Worst Recession Since The Great Depression?
Wednesday, December 3, 2008 | Teeka TiwariRating:
According to the National Bureau of Economic Research (NBER), we have been in a recession since December 2007. Normally markets have huge rallies after the recession becomes evident, yet we dropped over 600 points on Monday and bounced back 270 on Tuesday.What gives?
Here’s the deal, most recessions only last about 10 months on average. The worst recession we have experienced over the last 20 years was in 1991 and that was only eight months long. The tech wreck-led recession of 2001 was also only eight months long. But this current recession has already been going for a year, making it the fourth longest recession since the Great Depression! And if it should last for another year, as many analysts say, it would be the worst recession since the Great Depression.
This will probably not be a quick and easy run-and-recovery recession. In all likelihood there could be a second leg lower in the economy, and that looks to be what the market is trying to price in. Remember that the day-to-day movements are all going to sentiment-based. It’s the short-term traders that are currently ruling our markets.
The one piece of good news is that now at least the market definitively knows that we are in a recession. More than anything else, the markets despise uncertainty. Knowing that we are a year in already allows long-term money to get a gauge on how far we have to go before an earnings recovery is likely. The closer we get to knowing when corporate earnings will bottom, the closer we get to a real sustained turnaround in market direction.
The Government Rescue Myth
There is a misguided belief that the government can fix or somehow save the average American from this recession. This is a self-induced fantasy that is propagated by the media. You cannot un-break a broken economy. Governments cannot fix recessions; the best thing that they can do is to not impede the natural recovery process.
The Fed is going to continue to try and re-inflate our way out of this mess in an effort to make credit easier and easier to get. The fact is we are unwinding a massive asset price bubble that was fed by too much cheap money in the first place. Much of the growth we experienced was illusory, it was based on the greater fool theory and the banks fell for it hook, line and sinker.
Offering cheaper money isn’t enough to get us moving forward again. We need more. Chairman Bernanke is doing more, and he’s thinking outside of the box. The Fed has been very active in the commercial paper market (commercial paper is a short-term note issued by large companies to finance short-term needs such as payroll) and in large part have restored much of that market's former liquidity. Interbank lending rates have come down considerably, again due in part to the Fed Chairman’s efforts.
Note to President-elect Obama: Raising taxes will be a huge impediment to this country's recovery! Massive fiscal stimulus will certainly ameliorate this recession as will sub-$50 oil and sub-$2 gasoline. But if we can get tax cuts, especially a capital gains and payroll tax cut thrown into the mix, then we will be well on the road to recovery.
It’s going to be exceedingly difficult for the new President to sell a broad-based tax cut that includes payroll tax and capital gains tax reductions. The Dems have already said that they are going to let the reduced 15% dividend tax and 15% long-term capital gains tax provisions expire this year. So we are going to have a de facto tax increase going into 2009. Not a pleasant thought as we still probably have another solid year of poor business conditions ahead of us.
Our new President really is the wild card in how the back nine of this recession will play out. Will history remember Barack Obama as the Jimmy Carter of the new millennium? Or will he surprise us all and be the heroic figure that leads us out of the darkest economic period we’ve faced since the Great Depression?
Only time will tell.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
