub-prime borrower, while there may be truth to it, is a red herring...sorry. The common person is indeed gullible. This has been understood as far back in recorded history as you can go. But that is not the story. The real story for today is that smart people worked hard to go to the best schools, to get the best education, to get the best job, to get the best compensation, to buy the best home, to send their children to the best schools, and on and on... ; and, when it came time to exercise a little common business sense and judgement, instead went along with the herd and took everyone over the cliff with them. There's the story. Maybe you don't call it a "promise" but many people looked to our business leadership to make good decisions. Honest mistakes people will accept. But what we are witnessing is anything but honest. It is fraud on a massive scale. Of course, there are good and skilled businesspeople like yourself. We need more of you. Say whatever you want about "feeling," but when the average person is simply unable to make ends meet, that is reality and we are all going to suffer from the cure. Let's hope for better times. But "hope is not a valid investment strategy"...who said that? Todo? Best regards. Gary
Thanks for your thoughtful comments. But if I may be permitted to say, you sound like a doctor, in perfect health, talking to someone suffering from hypochondria. Kevin talked about people lining up at the bank to withdraw their money and the police getting ready for any violence. Is that hypochondria? Why did those people line up to withdraw their money? Because they felt bad? or was it because the bank was under federal supervision and they were scared to death that their meager savings would be lost? Those bank officers, how much did they get paid? What was their education, training, and experience? Didn't they know that making a $500k no document 100% loan was way too risky for the bank's depositors...for the stock holders...for the community they served? Your point about the sub-prime borrower, while there may be truth to it, is a red herring...sorry. The common person is indeed gullible. This has been understood as far back in recorded history as you can go. But that is not the story. The real story for today is that smart people worked hard to go to the best schools, to get the best education, to get the best job, to get the best compensation, to buy the best home, to send their children to the best schools, and on and on... ; and, when it came time to exercise a little common business sense and judgement, instead went along with the herd and took everyone over the cliff with them. There's the story. Maybe you don't call it a "promise" but many people looked to our business leadership to make good decisions. Honest mistakes people will accept. But what we are witnessing is anything but honest. It is fraud on a massive scale. Of course, there are good and skilled businesspeople like yourself. We need more of you. Say whatever you want about "feeling," but when the average person is simply unable to make ends meet, that is reality and we are all going to suffer from the cure. Let's hope for better times. But "hope is not a valid investment strategy"...who said that? Todo? Best regards. Gary
2008-07-17 13:11:22
Interesting side note
Mr. Monihan,
I have read multiple posts written by you and I wonder who you are trying to convince. You provide little anecdotal stories that you presume support some sort of conclusion.
Let's talk fundamentals.
The United States has an unsustainable current account deficit. What in your opinion is going to turn this around?
We have allowed most of our manufacturing base to be moved overseas. How does a 'service economy' compete with manufacturing economies? We will always need to import manufactured goods but why will they need our 'services'? What happens to the cost of these goods when the workers of these countries unionize and demand higher wages and benefits?
We are caught in an energy vice. The only thing that will bring down the price of oil is a slowing economy. It is as if we are swimming to shore to avoid being eaten by a mountain of oncoming debt and the faster we swim the more weight is added to our back.
With a national debt fast approaching 10 trillion dollars, with baby boomers set to change from peak earnings years to becoming a burden on society through Social Security, Medicare, booming medical costs and their contribution to an ever worsening housing glut (when they move to assisted living centers or simply die off) how long can the fact that we print money and have the guns save us?
Leadership has been replaced by pandering and people who insist that if we only just keep whistling through the cemetary everything will be okay. We just have to avoid talking ourselves into a recession/depression. Meanwhile we mortgage our future even further through two failed wars and government bailouts.
You decry a younger generation that doesn't know hardship but fail to acknowledge that this is just the reason we not only will get a recession (or worse), but desperately NEED one.
People say we can't compete in manufacturing in a global economy. I believe hunger, fear and even desperation are great motivators. Rising from the ashes of a depression will be people who value their jobs and take pride in their work. We need to go back to the days when people took pride in an honest days work for an honest days pay instead of get rich quick schemes like winning the lottery, flipping houses or just cheating your boss. Only when we rebuild our manufacturing base and start producing cheaper, better quality products will we have a chance.
People know deep down that we have been living an illusion of prospewrity built on debt for decades. They know we have been cutting corners and they know there will be a price to be paid. A large number of people when confronted with this reality will honestly admit 'they just want to get theirs' before everything collapses. They see the CEOs getting 400 times the average worker and say why should I be the only shmuck that doesn't cash in.
I know conservation, sacrifice and hard work have become dirty words but I believe that if we lower our standard of living we will not only save this country but ultimately improve our quality of life.
I more than welcome a rebuttal.
2008-07-17 15:32:39
The Party is Over
Richard, you are correct. You only see bank "social acrimony" when a bank has failed, or is rumored to be about to fail. Hasn't happened in my neck of the woods yet, either. Neither have we seen housing prices cratering locally (they never bubbled up, so they aren't popping). My local news ran a network story, to the effect that pet abandonment has quintupled due to the various housing issues, in parts of the country. The local wrap-up report on that topic was, "that is not happening here".
