A modern-day depression: The current secular market cycle mirrors one from the past
By Dave Scranton
In recent months, more than one economist has made the case publicly that our current economy is, in fact, once more in a historical depression.
One of the things I believe and try to teach others about the stock market is that its long-term secular cycles — its “biorhythms” that play out over decades — are, in many ways, repetitious. Secular cycles of the distant past mirror those that are more recent; not just in terms of their duration, but in other ways, as well.
For example, within every long-term secular cycle, there are shorter business cycles, which are rotating periods of recession and recovery lasting, on average, seven to eight years each. But occasionally, one of these recessionary periods sinks into a full-fledged depression, as happened in 1873, and most famously in 1929, when the so-called Great Depression began.
I mention this because in recent months, more than one economist has made the case publicly that our current economy is, in fact, once more in a historical depression. And if that is the case, then it’s just one more way in which our current secular bear market cycle resembles the one that began so dramatically on Oct. 29, 1929.
Gluskin Sheff chief economist David Rosenberg is among those now using the “D” word to describe our current situation, bluntly telling Yahoo’s Daily Ticker late last month, “We are living in a modern-day depression.”
Dow Jones Newswires columnist Al Lewis said almost exactly the same thing on Wall Street Journal Live more recently, only labeling it an “invisible depression” because social changes since the 1930s are, in many ways, masking the story told by the numbers. For instance, one of the most striking numbers cited in both reports was 46 million; that’s the number of Americans (one-in-seven) dependent today on food stamps. While this form of assistance is today administered electronically, Lewis noted that if all of these people were forced to stand in line each day to collect, the gatherings would look much like the iconic bread lines of the Great Depression.
Other factors cited to support the depression theory include the Fed’s recent report of the 40 percent drop in median household wealth, the housing bust and unemployment, which Rosenberg pointed out (as I have noted previously in this space) is actually closer to 15 percent when job seekers who’ve maxed out their benefits or just plain given up are factored in.
Another point I have made a number of times was also echoed in these recent reports: that the caffeine fixes (as I call them) served up by the Fed in the form of artificially suppressed interest rates, quantitative easing and — most recently — “Operation Twist” have probably done more harm than good in terms of helping to spur true recovery. As Rosenberg aptly put it, policymakers’ ongoing attempts to “put a floor” under the economy are only serving to “prolong the agony.” Prolong it for how long, though? Well, compared to the more common business cycles, recession and recovery, depressions do last longer. Based on historical research and past debt-deleveraging cycles, Rosenberg said he predicts our modern day depression is only halfway done — optimistically speaking!
Most history books teach that the Great Depression lasted about 12 years, and that economic recovery was spurred by the job growth created by the U.S. entry into World War II in 1941. That may be so, but as far as the stock market is concerned, it didn’t actually get back to its pre-1929 high or start to achieve any kind of consistent growth until 1954, a full 25 years after “The Crash.” That’s because the Great Depression wasn’t an isolated phenomenon; it was simply the most visible component of a long-term secular bear market cycle that, in keeping with previous secular bear cycles throughout history, lasted a full 25 years.
So, how likely is it that our current secular bear market, which began in 2000, will defy the repetitious trends of stock market history and end much sooner? Well, as the saying goes: “Show me a man who can see the future, and I’ll show you a man who has studied the past.”