Yesterday I participated in a roundtable discussion on the economy and how we can help our customers through the rough times ahead. At the outset, I cautioned participants against the tendency to look toward recent economic slowdowns for guidance: "this isn't like 1991 or 2001," I told them. "You'll have to go back to 1979-83 or 1929-42 to find a parallel."
My fellows flashed looks at me, then at each other. "Why did we invite this crackpot," they could be forgiven for thinking.
I'm not the only one seeing that the fundamentals of 2008 are much more like the Great Depression than like the late 70s and early 80s. Today's Wall Street Journal Online edition carries a sobering story about the parallels:
Strikingly, today's conditions bear quite a close resemblance to what Graham described in the abyss of the Great Depression. Regardless of how much further it might (or might not) drop, the stock market now abounds with so many bargains it's hard to avoid stepping on them.
The article goes on to describe the insane fear manifesting itself. Numerous companies in the S&P have market caps that are less than their cash value. In other words, an investor could buy the outstanding shares of the company for, say, $100, extract its cash of $150, and keep the company for free. Yet no one does it. Fear of the future, pessimism, is so strong that otherwise smart people cannot bring themselves to give up $100 in cash for $150 in cash. That's some kind of fear.
More sobering, still, is the historical lag between market crashes and unemployment. From another WSJ article:
Thursday's decline -- the 11th largest in percentage terms in the Dow's history -- put the stock market either in, or nearly in, a crash. A common definition of a crash is a 20% decline in a single day or several days. The Dow's crash in 1987 was 22.6% in one day. The 1929 crash was back-to-back declines of 12.8% and 11.7%.
High unemployment did not hit until 1931 after the '29 crash, until 1991 after the '87 crash. There was no crash preceding the mild depression of the late 70s and early 80s--the stock market had been flat for a decade, job creation flat, personal income flat, everything flat. The 70s were like Kansas.
Expect, then, things to stabilize over the next two weeks. The next year will be one of wary discontent and maintaining the status quo. But then the cash starts to run out, and the government does something stupid and injurious as governments always do. A tax hike or protectionist tariffs or new regulations--something liberal and dumb. Then the wheels come off.
The Great Depression was not about economics but about psychology. That's why nothing Roosevelt did made much of a difference in the market or in homes. The New Deal prolonged the Depression, just as Obama will prolong the next one. It took the Japanese to slap us to our senses, and for that we owe them a great debt of gratitude.
I'm not sure what or who will slap us out of this Depression. Al Qaeda could, as could Russia and China. By the time that happens, though, many liberties will have been lost and many days of misery strung together.