Economic Depression, Just Not That Simple

We are looking back at the year almost finished, and trying to figure out what lies ahead. The surprise of 2009 was that the stock market didn’t turn down again. Stocks worldwide were cut in half. Then, they bounced. A textbook, classic bounce…Normally, you’d expect the bounce to peak out after 5 or 6 months. This one hasn’t…yet. Our guess is that it will…

Of course, we could be wrong…

The ‘classic’ depression…a la Japan…comes about when an economy needs to make some fundamental changes. It discovers that a lot of what it has been doing was wrongheaded. Assets, valued at bubble levels, need to be marked down. People need to find new jobs; because the old ones no longer make sense. Businesses need to be restructured and retooled. Households, typically, need to stop spending and pay down debt.

This process is long and hard. The story of bubbles always begins cheerfully enough. But it always ends at Chapter 11, in long workouts…painful write-offs…and court cases.

“Recession Begins Flooding into the Courts,” says a headline in yesterday’s New York Times.

If this were a classic depression, we could anticipate another leg down in the stock market…more unemployment…and on-again, off-again growth over the next few years.

Our guess still is that it IS a classic depression…and that we should see stocks go down…along with all the other phenomena that usually accompany a depression.

But, it’s not that simple.

Because there are a lot of other things going on too. The feds are hell-bent on avoiding a painful restructuring of the economy. First, they made sure the bankers got their bonuses. The banks deserved to go bust…and the people who ran them should have been fired. But the fix was in from the beginning.

Then, they turned to consumers. The feds are using every trick they have to lure consumers back into bubble mode – buying things they don’t need with money they don’t have.

Is it working? Well, the results are mixed and confusing. Every day seems to bring more noise. Today, for example, we learn that spending is up 3.6% this holiday season. We have to wonder…how could that be? Fewer people have jobs. Those who have jobs are working fewer hours and earning less money. And the bankers – bless their greedy little hearts – are not passing on the feds’ cash to consumers. Consumer credit is going down at the fastest pace since the Great Depression. So, how can consumer sales go up? We’ll just have to wait to find out.

The Dow rose 29 points yesterday. Gold went up $3. We would like to see both of them go down. Then, we would sure our ‘classic depression’ hypothesis is correct. In the meantime, we’re watching…waiting…and wondering…along with everyone else.

The Daily Reckoning