The housing bubble is confined to 4 or 5 states, and really, only part of those 4 or 5 states is affected. (Note: Michigan is a separate case.) Now, the credit crisis is a whole other story, as you suggest. The simple fact that a sophisticated financial entity has effectively no idea what the securities on the books are worth has got to be a ground-shaker, the damages of which are still reverberating.
Bottom line: it's not as bad as people say it is. At least not yet. Not where I live, anyway. That said, the spend-y zeitgeist is dead, even where life is not so bad (teen-age girls, possibly, excepted.)
ciao.
The housing bubble is confined to 4 or 5 states, and really, only part of those 4 or 5 states is affected. (Note: Michigan is a separate case.) Now, the credit crisis is a whole other story, as you suggest. The simple fact that a sophisticated financial entity has effectively no idea what the securities on the books are worth has got to be a ground-shaker, the damages of which are still reverberating.
Bottom line: it's not as bad as people say it is. At least not yet. Not where I live, anyway. That said, the spend-y zeitgeist is dead, even where life is not so bad (teen-age girls, possibly, excepted.)
ciao.
2008-07-17 16:35:25
The Party is Over
I understood his post regarding the police and people lining up to remove their deposits. I completely "get it". But it was one instance, and as I have pointed out in other posts regarding viewpoints of my own, anecdotal evidence is not always accurate. It is directional.
I live in the suburbs of the Northeast, in NYC. I haven't seen lines at banks, nor (aside from this one article) heard of disruptions that would require the police in events of this nature. In fact, I HAVE heard of similar instances during previous recessions (in 2001 and in 1992) when people lining up for jobs required police coverage in case of riot. So a few instances of this are hardly indicative of general trend. Certainly they COULD be, but given that these events are not regularly occurring (as they did in 1929-1932), I'd be hard put to say this is really useful information at this stage.
The Depression of the 1930's was evident well before 1929. This is a well documented fact noted in every book regarding the topic. If you were paying attention to plant closings, unemployment rates, decimation of income and savings of all kinds prior to the crash, you saw something big was coming. More importantly, few systems were in place to deal with them, and the ones that did exist were woefully designed and not fully understood (hence Smoot-Hawley, the attempt to balance the budget, and increased interest rates).
At no point have I said that any doom and gloom forecast is wrong. I have, in each post, clearly stated it's a possibility and certainly one which we should all pay very rapt attention to and seek signs of.
I seem to be a doctor who is in good health talking to somebody with hypochondria? Hardly. I fully recognize the dangers and possibilities that exist. A good doctor (and I'm the son of one) analyzes the issue, tells the patient what the situation(s) may be, helps them to remain calm, optimistic, and let them know what the treatments are.
I see alot of analysis from authors on this site, but very little cause or desire for optimism or even ideas for treatment.
From posters, I see anger, pessimism and alot of blame.
I like the analysis, which is why I love Minyanville. I don't have to agree with all the analysis to enjoy it.
But in every Depression or Recession, panic, anger and fear play a huge role. The ability to suppress these natural emotional responses is important to managing expectations.
I am very angry that politicians of all nature pander and lie to us. But I don't blame them, nor do I expect them to do anything. They never have, nor will they ever. Obama? He'll likely lead us down a rathole. McCain? Possibly the same. We can't expect them to help.
I have always lived my life with the expectation that my intelligence and ability will help make me successful REGARDLESS of the events that surround me. With a few rare exceptions, this has always been the case. Those rare exceptions were not horrific experiences, though, they were learning events and I learned how to manage myself better to make the next rare exception less painful. I can get more detailed, but I have in posts elsewhere on MV, so I won't here.
I don't believe the troubles we potentially face are bad for a variety of reasons (someone said I haven't posted facts, but I will here):
1. shipping remains strong. Bottlenecks, while they exist, will ease because the nature of the industry is to find solutions to these and they are being found. Solutions always exist to the imaginative sould.
2. the weak dollar is a blessing in disguise. It will bolster manufacturing and agriculture as we ship more overseas. Part of the reason outsourcing has been occurring is due to the strong dollar and the ability to hire more cheaply elsewhere. This is no longer true to the degree it once was.
3. deficits are essentially an issue of percentages. The ability to service debt is more important than the size of the debt. Determining the level at which our debt is no longer serviceable is a matter of not just how much debt we are creating, but how much value we are creating....and also WHO IS HOLDING that debt. China cannot "call" the debt they hold without facing massive failures of their own. It would be a politically non-viable situation.
4.Intuition and imagination - recessions and depressions are usually overcome with massive waves of creativity and development. With the energy pressures we currently face, it's very likely this will come in the form a inventiveness from the alternative energy sources. I, for one, have been investigating wind, solar, and geothermal. Also, Stirling Engines in conjunction with wind/solar/geothermal. The solution that someone comes up with (and someone will) will help jumpstart whole new sectors of the economy and create a economic and political realignment (which is precisely why having a "manhattan project" for energy is a terrible idea because then the gov't would own it and further enslave us).
