#38 Another Great Depression?

On January 8, 2009

Hello Everyone,

You may have been wondering where I have been since my last Obamagram on October 23. Well, I’ve been trying to figure out what to make of Barack Obama’s remarkable victory and whether to continue writing Obamagrams or not.

The Election

First, congratulations to all of you — whether you voted for the President-Elect or not. As I wrote earlier, Daniel Patrick Moynihan once told a friend of ours who worked for him, “America has within its gift to become the first truly multi-racial society in history.” We’ve just taken another giant step in that direction.

To those who supported the Obama campaign with donations large or small or worked on the phones or on the ground, thank you. Election night in Grant Park, for those of you not able to be there, was magical. It was at once celebratory, surreal, and serene. The president-Elect, with his seemingly perfect pitch, set just the right tone. He was optimistic, grateful, and gracious, even deciding to cancel planned fireworks. It was definitely a commencement, not a graduation.

What’s Ahead?

I have been saying to people, adapting a familiar admonition, “a movement is a terrible thing to waste”.

Months ago, when I started to write these missives, I did so to clarify my own thinking (you don’t know what you really think until you write it down), to introduce Barack to many of you, to vouch for him based on my own due diligence and as a member of his National Finance Committee, and to generate support for him, while helping to sustain that support during the inevitable highs and lows of the campaign.

There were 37 Obamagrams dispatched over a 20 month period. I learned a lot and hope you learned something, too.

My instincts say to keep writing, not knowing where that might lead. I do know that it would be a shame if most of us went back to our pre-campaign postures, barely paying attention to our democracy and largely “out-sourcing” it to professional politicians and the self-interested.

If, however, you’ve heard enough from me, click “reply” and tell me so. I promise not to be offended.

Putting the Credit Crisis in Perspective

As we enter the new year, everyone is concerned about the “economy” – or more accurately, the “credit crisis”. So I thought I would start by offering some personal perspectives on those concerns. And, as you will see, maybe I just had too much time on my hands over the holidays!

I learned during the campaign that the media writ large tends to oversimplify and over amplify, frequently coalescing around one narrative all too quickly. Reaching for the drama in any story, they seem to need to hold our attention, like the cable news channels try to do by constantly displaying the “Breaking News” banner across their screens.

At bottom, this is our fault, too, because we collectively thirst for impossible predictions or demand quick and facile explanations for complicated phenomena. For instance, in late 2007, I expressed my doubts about the predictive utility of Senator Clinton’s 20+ point lead in the national polls while many pronounced the race over. We never seem to be satisfied with the explanation, “I don’t know” or “It’s unknowable”.

The Sky is Falling

That’s why I am frustrated these days as commentators, and politicians, far and wide ominously liken the current credit crisis to the Great Depression. “In 2008, the stock market had its worst year since the Great Depression”. Not so fast. It isn’t that simple. Or that scary. I surely won’t pretend to know where we are headed, and I don’t mean to diminish the seriousness of our situation. But, I do think we need to be reticent to cry “the sky is falling.”

Here’s another perfect example of “the sky is falling” rhetoric. In Monday’s Wall Street Journal, one article ominously begins: “The current U.S. recession, with no end in sight, threatens to be the longest since 1933…”

If the data in the chart accompanying the article had been more thoughtfully displayed, a more measured way to characterize that data might have been: “During the period from 1969 to 1982, the U.S. Economy experienced 4 recessions, while over the next comparable period (1983-1995) it experienced only 1 recession. During the current period (1996-2008), it has witnessed only 2. While today’s recession is in its 13th month and is not yet over, 2 of the recessions in the 1969- 1982 period lasted even longer (16 months). The duration of each of these recessions pales in comparison to the long recession during the Great Depression, which persisted for 43 months (1929 to 1933).”

Dec. ’69 – Nov. ’70 ___________ 11
Nov. ’73 – Mar. ’75 ________________ 16
Jan. ’80 – Jul. ’80 ______ 6
Jul. ’81 – Nov. ’82 ________________ 16
Jul. ’90 – Mar. ’91 ________ 8
Mar. ’01 – Nov. ’01 ________ 8
Dec. ’07 – present _____________ 13
Aug. ’29 – Mar. ’33 ___________________________________________ 43

What’s a Recession?

Most of us who are not economists loosely think of a “recession” being a period when Gross Domestic Product (GDP) actually declines for at least 2 consecutive quarters. The government declared recently that the U.S. has been in a recession since the 4th quarter of 2007. When it was declared, there had not yet been 2 consecutive quarters of declining GDP. So, I looked up the more nuanced definition used by the government’s National Bureau of Economic Research: “a significant decline in economic activity spread across the economy, lasting more than a few 3 months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales.” By that measure, we have, in fact, been in a recession for a while.

