Great Depression or Great Opportunity?

• Print
• E-Mail

Profound Differences from the Great Depression

When the Great Depression was developing, the government's first response was to do nothing. Today they seem to be doing everything. Perhaps they’ve panicked in an attempt to avoid another Depression and eroded confidence in what is actually a normal recession. After all, 6 percent unemployment (even though it will likely go up from this level) isn’t anywhere close to Depression-era levels.

During the Great Depression, there was no international cooperation and most countries were on the gold standard--making it impossible to expand liquidity (print money) or borrow above gold reserve levels. There was no coordinated policy of money expansion, and this turned what could have been a recession into a depression. Now there is a global coordinated effort. Most of the world’s Central Banks (Europe, England, Canada, Swiss, Australia, South Korea, China and the US) lowered rates last week.

Before the Great Depression, governments relied on fiscal conservatism and used the gold standard to maintain discipline. Afterwards, the Keynesian philosophy of running deficits to stimulate economic activity gained credibility. In recent weeks, the Fed has come up with a bailout plan to pour billions into the credit markets with billions more to AIG and others to unclog the credit markets.

However, it should be noted that Keynes recommended governments maintain a surplus during times of high employment to be able to utilize deficits to fight a recession and rising unemployment. Unfortunately, the Bush Administration and Congress over the past eight years have overspent in Iraq and Afghanistan as well as at home, creating massive deficits during a time of high employment. This makes the job that much more difficult now with rising unemployment. If government spending wasn’t so out of control before the current crisis, a larger government would have had a much greater positive effect than we’ve seen in recent weeks. If we’ve learned anything from the Great Depression, raising taxes isn’t the answer. And, thus far, pumping in additional liquidity hasn’t restored confidence. But hopefully it will going forward.

So what now?

Confidence has to be restored to the lending system. When the bulk of the bad banks are gone with just the solvent banks remaining, and with the government propping up the whole house of cards, all this grease should get this hulk rolling again--at least temporarily. Today fear and panic are at levels only seen at--or close to--market bottoms.

With this said, I’m not suggesting you try to catch a falling knife. I never advocate bottom picking. (Bottom pickers get their hands slapped). Rather, let the market tell us when it’s begun trending up again. In other words, listen to the markets; they know best. Look for prices to begin rising again for at least more than a day or two. This will indicate the worst of the economic downslide is over. I believe we’re close.

I look at the next few weeks’ price action as being critical. Technically, stocks and commodities are at--or close to--the perfect level for a rebound. Why? In real panics over a wide variety of markets and market conditions, it’s a known fact that bear markets generally will either bottom or--at the very least--temporarily bounce at or near the 50 percent correction level; this phenomenon is termed the 50 percent retracement.

The CRB index--a basket of commodities--is now down just about 50 percent of its six-year bull run. Of course, most of the decline took place in just the past few months. But right now it’s at--or close to--the level we’d expect from a forming bottom, or at least a bounce.

The 1987 bottom for the Dow was 1,706. The October 2007 high was 14,198. The 50 percent retracement level works out to be 6,246 Dow points lower from the high, and this number subtracted from the high equals 7,952. Friday’s low was 7,882, which is within just a few points of our expected bounce level. So let’s see if this low can hold.