5. The credit crunch - this is the one item I am very worried about. Not for the same reasons as most people, though. I see it as a potential problem because if people really believe their investments are going up in smoke as they approach retirement, they will be inclined to withdraw them. This will create a waterfall effect and the self-fulfilling prophecy I keep mentioning when I complain about the doom and gloom I see...which can lead to panic.
I intend to profit from this, should it occur. And then I'll profit again when it's over. But I'd prefer it just not occur because who needs the heartburn these events provide? As a result, I tend to act like the doctor you described...in good health, etc. Because the one thing that ALWAYS creates a Depression is the inability of people to seek silver linings when many exist. By focusing on the bad, we ignore the good, and we cause a pile on effect that exacerbates the bad and more than negates the good that exists.
I am fond of teaching my boys one strong lesson - you will always have a list of many reasons to oppose something. Humans are good at being negative. But to support something and actually do it, all you require is one very good reason.
You may ask, what is the very good reason for me to say the things I do and believe what I do? Because the alternative is, to me, an unacceptable acceptance of events that I don't wish to see occur. I don't believe in fate, so I certainly don't feel we are "fated" to have a crash, regardless of events.
I do believe that there is always a way to make things work. And so far, in my life, I have always been correct. My life has been wonderful.
Should the awful events of a Depression come to pass, it will not alter my viewpoint one bit. An optimist prepares for the worst even as he expects the best.
I live in the suburbs of the Northeast, in NYC. I haven't seen lines at banks, nor (aside from this one article) heard of disruptions that would require the police in events of this nature. In fact, I HAVE heard of similar instances during previous recessions (in 2001 and in 1992) when people lining up for jobs required police coverage in case of riot. So a few instances of this are hardly indicative of general trend. Certainly they COULD be, but given that these events are not regularly occurring (as they did in 1929-1932), I'd be hard put to say this is really useful information at this stage.
The Depression of the 1930's was evident well before 1929. This is a well documented fact noted in every book regarding the topic. If you were paying attention to plant closings, unemployment rates, decimation of income and savings of all kinds prior to the crash, you saw something big was coming. More importantly, few systems were in place to deal with them, and the ones that did exist were woefully designed and not fully understood (hence Smoot-Hawley, the attempt to balance the budget, and increased interest rates).
At no point have I said that any doom and gloom forecast is wrong. I have, in each post, clearly stated it's a possibility and certainly one which we should all pay very rapt attention to and seek signs of.
I seem to be a doctor who is in good health talking to somebody with hypochondria? Hardly. I fully recognize the dangers and possibilities that exist. A good doctor (and I'm the son of one) analyzes the issue, tells the patient what the situation(s) may be, helps them to remain calm, optimistic, and let them know what the treatments are.
I see alot of analysis from authors on this site, but very little cause or desire for optimism or even ideas for treatment.
From posters, I see anger, pessimism and alot of blame.
I like the analysis, which is why I love Minyanville. I don't have to agree with all the analysis to enjoy it.
But in every Depression or Recession, panic, anger and fear play a huge role. The ability to suppress these natural emotional responses is important to managing expectations.
I am very angry that politicians of all nature pander and lie to us. But I don't blame them, nor do I expect them to do anything. They never have, nor will they ever. Obama? He'll likely lead us down a rathole. McCain? Possibly the same. We can't expect them to help.
I have always lived my life with the expectation that my intelligence and ability will help make me successful REGARDLESS of the events that surround me. With a few rare exceptions, this has always been the case. Those rare exceptions were not horrific experiences, though, they were learning events and I learned how to manage myself better to make the next rare exception less painful. I can get more detailed, but I have in posts elsewhere on MV, so I won't here.
I don't believe the troubles we potentially face are bad for a variety of reasons (someone said I haven't posted facts, but I will here):
1. shipping remains strong. Bottlenecks, while they exist, will ease because the nature of the industry is to find solutions to these and they are being found. Solutions always exist to the imaginative sould.
2. the weak dollar is a blessing in disguise. It will bolster manufacturing and agriculture as we ship more overseas. Part of the reason outsourcing has been occurring is due to the strong dollar and the ability to hire more cheaply elsewhere. This is no longer true to the degree it once was.
3. deficits are essentially an issue of percentages. The ability to service debt is more important than the size of the debt. Determining the level at which our debt is no longer serviceable is a matter of not just how much debt we are creating, but how much value we are creating....and also WHO IS HOLDING that debt. China cannot "call" the debt they hold without facing massive failures of their own. It would be a politically non-viable situation.
4.Intuition and imagination - recessions and depressions are usually overcome with massive waves of creativity and development. With the energy pressures we currently face, it's very likely this will come in the form a inventiveness from the alternative energy sources. I, for one, have been investigating wind, solar, and geothermal. Also, Stirling Engines in conjunction with wind/solar/geothermal. The solution that someone comes up with (and someone will) will help jumpstart whole new sectors of the economy and create a economic and political realignment (which is precisely why having a "manhattan project" for energy is a terrible idea because then the gov't would own it and further enslave us).
5. The credit crunch - this is the one item I am very worried about. Not for the same reasons as most people, though. I see it as a potential problem because if people really believe their investments are going up in smoke as they approach retirement, they will be inclined to withdraw them. This will create a waterfall effect and the self-fulfilling prophecy I keep mentioning when I complain about the doom and gloom I see...which can lead to panic.