A More Comparable Period

Very few of us are old enough to remember the 1930s, or have studied that era in depth. But, some of us are old enough to remember a pretty dramatic period of market dislocation — the 1970s and early 1980s which I just referred to. Despite the obvious differences between then and now, I think recalling that earlier time can provide some much needed perspective — and possibly even calm our nerves a little.

During that very tumultuous time, we learned much that is applicable today. Most importantly, the world didn’t come to an end. In fact, an extended period of virtually-uninterrupted prosperity followed it. We learned that we are all culpable for our economic difficulties, not just some malevolent “others”. Confidence in our system, and in ourselves, is the all-important, but often elusive, pre-requisite to economic health. Sustained and capable leadership by presidents who are publicly persuasive and who engender trust is critical. Broad cultural phenomena affect economic conditions in ways that are too complicated to understand in the short run, if ever.

Since I graduated from college in 1964, was in the Army in the late 1960’s, and started in the investment banking business in 1970, I had a front row seat and paid close attention to the turbulence that engulfed us in the 1963-1982 period which I will summarize below.

Today’s breathless and ceaseless reporting would have us believe, as mentioned above, that the 2008 stock market was “the worst since the Great Depression”. Technically true, but misleading in some ways.

I think that the S&P 500 Index, with its 500 stocks, is a better measure of market performance than either the Dow Jones Industrial Average, and its 30 stocks, or the Nasdaq Composite Index which are the two most commonly cited indices. [The Dow is older, having been established in 1896 (with only 12 stocks), while the S&P 500 was started in 1923, and the Nasdaq in 1971. The Dow gets a lot of play presumably because of its common heritage with The Wall Street Journal. And the Nasdaq index’s popularity, gained during the tech bubble, has persisted for some inexplicable reason.] Nonetheless, I use the S&P as my primary point of reference.

True, the S&P 500 was down 39% in calendar 2008 (down 37% including dividends, a better measure still, but less widely quoted). That was in the ball park of the 47% and 39% declines in 1931 and 1937. Pretty scary stuff. But, it is seldom pointed out these days that the market was down 30%, much more recently, in 1974.

More interesting, less arbitrary, and perhaps more instructive than calendar year measures, however, are those recorded between market highs and market lows. In that respect, I think it is much more appropriate to compare the Jan. 1973 – Sep. 1974 period (S&P down 50%) with the Oct. 2007 – Nov. 2008 period (S&P down 53%). Pretty comparable.

By contrast, the peak-to-trough decline from 1929 to 1932 was 89%! Not very comparable. So why are folks so quick to go there?

My point here is a simple one. The markets in the 1970s are much more relevant to the current situation then are the markets in the 1920’s and 1930’s. Why, then, are we constantly pointed to the Great Depression as our frame of reference? Greater dramatic effect, perhaps? Politics? More on that later.

1963-1982 Turbulence

I think it very useful to remember what that dramatic period was really like. Think of all the dislocations and social changes we experienced – 4 major assassinations; 4 recessions; the civil rights movement; a presidential retirement; the only presidential resignation in history; the Vietnam War and the Great Society (“Guns and Butter”); the draft; OPEC and an oil embargo; hyper-inflation plus high unemployment and slow growth leading to “stagflation”; Iranian hostages; urban riots; the women’s movement; the environmental movement; and major stock market declines.

Although I come to this without the benefit of professional training as an historian or economist (as many of you will undoubtedly remind me), in my mind’s eye I imagine the trouble starting in 1963. Here is a chronology of the 20 years that followed:

1963 — JFK assassinated; LBJ assumed presidency; March on Washington.

1964 – the Civil Rights Act passed; LBJ defeated Goldwater, winning a full term.

1965 – Bloody Sunday in Selma; Voting Rights Act passed; Malcolm X assassinated; Medicare and Medicaid passed.

1966 — National Organization of Women established.

1967 — Supreme Court knocked down remaining anti-miscegenation laws in 17 states (Barack’s parents’ marriage in 1960 in Hawaii would have been illegal in over half of the states in the union.)

1968 — MLK assassinated; riots in Washington, D.C., Detroit, Watts, and elsewhere; LBJ declined to run for second term; RFK assassinated on night he ostensibly won Democratic presidential nomination; violent anti-Vietnam-War demonstrations at Democratic National Convention in Chicago; Nixon elected president; inflation exceeded 4% for first time in decades.

1969 – 11 month recession started.

1970 – first Earth day; EPA established; inflation exceeded 6%.

1971 – Nixon imposed wage and price controls.

1972 – Watergate break-in; Nixon re-elected anyway; Equal Rights Amendment approved by Congress (states failed to ratify it by 1979 deadline).

