Welcome to the Depression

Minyanville ^ | 26 Jan 2009 | Bennet Sedacca

[BGHater]

Recession:
A recession occurs when a nation’s living standards drop and prices increase. This downturn in economic activity is widely defined as a decline in a country’s gross domestic product for at least 2 quarters.

Depression:
An economic condition caused by a massive decrease in business activity, falling prices, reduced purchasing power, excess of supply over demand, rising unemployment, and other negative economic factors.
- Bloomberg financial definitions

Truth or Dare: Recession or Depression?

As unpopular as it may have been, I have been writing about the impending recession over the past several years. I am rather used to being called a "perma-bear" as it relates to the asset-based, over-leveraged mess we call our economy.

Truthfully, it's been no fun whatsoever to call 'em as I see 'em. An outlier view has been a necessary evil, however, and one that I've been proud to have had the guts to provide.

I will now turn to what, in my view, is the biggest risk of all: We're in a recession - and the economy can actually shrink. And shrink it has, is, and will likely continue to do. The question now: Are we going through a traditional recession, or a once-in-a-lifetime depression?

I actually hoped the unprecedented credit unwind would end up in a nasty recession; but I fear a depression is either upon us or will soon be upon us. To be truthful is essential in markets and life: To face head-on the bad news which isn't at all fun or exciting to face.

I hate to say this, as unpopular as it may be: Welcome to the depression. For my reasoning, please read on.

Putting the Recession Question to Bed

GDP estimates for 2008's fourth quarter are due to be released on Friday morning at 8:30 a.m., with estimates coming in the -5.5% range, which follows a -0.5% number in the prior quarter. Many believe the economy will turn around in the second half of the year, when the Obama administration’s fiscal stimulus plan makes things all better.

I couldn't disagree more. We have seen these stimulus plans before: Dropping $500 checks into the mail has produced more savings and debt repayment - but not a flow of steady consumption by consumers. Seriously, with new claims for unemployment benefits now averaging over 500,000 per week, the economy losing 600,000 jobs per month, and leverage still piled up on top of leverage, I think the odds of the economy being in growth by the end of 2009 (and possibly the end of 2010) is nothing more than a pipe-dream.

GDP Quarterly Change Since 1994

Are We in a Economic Depression?

There are several criteria that an economy must meet to be in a depression:
 

• Massive decrease in business activity
• Falling prices
• Reduced purchasing power

• Excess of supply over demand
• Rising unemployment
• Other economic factors.

I would like to address these factors one by one in an attempt to determine if we have actually landed in an economic depression - one that sadly may be global in nature.

The Chicago Purchasing Managers Index


The Chicago Purchasing Managers index has fallen off a cliff. The index is a monthly regional index of Midwestern manufacturing activity. An index reading below 50 (we are now at 35.1) means manufacturers are reporting deteriorating business conditions.

Richmond Federal Reserve Manufacturing Survey


Just in case you would like to believe that the Chicago manufacturing number is a fluke, get a load of the chart above, which covers states like Virginia and North Carolina.

Furthermore, if you thought manufacturing alone was under attack, you may wish to reconsider. As the US economy has become more of a service economy and less of a manufacturing economy, many have pointed to the ISM Non-Manufacturing Index for hope. Sadly, that index is plummeting as well.

Everywhere we turn, no matter the industry, no matter the country, the answer is the same: A massive economic slowdown so pervasive that nothing seems to be able to stem the tide.

ISM Non-Manufacturing Index since Inception (1997)


What about falling prices? No matter where we turn, the prices of everything -- from equities to commodities (with the notable exception of gold) to esoteric securities  to real estate -- are falling. I could fill the next 5 pages with gory details, but anyone who opens their brokerage statements knows what I mean.

There used to be "inflation in the things that we need and deflation in the things we want," but that saying is no longer apropos. Everything is falling in price, which is, at best, deflationary; at worst, it signals the depression we may very well be in.

Rising Unemployment - the Really Big Problem

Reduced purchasing power is evident (thus the question of whether supply exceeds demand can be bracketed). The charts above are quite simply proof these issues exist.

The really big problem: unemployment. Like the old saying goes, "It's a recession when your neighbor loses his job; it's a depression when you lose yours." As I write this, Caterpillar (CAT), the international leader in heavy equipment, just posted an abysmal quarter; it's laying off 20,000 people.

Many would have you to believe this is a domestic issue. Nothing could be further from the truth. Since much of Caterpillar's business is conducted outside the US, it confirms my suspicions that the economic issue is indeed global; anyone hanging their hat on an economic recovery due to a 1933-style infrastructural improvement had better take a look at Caterpillar's news release.