I intend to profit from this, should it occur. And then I'll profit again when it's over. But I'd prefer it just not occur because who needs the heartburn these events provide? As a result, I tend to act like the doctor you described...in good health, etc. Because the one thing that ALWAYS creates a Depression is the inability of people to seek silver linings when many exist. By focusing on the bad, we ignore the good, and we cause a pile on effect that exacerbates the bad and more than negates the good that exists.
I am fond of teaching my boys one strong lesson - you will always have a list of many reasons to oppose something. Humans are good at being negative. But to support something and actually do it, all you require is one very good reason.
You may ask, what is the very good reason for me to say the things I do and believe what I do? Because the alternative is, to me, an unacceptable acceptance of events that I don't wish to see occur. I don't believe in fate, so I certainly don't feel we are "fated" to have a crash, regardless of events.
I do believe that there is always a way to make things work. And so far, in my life, I have always been correct. My life has been wonderful.
Should the awful events of a Depression come to pass, it will not alter my viewpoint one bit. An optimist prepares for the worst even as he expects the best.
2008-07-17 17:01:09
Interesting side note
I agree with some of your points, so I have no need to rebut. I agree, hunger is a great motivator. That's why I am a Libertarian.
I agree there is much pandering on the part of politicians. That's why I can't stand them. But I hardly BLAME them. It's their job. I BLAME voters for not understanding that a politician can't feed them. Regardless of what Obama or McCain say, neither will "help" us.
Where you and I do differ are on items of little consequence. I didn't say we desperately need a Depression as you claim I did. I do think it wouldn't be a bad thing if it did occur because Schumpeter always pointed out the cleansing effects it has on the economic psyche...just as you did. So I'm thinking we probably agree more than disagree on this item.
I do disagree about the debt/deficit and maintaining it. Growth in productivity and GDP are what can sustain a growing deficit/debt. Sure, it's inevitable that it has to be addressed. But we forget that surpluses almost always lead to recession. Of course, excessive deficits lead to inflation and recession, too. Running a gov't balance sheet isn't the same as running a home or corporate balance sheet - there are far reaching effects.
Still, just saying "it's too high" doesn't make it so. Supposedly it was "too high" 25 years ago. On a % basis (which is the only way to view it), the differences are not that significant.
As for energy, there we will vastly disagree. A recession is NOT the only way to bring down energy prices. As you've seen, the last 3 days, we are clearly in a speculative bubble around energy. There's no reason to fall so precipitously over such minute alterations in supply.
Still, even if the majority of the run up is based in reality (it likely is, due to demand from China and India), there are other ways to lower prices.
I mentioned some in a previous post - wind/solar/geothermal. Recently, while investigating wind and geo, I was told by both biz development people that there are backlogs of significant lengths in their chain. I couldn't expect to get my geo in for 4 months and my wind would take about as long.
Wind has been growing exponentially the last few years.
These items will have a huge effect on oil prices.
Unfortunately, I can't get geothermal in my house due to restrictions on my land. So I'm switching from oil heat to natural gas. With a price 25% lower than oil, and 80% greater efficiency, I am improving my situation and helping to lower the price of oil (while raising the price of natural gas, LOL).
Substitution effects exist everywhere for those of us who choose to seek them out.
There's always a way to make it work. That's my motto.
I agree there is much pandering on the part of politicians. That's why I can't stand them. But I hardly BLAME them. It's their job. I BLAME voters for not understanding that a politician can't feed them. Regardless of what Obama or McCain say, neither will "help" us.
Where you and I do differ are on items of little consequence. I didn't say we desperately need a Depression as you claim I did. I do think it wouldn't be a bad thing if it did occur because Schumpeter always pointed out the cleansing effects it has on the economic psyche...just as you did. So I'm thinking we probably agree more than disagree on this item.
I do disagree about the debt/deficit and maintaining it. Growth in productivity and GDP are what can sustain a growing deficit/debt. Sure, it's inevitable that it has to be addressed. But we forget that surpluses almost always lead to recession. Of course, excessive deficits lead to inflation and recession, too. Running a gov't balance sheet isn't the same as running a home or corporate balance sheet - there are far reaching effects.
Still, just saying "it's too high" doesn't make it so. Supposedly it was "too high" 25 years ago. On a % basis (which is the only way to view it), the differences are not that significant.
As for energy, there we will vastly disagree. A recession is NOT the only way to bring down energy prices. As you've seen, the last 3 days, we are clearly in a speculative bubble around energy. There's no reason to fall so precipitously over such minute alterations in supply.
Still, even if the majority of the run up is based in reality (it likely is, due to demand from China and India), there are other ways to lower prices.
I mentioned some in a previous post - wind/solar/geothermal. Recently, while investigating wind and geo, I was told by both biz development people that there are backlogs of significant lengths in their chain. I couldn't expect to get my geo in for 4 months and my wind would take about as long.
Wind has been growing exponentially the last few years.
These items will have a huge effect on oil prices.