1973 – S&P 500 set record of 122; OPEC established and oil embargo started, leading to long lines at the pump; 16 month recession started.

1974 – Nixon resigned and Ford assumed presidency; S&P 500 bottoms out at 61, a 49% decline; inflation exceeds 12%.

1975 – Vietnam War ended; unemployment rate hit 9%.

1976 – Carter defeated Ford, the incumbent president.

1979 – the second oil crisis; Iran took 52 U.S. diplomats hostage for 444 days.

1980 – Reagan defeated Carter, another incumbent president; hostages released on day of inauguration; 6 month recession; stagflation reached apex with “misery index” of 22% [employment rate (8%) plus inflation rate (14 %)], staggering compared to Nov. 2008 misery index of 8% [unemployment rate (7%) plus inflation rate (1%)]; prime rate hit record of almost 22%; after almost 7 years, the S&P exceeded its 1974 high.

1981 – 16 month recession started.

1982 – unemployment rate peaked at almost 11%; real GDP declined almost 2%.

Inappropriate Comparisons

Economists, politicians and others have been quick to draw parallels between today’s difficulties and the Great Depression in part because of the fragility of our banking system and capital markets and a fear of deflation. Most tend to ignore comparisons with the 1970s and early 1980s, in part because inflation, not deflation, was a major concern then.

Having said that, so far, the key economic statistics for the 1970s-80s seem to be much closer in magnitude to today’s then the Depression’s were, as indicated in the following table.

  1920s/30s 1970s/80s 2007/08
S&P 500 (peak to trough) -89% -50% -53%
Peak Unemployment Rate 25% 11% 7%
Largest Annual GDP Decline (1929-33) (1981-82) (through 3Q08
Real: -27% -46% None
Nominal: -46% None None

Cultural Revolutions

The period from the early 1960s to the early 1980s was, indeed, difficult in many ways. As my wife, Penny, points out, while the Chinese were suffering through their Cultural Revolution (from approximately 1966 to Mao’s death in 1976), we endured a cultural revolution of our own. Social unrest is not good for markets or economies.

I believe we have now entered a new period of cultural change in the U.S. as we try to wean ourselves off of what I call an “addiction to debt” — as individuals, as institutions, and as a country. Painful though it may be, getting off the wagon is seldom fatal. But continuing addictive behavior can be fatal. So, our current cultural change can lead to a healthier economy and markets then we experienced in the debt-fueled expansion from 1982 to 2007.

Con Games

I have long said that the financial markets are a “con game”. That is, a confidence game in the most fundamental meaning of that term. Markets are based on predictability and trust among their participants. Investors will invest in companies led by stable managements that they deem trustworthy and avoid those which are considered unstable or untrustworthy. Similarly, healthy markets require stable and trustworthy political leadership symbolized most importantly, in the U.S., by the president.

In hindsight, it should have been no surprise that the U.S. markets and economy fared badly during the 20-year period of great presidential instability from 1960 to 1980, when:

  1. none of the 5 presidents completed more than 1 elected term in office;
  2. 2 left office prematurely, 1 by assassination and 1 by resignation;
  3. 1 decided to not run for reelection; and
  4. 2 incumbents lost their bids for reelection.

We have had much more stability — and prosperity — beginning with Ronald Reagan’s presidency. On the other hand, I think most of us would agree that the loss of confidence in our current president has exacerbated the current downturn.


The points I am trying to make here are relatively simple. I am more optimistic than many observers because I’ve witnessed much worse economic conditions during my adult lifetime and seen us recover from them quite nicely. And, in the current situation, we are not being bombarded by the kinds of societal shocks we endured back then.

While I see the utility of playing the Depression card, it probably overstates the case and can be self-defeating if we stay on that depressing theme too long. No one can predict outcomes, and I don’t pretend to try. But, I think psychology and social contagions greatly affect economic conditions and should be carefully attended to.

I believe in the power of leadership — for companies and for countries. And, I strongly believe in the competence, judgment, and temperament of the man who will shortly take office as our 44th president.

One of the many reasons I think President Obama will be good for our markets and our economy is because he thinks in nuanced ways. He, too, is crying “the sky is falling” these days – because he knows what he needs to do to get a massive stimulus package passed with bi-partisan support. Such a package is smart and much needed. He also knows that a “crisis is a terrible thing to waste.” So, he knows he can get some things done now that we should have been doing all along, but lacked the political will to do – like investing in our infrastructure. But, once passed, I suspect that President Obama, with his perfect pitch, will start to strike more optimistic notes, understanding the psychology of markets as well as their mechanics. He’s no “one note Johnny.” That’s why we will be thankful we elected him.

As always, I look forward to your comments, corrections, and reactions.


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