Just to give you a flavor for how far-reaching the unemployment situation is, the following companies have recently announced job cuts and layoffs - all are global, best-of-breed and industry leaders: Caterpillar, Kimberly-Clark (KMB), Pfizer (PFE), Royal Bank of Scotland, ING (ING), Harley-Davidson (HOG), Philips International, Microsoft (MSFT), Deere (DE), Starbucks (SBUX), United Airlines (UAUA), Schlumberger (SLB), Xerox (XRX), Toyota (TM), Sony (SNE), Union Pacific (UP), Bentley, Reebok, Fiat and Clear Channel (CCO).

OK. Are you depressed yet? If you think that list is scary, consider this: All those layoffs have been announced since last Thursday.

To get a sense of just how bad things have become, I offer up these rather sobering charts:

US Initial Jobless Claims


The difference between this cycle and past cycles is the persistence of the high numbers of laid-off workers and the rather high absolute number.

Sadly, I don't expect this trend to change for quite some time, with a terminal unemployment rate between 12-20%. Once again, depression-like numbers.

US Continuing Jobless Claims


While the reported unemployment rate in the US creeps toward 7.5%, it's nowhere near the highs reported in the early 1980s, let alone the rates of prior depressions. The $64,000 question is whether or not we can trust the numbers being reported. As a cynic, I certainly do not. Whether it's the flawed "Birth/Death Rate Model," which arbitrarily adds jobs via "hedonic adjustments," or other manipulations of the unemployment rate, it's nearly always understated.

A recent study showed that, when we add in "discouraged workers" -- those who have given up looking for a new job and have run out of unemployment insurance -- then add part-time workers who want to work full-time, the US unemployment rate is closer to 13.5%.

And with economic activity dropping off a cliff, the 13.5% number seems much more logical to me than 7.2%.



Unemployment Rate, Courtesy of Shadow Government Statistics


According to the data from John William’s website, www.shadowstats.com, the rate stands at 13.5%.

The main point I would wish to deliver here: An economy built on so much leverage, deteriorating so quickly, is going to collapse, no matter what the stimulus (bailouts, buyouts, TARP, Stimulus packages, quantitative easing, mortgage market manipulation, etc).

The economic avalanche is upon us. And if you've ever witnessed an avalanche, there is no way to stop it.

In fact, with Ex-Fed Chairman Paul Volcker as President Obama’s economic advisor, I would expect some tough times ahead. Mr. Volcker has a tough-guy reputation (recall he snuffed out double-digit inflation in the early 1980s - I was there to see it, and can tell you it wasn’t fun) by raising short-term rates to near 20%, causing an ugly recession, double-digit unemployment, and pain for all asset classes. The tough decisions he made, however, paid off with a 26-year bull market for Treasuries, which I believe is now over. Finally, I believe Mr. Volcker will be the real force behind the Treasury Department's actions - not Tim Geithner.

In short, buckle your seatbelts. I continue to avoid credit, under-weight equities, and to batten down the hatches. Unfortunately, I believe the worst is yet to come.

[BellStar]

Buy Gold and head for the hills!

[quack]

I agree.My grandmother,who survived the Great Depression,says these are great times in comparison.We may get there,yet.She told me that she and my grandfather had to walk the rail lines,in search of coal to heat with.They couldn’t afford to buy any.

[wbill]

Count me in the Ostrich Brigade, I guess.

People who are talking "Depression" need to discuss the meaning with someone who's actually lived through one. Poverty has been defined down to "only Basic cable and two Ipods".

Things aren't good, but so long as you continue to see lines at the local "Applebee's" and a goodly number of cars on the road....we're not even close to a Depression.

[BGHater]

Lead. Always, invest in Lead.

[BellStar]

Buy Gold and head for the hills please God give us another chance!

[autumnraine]

Exactly! The TARP was sold as a way to keep credit flowing and keep the jobs going by businesses being able to keep lines of credit.

We see that they just used the money to keep themselves afloat for a while longer and not much credit is flowing out of the banks our taxes kept going.

[Star Traveler]

Even during the last Great Depression, there were large numbers of people who lived very well, indeed. In fact, if there was 25% unemployment, at a particular time of the Great Depression, there were still 75% still employed... :-)

[BellStar]

Amen! Always, invest in Lead.

[BGHater]

It is also a regional and very specific target as well.

I would say parts of Michigan is definitely in a ‘Depression’. Also, some home builders and construction workers are certainly in a ‘Depression’.

[wbill]

If we don’t return to sound business practices and compendent governmental policies we may get there. Does this make me delusional?