Unfortunately, I can't get geothermal in my house due to restrictions on my land. So I'm switching from oil heat to natural gas. With a price 25% lower than oil, and 80% greater efficiency, I am improving my situation and helping to lower the price of oil (while raising the price of natural gas, LOL).
Substitution effects exist everywhere for those of us who choose to seek them out.
There's always a way to make it work. That's my motto.
2008-07-17 17:09:37
The Party is Over
David, thanks.
You're right about the real estate.
In 2003, while visiting my in-laws in Florida, it was suggested that we invest in FLA real estate. I stated, unequivocally, NO. Here's why:
1. Florida, as I learned from my Real Estate salesman stepfather (yes, my dad's a doctor and my stepfather sold Florida real estate), Florida is the SPECULATIVE real estate capital of the US. It crashes first. Indeed, when it started to crash in 2007 I was visiting my in laws again and heard some of the sob stories from the speculators, several of whom I am friendly with and wished me to join them. I'm glad I didn't.
2. Interest rates were too low and artificial. I took advantage when I upgraded my home 2 years ago, but I did so recognizing that I risked suffering several years of decline in home value (hasn't occurred yet in my hometown) but this would only effect the gains I netted from my first home which I'd sold (this home, in a worse section of my town, is actually worth MORE today!!!!).
3. Speculation in real estate was rampant. Similar to 1998, when I was learning the hard way about speculation in stocks, I noticed a bubble is a bubble when it's all that people talk about, and everyone was in the game. Well, I saw that happening with real estate. (By the way, isn't it interesting that it's happening with oil companies and commodities too right now?)
I steer clear when I see an everyday guy investing in something I'm in. It's time to sell or at least not get involved.
Real estate in NJ (where I live) is down, but not tremendously and not at all where I live. Location, location, location. It's true.
You're right about the real estate.
In 2003, while visiting my in-laws in Florida, it was suggested that we invest in FLA real estate. I stated, unequivocally, NO. Here's why:
1. Florida, as I learned from my Real Estate salesman stepfather (yes, my dad's a doctor and my stepfather sold Florida real estate), Florida is the SPECULATIVE real estate capital of the US. It crashes first. Indeed, when it started to crash in 2007 I was visiting my in laws again and heard some of the sob stories from the speculators, several of whom I am friendly with and wished me to join them. I'm glad I didn't.
2. Interest rates were too low and artificial. I took advantage when I upgraded my home 2 years ago, but I did so recognizing that I risked suffering several years of decline in home value (hasn't occurred yet in my hometown) but this would only effect the gains I netted from my first home which I'd sold (this home, in a worse section of my town, is actually worth MORE today!!!!).
3. Speculation in real estate was rampant. Similar to 1998, when I was learning the hard way about speculation in stocks, I noticed a bubble is a bubble when it's all that people talk about, and everyone was in the game. Well, I saw that happening with real estate. (By the way, isn't it interesting that it's happening with oil companies and commodities too right now?)
I steer clear when I see an everyday guy investing in something I'm in. It's time to sell or at least not get involved.
Real estate in NJ (where I live) is down, but not tremendously and not at all where I live. Location, location, location. It's true.
2008-07-17 17:38:39
Interesting side note
The national debt (and the interest we have to pay to maintain it) aren't the primary issue. The current account defict and the trade defict are. This CAN'T be sustained indefinitely. No matter how rich of a country we are (or were) if we continue to buy more than we sell we will go broke eventually.
I'm not against developing alternative energy sources but for the foreseeeable future they will count for such a small percentage of our total energy usage that absent conservation at a significant level the growing economies of Asia will eat up any gains that would substantially lower the price of oil.
Just because oil went down this week don't expect it to stay down absent serious signs of recession.
I also believe that history will see the 'war on terror' as being a significant contributor to our decline. Its as if Osama bin Laden threw a stick over a cliff and George Bush went running after it bringing our economy and our country's prestige with him.
I don't want to be one of those nattering nabobs of negativity but I do want to confront reality. I'm not saying we are facing mass starvation only that the era of our greed and gluttony seems to be coming to an end and I believe this is a good thing.
For generations parents in this country wanted their children to have a better life than them. I believe that future generations don't need more material comfort but rather more character, discipline and values.
A depression might just be the lesson we need.
2008-07-17 22:44:01
Interesting side note
The concept you propose - spending more than we make leading to being bankrupt/broke - is simply mercantilism in reverse (mercantilism being that a nations prosperity is dependent primarily on development and export of capital). This is not true because as Ricardo demonstrated, and history has shown, comparative advantage creates situations of beneficial outcomes regardless of overall value.
Eventually economies do reach a "breaking point" whereby the value they create is no longer equivalent to the value they bring in. I doubt we are even close to that point, because the US dominates in so many fields and patents out of the US remain the highest in the world. But let's say for the sake of argument we are. Would this necessarily lead to a massive redeployment of funds worldwide accompanied by market dislocation?
