Great Depression

I'm all for capitalism, but Banana Republic level inequality is killing us ...

It depends where you live, your race, income and age ...

The place where the global crisis, culminating as a result of 30 years of cheap money, began, Iceland, may well be the place which sees the first ever criminal conviction stemming from the Depression v2. Globe and Mail reports that Iceland's former prime minister has been referred to a special court, which could make him the first world leader to be charged in connection with the global financial crisis.

Scott Minerd, CIO of Guggenheim Partners, parses through the years of the Great Depression, and focuses on the pivotal 1936, which contained in it the seeds for the destruction of the period of relative economic growth and stability from 1932 to 1936, and resulted in a plunge in the economy in the second great recession of the Depressionary period: that of 1937 and 1938. While the first period saw "GNP grow at an annualized rate of 10 percent, the Dow rose approximately 20 percent per annum, and unemployment declined from as high as 25 percent in 1933 to as low as 11 percent in 1937" the second and much more dire phase of 1937-1938 . saw a unprecedented plunge in economic data: "national output declined by 5.4 percent, unemployment skyrocketed from 11 percent back to 20 percent, the Dow Jones Industrial Average declined 49 percent, and four years of healthy price recovery receded into 3 percent annual deflation." What precipitated the second collapse? "The short answer is that it was a confluence of factors, a perfect storm of monetary and fiscal policy mistakes" yet the immediate catalyst, if one can be defined was "the fiscal policy missteps of the Roosevelt Administration, who, in an effort to balance the budget after six years of deficits, implemented a series of tax increases in 1936 and 1937 that caused output, prices, and income to fall and sent unemployment skyrocketing." We are currently faced with precisely the same juncture, and unfortunately for America, things now have a far lower probability of occurring "just as they should" in order for the country to emerge in one piece on the other side of the tunnel. Here is why.

Every now and then it is prudent to repeat what is promptly becoming the most critical phrase of the 21st century, which is odd considering that it was uttered over 70 years earlier by then Treasury Secretary Henry Morgenthau, who wrote: “We have tried spending money. We are spending more than we have ever spent before and it does not work....  We have never made good on our promises.... I say after eight years of this Administration we have just as much unemployment as when we started ... and an enormous debt to boot!" And since this Great Depression is not really all that different from the first one, we would like to again present the must read analysis by the Mackinac Center "Great Myths of the Great Depression", which so far is predicting exactly where our own economy will be in about a decade: "At the end of the decade and 12 years after the stock market crash of Black Thursday, 10 million Americans were jobless. The unemployment rate was in excess of 17 percent. Roosevelt had pledged in 1932 to end the crisis, but it  persisted two presidential terms and countless interventions later." And let's not forget the conclusion: "Along with the holocaust of World War II came a revival of trade with  America’s allies. The war’s destruction of people and resources did not help the U.S. economy, but this renewed trade did. A reinflation of the nation’s money supply counteracted the high costs of the New Deal, but brought with it a problem that plagues us to this day: a dollar that buys less and less in goods and services year after year." Why should this time be any different? And even post what many perceive to be an inevitable war outcome (because history sure does rhyme), what will America export this time around to start a new US Golden Age? Unfortunately financial innovation is no longer the hot commodity it once used to be.

For those looking at the recent moves in the gold chart with disenchanted amusement, here are some scenarios to ponder. Below are the recent cycles associated with the S&P priced in gold (ratio format), where it is can be seen that the ratio is once again climbing to the upside, just below 0.96. That's fine, although as the chart demonstrates the lower low moves occur with greater frequency and greater downward momentum with each iteration. Yet where this chart gets interesting is when it is recreated from the perspective of the 1930s. As can be seen, the recent lows in the ratio at around 0.9 are a joke compared to the nearly 0.2 achieved in 1932... just before FDR decided to make gold ownership illegal.

Should we be tightening our seat belts?

After surviving the start of the Second Great Depression, and living in its first great bear market bounce/short squeeze, where now all the attention is focused on a collapsing Europe, many could be wondering how, if at all, it would have been different to have lived through the first Great Depression. Luckily, courtesy of the recent release of the BIS's full annual reports, history buffs can now replay, year by year, the events in world capital markets from 1931 onward. We have put particular emphasis on the dark days of the 1930s. Below we present the first several such years as seen from the perspective of the BIS. Note the endless similarities - in fact one could say the only difference between then and now is the lack of "liquidity providing" algos (soon, there will be an iPad app for that) to front run slow and stupid retail/pension/mutual fund money. Pay particular attention to the role of gold in the crisis period, the amusing reference to FDR's confiscation of gold in 1933, and how the mood of insecured optimism shifts to one of endless gloom, and ends, as everyone knows, with World War 2.

Paul Farrell's latest perspective: "Last March I wrote "6 reasons I'm calling a bottom and a new bull." Today it's time for a new call. We've had a good year. Net gains over 50% in 2009. But now: "Game over, head for the exits." Bears beating bulls. Dow sinking below 6,470...The clock's flashing. Huge point spread. Think bear, think crash, think end of capitalism, think Great Depression II ... This is no buying opportunity, this game's in the refrigerator, call it." So much for Paul's chances of ever getting invited on CNBC.

Buckle up ...

The Fib retracement from the highs to the lows in the cycle is now nearly 61.8 (at 1,228). The retracement from the highs to the lows in the first wave of the Great Depression peaked just below 61.8. Does history repeat itself, or come in tidy little Fibonacci packages? Are today's math Ph.D.'s even aware of retracements, or do they just know how to buy, buy, buy on ever declining volume?1,228 is the magical number on the S&P. We'll find out soon enough.

Bill Hemling, a widely respected agricultural economist, told the Kansas City Star that “we’re heading for a recession we haven’t seen the likes of since the 1930s.” Let's pray he is is wrong — again.

Add the Maestro to the list ...

"The intensifying economic and solvency crises, and the responses to both by the U.S. government and the Federal Reserve in the last two years, have exacerbated the government's solvency issues and moved forward my timing estimation for the hyperinflation to the next five years, from the 2010 to 2018 timing range estimated in the prior report. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, gross mismanagement, and a deliberate and ongoing effort to debase the U.S. currency. Accordingly, risks are particularly high of the hyperinflation crisis breaking within the next year." - John Williams, ShadowStats

Yields are much lower today and are trending down again despite the significant upward yield trend back then. So is this a genuine early economic recovery, or a sign that the modern stock market tends to be a capital-gain seeking momentum machine with little regard for underlying fundamentals? Yes, interest rates are low, but they were back then too, and David Rosenberg suggests most current corporate bond yields are a lot more attractive than yields of the same companies' stocks.