Insights & Advice

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So what happens now?

Sometimes I’m called upon to forecast the future in this business despite the fact that no one really knows how things will turn out. Right now, according to a recent poll on Yahoo, 6 out of 10 Americans believe we are entering a second Great Depression. They point to the present global stock market crash as evidence. After all, they argue, the 1929 stock market crash ushered in almost a decade of decline in the United States.

“Gee,” said one of my smarter clients on hearing that news,” I must have missed the Great Depression of 1988.”

The client was pointing out that a correction, like the 1987 Crash, did not necessarily presage a Depression nor did any of the many other corrections we’ve had since 1929.

“But this one is different,” protested another client.

As I’ve said before, every correction I have experienced has been different, unique and ultimately frightening. In that sense this one is no different.

I believe we are in a recession but I also balk at the “D” word. So how do I see this playing out?
The stock markets will continue to decline at least to the lows they established in 2002. Volatility will also remain high and we may have one or two bear market bounces along the way. Clearly, the markets are as oversold now as they had been in the 1987 decline. So expect a bounce at some point but don’t get excited about it.

In the meantime, we have to take Treasury Secretary Henry Paulson at his word when he says the market rescue plan will take time to produce results. We have all become accustomed to getting what we want when we want it (usually now) but this time will be different. Think of the present as if we are going on a forced diet. Instead of food, however, the nation and most Americans have been addicted to borrowing for a long, long time. Living within our means (in Washington they call it a budget) has simply not been taken seriously.

Even today, if you believe the presidential candidates, they both promise to solve the present economic problems without cutting their pet programs like health care, environment or education. In essence, they too are still singing the same siren song we want to hear.

Once the economy bottoms there will be a long period of de-leveraging where both the nation and its consumers will be forced to reduce the debt we have all accumulated over the course of a generation or two. That will mean postponing what we have come to believe as our God-given right to live beyond our means. Hopefully, the almighty U.S. consumer will become the almighty saver in the process.

In the meantime, expect bigger government. As spender of last resort, the federal government will need to spread a safety net under society. Think FDR’s New Deal with construction projects, highway repair and other make-work projects. That will be expensive. As a result, most of us will be paying higher taxes in the years to come which will further cut back on our ability to spend.

I suspect taxes will also be far more progressive than in the past. It will mean that high net worth taxpayers will pay far, far more than before. The nation will cheer that trend since I detect a deep shift in this country. The rise and fall of Wall Street and the billionaire pirates it spawned has moved the pendulum to the extreme right subverting the Reagan Revolution in the process.

Posted in A Few Dollars More, Macroeconomics