Not really. Capital and currency markets will usually right themselves over time and part of the reason for the US dollar being so weak (aside from low interest rates) is the huge outsourcing and importing binge we've been on. The shift was due to occur eventually, and if you assume it's a bad thing you're probably wrong. Outsourcing in and of itself is a good thing - if it's done properly. Several companies I've worked for have done it very effectively. I know of several who THINK they are doing it effectively but are not. (my sister's outsources 80% of their software to India, and when it is shipped back it is reviewed by a different division. This division then debugs it. The problem is the company ASSUMES it's saving money because the outsourcing saves the first division huge amounts of money, and this is what the CFO talks about. What he doesn't talk about is that the second division, doing the debugging, has a budget that has actually grown faster than the savings from outsourcing. This is NOT the correct way to do it! LOL They'd save more just doing the work here.)
Anyway, it's just poor economics to make the basic assumption that a trade imbalance is a bad thing, regardless of size, length of existence, or reasons for it.
If I am a better farmer than you, but I also play the guitar well and can get paid for it, then it's better for me to let you do my farming while I play the guitar and get paid. Technically, I have a trade imbalance in effect regarding my relationship with you because I could most likely produce far more than you at my farm. But I'm concentrating on providing a valuable service which is offsetting that imbalance, even if it's not clearly apparent.
Britain became a service economy well before the US did, and is doing quite well after all these years. So the nature of the economy has little to do with the value of what it provides. If it did, then we'd all be Physiocrats, because real value (according to them) is really only accountable to agriculture. Manufacture cannot add value, and certainly services couldn't (and more likely would subtract value).
My father (the doctor) recently commented that at my age (46) I have more, have traveled more, do more, have more opportunity and am generally better off than he was at the same age. Granted, at 46 he was sending the second of 2 sons to college, but he was making double my income in real terms, and had been for some time.
We forget that as we speak of inflation, there are alot of things that actually cost "less" because they do more...or that we have things that have enhanced our lives that our parents didn't have.
One major reason I'm living better than my father is Quicken. I can track every penny I make and spend. I spend 1 hour a week on Quicken. My father spent 2 hours a night, after office closing, to do his books. What is the value of that in today's terms?
Alternative energy - remember, a "small fraction" of the energy may be more than you realize. Wind power, at least the one I'm installing, will cut my electric bill in half. Is that a small fraction if 5% of the homes have it? It will be 5% very soon, and that's just wind. I suspect alternatives are playing a larger role in reducing our dependence on oil already - far larger than we may realize.
The recent drop in oil, we are told, is "likely to reverse". Of course, we're being told this by those who are making money having it go up.
It may go up again. But I doubt it will hit $200 anytime soon. In fact, I'd be surprised if it hit $150. It was supposed to be at $150 already, but summertime traffic isn't growing as expected. Which is no surprise. More people are choosing to vacation closer to home and are driving smaller cars, and driving more carefully (I actually got 23 mpg from my Explorer during my recent 600 mile drive to Hatteras because I went 55 the whole way! 3 fill ups became 1!)
As my motto points out, there's always a way to make it work. America is great because we are quick to substitute, quick to innovate, and extremely productive people.
I'm not sure why you mentioned Osama, but I suppose it has something to do with politics and not economics. I don't really engage in politics, so it's not worth discussing. All politicians are kleptocrats.
Eventually economies do reach a "breaking point" whereby the value they create is no longer equivalent to the value they bring in. I doubt we are even close to that point, because the US dominates in so many fields and patents out of the US remain the highest in the world. But let's say for the sake of argument we are. Would this necessarily lead to a massive redeployment of funds worldwide accompanied by market dislocation?
Not really. Capital and currency markets will usually right themselves over time and part of the reason for the US dollar being so weak (aside from low interest rates) is the huge outsourcing and importing binge we've been on. The shift was due to occur eventually, and if you assume it's a bad thing you're probably wrong. Outsourcing in and of itself is a good thing - if it's done properly. Several companies I've worked for have done it very effectively. I know of several who THINK they are doing it effectively but are not. (my sister's outsources 80% of their software to India, and when it is shipped back it is reviewed by a different division. This division then debugs it. The problem is the company ASSUMES it's saving money because the outsourcing saves the first division huge amounts of money, and this is what the CFO talks about. What he doesn't talk about is that the second division, doing the debugging, has a budget that has actually grown faster than the savings from outsourcing. This is NOT the correct way to do it! LOL They'd save more just doing the work here.)
Anyway, it's just poor economics to make the basic assumption that a trade imbalance is a bad thing, regardless of size, length of existence, or reasons for it.
If I am a better farmer than you, but I also play the guitar well and can get paid for it, then it's better for me to let you do my farming while I play the guitar and get paid. Technically, I have a trade imbalance in effect regarding my relationship with you because I could most likely produce far more than you at my farm. But I'm concentrating on providing a valuable service which is offsetting that imbalance, even if it's not clearly apparent.
Britain became a service economy well before the US did, and is doing quite well after all these years. So the nature of the economy has little to do with the value of what it provides. If it did, then we'd all be Physiocrats, because real value (according to them) is really only accountable to agriculture. Manufacture cannot add value, and certainly services couldn't (and more likely would subtract value).
My father (the doctor) recently commented that at my age (46) I have more, have traveled more, do more, have more opportunity and am generally better off than he was at the same age. Granted, at 46 he was sending the second of 2 sons to college, but he was making double my income in real terms, and had been for some time.