Hey! There will be NO rationality on this gloom-and-doom thread. Remember that if it weren't for bad luck, we'd have no luck at all.

Geez, I just read through the thread and you'd think that that we were reverting to medieval times. Things aren't especially good right now, but it ain't the end of the world. What's going to happen if things actually get bad?

[autumnraine]

They were no where near it before it got that bad too.

They didn’t wake up one day and it was that way.

I keep wanting to point out that Hitler didn’t jump into office and start killing jews either. It was a slope he slid down and took Germany with him.

History tends to condense things and you can’t compare Depression in the 30’s five years into to it to the Depression now, less than a year into it.

[autumnraine]

Wow! It has went up since I listened to the news???

Just damn.

[autumnraine]

Lots in the southeast are in one too. I keep hearing about lines at Applebees. Maybe on the north side of Atlanta, but not in the rural areas.

[wbill]

Even during the last Great Depression, there were large numbers of people who lived very well, indeed

Count my grandparents among them. Grandma lived on a farm...no lack of food. She used to say that they didn't have any money, but neither did anyone else. And, that wasn't a whole lot different from when times were good.

My great-grandfather was a mechanic, who could fix damn near anything. Lots of demand for that in a rough economic patch. Grandpa said that they more-or-less lived on a barter system.

[AndyJackson]

Mr. Volcker has a tough-guy reputation (recall he snuffed out double-digit inflation in the early 1980s - I was there to see it, and can tell you it wasn’t fun) by raising short-term rates to near 20%, causing an ugly recession, double-digit unemployment, and pain for all asset classes

For those of us who believed in saving money instead of borrowing and spending it, it was a great time.

[VanillaBlizzard]

We would then all have to bow to Allah or be “removed” from society....

[wbill]

And, as an aside, I thought that this was telling.

I became a Dad a couple of years ago, and was sitting in my Living Room on top of a pile of baby stuff. I mean, it looked like the grandparents went to Babies R Us and bought two of everything...Mrs WBill and I were having a problem finding places to put it all, and simultaneously wondering if we had enough stuff.

Meantime, my Dad brought over some letters that he discovered from my Great-Grandmother, to my Grandmother. They were written during the war (WW II) just before Dad was born. So...we're sitting atop this massive pile of stuff reading the letters, and one of them mentions a "Need to save Safety Pins, because they're expensive and hard to find due to rationing." Ironic? Sure.

Things aren't that bad right now. While I won't deny that they can get worse....they're not that bad.

[SierraWasp]

Laugh if you want to, but Rush H. Limbaugh just presented in 14 minutes flat, his NON-PARTISAN plan to resolve the recession and if 0bama even announces that he will consider it, the markets will rocket up and the economy will follow the market’s lead in a hurry!!!

[mikelets456]

+++”Things aren’t good, but so long as you continue to see lines at the local “Applebee’s” and a goodly number of cars on the road....we’re not even close to a Depression.” ++++

Americans are fickle and do not like to change the routine they are used to. Most Americans enjoy getting out to eat, stroll the malls and simply take a drive to the lake or beach.

I think you’ll see a change from going to the movies and out to dinner every night to hanging around the house, going for a walk in the park and simply doing inexpensive things with the family to keep your mind off of things.

My prayer has been for the people of this country to turn back to God....if this “depression” does not do it, I have no idea what will. It seems that when times get really bad, most people turn to God and back to the basics of life.....like eating dinner together, having actual conversation and hanging out with God and family.

Think I’m off track....you’ll soon see I am not.All I can say is when the 9/11 tragedy happened, for about a year or so Americans were friendlier to each other and put their petty differences aside. We knew we needed to rely on God and each other and I saw a lot of good come out through that period...FROM EVERYONE! Give it some time. Remember, something that seems bad can actually turn out good in ways we never expected!

[Star Traveler]

You said — “Things aren’t that bad right now. While I won’t deny that they can get worse....they’re not that bad.”

True, but we’re still not several years on yet... there’s still time for this to “play out”...

I remember hearing all about the Great Depression from my grandparents and parents. I had hoped I wouldn’t ever see such a thing in my time. But, there was always a nagging suspicion that it would come around again. I think this is it...

—

My dad and mom were born just a few years after Oklahoma became a state from being Indian Territory. My grandparents lived outside of Indian Territory and moved into it as it became a state (one set from the south and the other from the north and east. One grandparent got caught over in America (from England) during World War 1 and couldn’t return (and never did). I was born in Oklahoma a mere few decades after it was Indian Territory and became a state.

And so it goes...