We forget that as we speak of inflation, there are alot of things that actually cost "less" because they do more...or that we have things that have enhanced our lives that our parents didn't have.
One major reason I'm living better than my father is Quicken. I can track every penny I make and spend. I spend 1 hour a week on Quicken. My father spent 2 hours a night, after office closing, to do his books. What is the value of that in today's terms?
Alternative energy - remember, a "small fraction" of the energy may be more than you realize. Wind power, at least the one I'm installing, will cut my electric bill in half. Is that a small fraction if 5% of the homes have it? It will be 5% very soon, and that's just wind. I suspect alternatives are playing a larger role in reducing our dependence on oil already - far larger than we may realize.
The recent drop in oil, we are told, is "likely to reverse". Of course, we're being told this by those who are making money having it go up.
It may go up again. But I doubt it will hit $200 anytime soon. In fact, I'd be surprised if it hit $150. It was supposed to be at $150 already, but summertime traffic isn't growing as expected. Which is no surprise. More people are choosing to vacation closer to home and are driving smaller cars, and driving more carefully (I actually got 23 mpg from my Explorer during my recent 600 mile drive to Hatteras because I went 55 the whole way! 3 fill ups became 1!)
As my motto points out, there's always a way to make it work. America is great because we are quick to substitute, quick to innovate, and extremely productive people.
I'm not sure why you mentioned Osama, but I suppose it has something to do with politics and not economics. I don't really engage in politics, so it's not worth discussing. All politicians are kleptocrats.
2008-07-18 09:10:27
Maybe fiends as the last asset they had? Throw parties seems as good an idea as any. With the welfare state and the war inflation gearing up big time the money would not have mattered anyway.
2008-07-18 12:22:08
Interesting side note
So...trade imbalances don't matter. Very interesting concept.
Since you like simplification, let's simplify.
There are three foreigners and an American on an island. One foreigner grows the food, one foreigner harvests the food and one foreigner cooks the food. The American eats the food...on credit.
What happens when the foreigners realize that the American isn't really doing anything that they couldn't do for themselves and start to re-think their business plan?
You state that "Capital and currency markets will usually right themselves over time" but the dollar has been falling for ovder three years and I don't see a significant change in the trade deficit despite our exports going up slightly.
To really simplify why don't you answer this question:
If government debt doesn't matter why don't we all just stop working and live on government 'rebates' and bailouts...except for the 'guitar players' of course?
In a depression (which as you admit will come sooner or later) will the guy who exported his 'farm' feel so smart when no one is in the mood to pay for guitar music...expecially when his farm has been nationalized and the price for 'food' is sky high?
You seem to want to confuse inidvidual economics with macro economics. Things that might work on an individual scale often fail miserably on a much larger scale. How many windmills would it take to power New York City? Since the vast majority of oil we import is used in internal combustion engines how long before we see a windmill powered car or tractor? Where is the money going to come from to build and maintain all these windmills? Oh, I forgot...debt doesn't matter. Peak oil and the exploding demand for it by former third world countries doesn't matter. Only sustaining the delusion matters.
It is very difficult to debate over the Internet. My findamental belief is that since people don't want to confront even the concept of sacrifice, hard work and a lower standard of living they are willing to accept almost any obfucation of reality. It reminds me of the dot com boom when people were rushing to buy 'beach front property' in cyberspace acting as if we would all one day be living cyber houes, eating cyber food and wearing cyber clothes. It was called 'the new economy' where profits didn't matter any more.
I mentioned Osama bin Laden because I believe the entire 'war on terror' is another obfuscation of reality whose sole intent is to maintain the status quo without forcing us to confront reality. Ask yourself what would happen if the United States decided to support the 'terrorists' instead of the corrupt regimes that keep them in subjugation. Just as with all obfuscations it is ultimately doomed to failure and the trillions squandered to enable this delusion will become one more example of our chickens coming home to roost.
Only time will ultimately settle this debate. I agree with you that the United States is a rich country. Where we seem to disagree is about how it got that way. I recall a time when hard work and sacrifice were lauded and held up as virtues. These vitues built the roads, bridges, factories, schools, librairies and hospitals that allowed us to have the standard of living you are so proud of. Who would have believed that in a couple short generations we could have torn down so much that took such effort to create.
I believe that future generations will curse this era of greed and over-consumption and wonder at the sheer audacity that we would try to defend it with self-serving sophistry and my favorite...
'mistakes were made'!
Alan Greespan has a 'motto' very similar to yours. When asked how we will get out of the mess we're in he said he didn't know but that we have always found a way in the past.
We will continue to find a way...until we don't.
The American Empire will be recorded as pretty short-lived by historical standards and people will look back and wonder how we could have been so foolish and self-obsessed. I will be long dead but it makes me smile to think of some historian discovering the archives of Minyanville and exclaiming 'Oh, I see'!
2008-07-18 13:28:17
Al Gore calls for a plan. What I think he really said
I'm not sure do we now call all politicians "berries" (see Mr Practical)
O.K., So yesterday Berry Gore call for the the elimination of carbon based fuels from our country. While I believe Berry Gore does state facts, he also tends to add dramatic effect. But a few points came out of his speech for me.
1. We are closer to peak oil, than most of us realize. He is yet another major player who has stated "We can not drill our way out". This for me is berry-speak for peak oil. Even more stunning was than John McCain and Barrack Obama both supported this notion, and deferred to his expertise.
2. His stated cost was $1Trillion. I won't pretend to be an analyst, but my guess is this is significantly more ($3-$5Trillion?). Anyone want to guess what the cost would be over his 10 year plan? How about a 5 year crash plan?
3. So now we come to the time frame. He says 10 years to get mostly off of oil. So given we have been plateaued on oil since 2005, do you believe that the plateau will last for 13years? I don't. I think, a few years from now the total world supply will be declining at 3-5% per year. This will mean an even larger spending program is required.
Now we have a few things going for us right now. First of all this likely bad recession will cut the demand for oil (as it already has), and this will give us a little more time. Second, the Europeans and other are way ahead of us and will not be hit as hard by this.
So this is how I came to my "reciflation" prediction. This recession will get bad but before it hits a depression state, the government will be spending like a drunken sailor on the oil issue. Growth will still be horrible, especially when the supply of oil starts its downward slide.
But once we emerge from the other side, there will be new industries and new technologies which we will be selling al over the world.
I expect it will take a while for all of this to sink into the "berries" who are still after the "speculators". They are going to find out that this is one problem they no longer can push forward.
O.K., So yesterday Berry Gore call for the the elimination of carbon based fuels from our country. While I believe Berry Gore does state facts, he also tends to add dramatic effect. But a few points came out of his speech for me.
1. We are closer to peak oil, than most of us realize. He is yet another major player who has stated "We can not drill our way out". This for me is berry-speak for peak oil. Even more stunning was than John McCain and Barrack Obama both supported this notion, and deferred to his expertise.
2. His stated cost was $1Trillion. I won't pretend to be an analyst, but my guess is this is significantly more ($3-$5Trillion?). Anyone want to guess what the cost would be over his 10 year plan? How about a 5 year crash plan?
3. So now we come to the time frame. He says 10 years to get mostly off of oil. So given we have been plateaued on oil since 2005, do you believe that the plateau will last for 13years? I don't. I think, a few years from now the total world supply will be declining at 3-5% per year. This will mean an even larger spending program is required.
Now we have a few things going for us right now. First of all this likely bad recession will cut the demand for oil (as it already has), and this will give us a little more time. Second, the Europeans and other are way ahead of us and will not be hit as hard by this.
So this is how I came to my "reciflation" prediction. This recession will get bad but before it hits a depression state, the government will be spending like a drunken sailor on the oil issue. Growth will still be horrible, especially when the supply of oil starts its downward slide.
But once we emerge from the other side, there will be new industries and new technologies which we will be selling al over the world.
I expect it will take a while for all of this to sink into the "berries" who are still after the "speculators". They are going to find out that this is one problem they no longer can push forward.
2008-07-18 13:52:30
And don't forget the elimination of the "archiac" uptick rule.
When Usury Secy. Paulson was asked during hearings this week about "accountability" he replied that he was "not looking for scapegoats", trying to make the Senator look vindictive.
So not only are the "conservatives" socialists, they are anti- "law and order" too.
So not only are the "conservatives" socialists, they are anti- "law and order" too.
2008-07-18 14:04:19
Cause and Effect
The disintegration of the Entire Financial System in the aftermath of the greatest credit bubble in history may edge out Mr. Bunning in that race. In my opinion.
2008-07-18 14:29:09
the dark cloud in the dismal science
A moving and well-researched article. Unfortunatley, the most significant product of the Great Depression was the economic crisis in Europe and the rise of facist parties (who promised to restore social order and maintain capitalism). When the values of assets are rising people borrow; when the values of assets go down and do not produce the income to pay the loan payments, there are only 3 choices: 1) defalut and bankruptcy; 2) hyper-inflation and the the destruction of the exchange value of fixed interest loans; and 3) paying back the loans through cash flow. The Great Depression in the US is an example of #1, the hyper inflation of the Weimar Republic (Germany) was an example of #2. Both massive deflation and hyper inflation do remove debt and clear the decks for future investment. But few people have Kevin's historical perspective; a few months of economic downturn leads to fear and political intervention in markets, and in extreme cases after a few years to dictatorships such as Hitler and Mussilini. In my humble opinion, the only solution that does not lead to political instability, dictatorship and war would be #3, an orderly and painful pay down of the massive word debt. Even if this could be done, it would mean sacrifice by almost everyone on the planet--a lower living standard and a living standard that relects actual value of what one produces (and not debt inflated values)--it is unlikely that people would accept this or that politicians would even try and sell it. When things go bad people know whose fault is is--someone else's. Maybe another race, another country, another class. If things get as bad as the Great Depression, especially in China, war may be on the far horizon.
2008-07-18 17:53:01
sigh...
I just hope my fellow Americans don't embrace a command economy and blame the "free" market for the problems we are about to experience. Time will tell.
2008-07-21 09:45:46
Eloquent, insightful and terrific research. Thank you for the unearthed perspective.
2009-11-23 21:39:15
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