America's Worst Economic Depression

by Robert M Davidson

  This effort to control has frustrated many fund managers, as shared here:

  Unfortunately, it is both dangerous to speculate, and utterly frustrating to remain defensive, in richly overvalued markets coupled with significant economic risks or strenuously overbought conditions. This is the environment we are presented with, and it is in no way typical of “standard” market conditions, despite its repetition in

  recent years. [ccxciii]

  The traditional tools to manage a portfolio, like time horizon and diversification, have been thrown out the window. All the lessons my generation has learned over our lifetime have been seriously called into question these last few years. [ccxciv]

  As you might imagine and agree, most Financial Brain Trust members feel no individual or nation can prohibit the will of free markets - forever, anyway. Accordingly, you want to be on guard for a major move in stocks. That move will surely be to the downside, and that could/should occur on most any day now.

  When that occurs, you want to be on the correct side of it with the proper positions, as it can prove extremely profitable – not to mention protective of your assets and net worth. Of course, the alternative, which the vast majority of investors will experience, will prove financially devastating. Also, you must remember that stock markets do NOT move in a straight line whether up or down.

  As long as the price rise does not produce rising volume, we can be confident a significant top is approaching. What we see is that volume failed to follow the sharp price rise in both 1987 and 2007, that volume rose slightly but was essentially flat, a bearish divergence . What is alarming now is that volume is declining sharply as prices rise, an historic bearish divergence in terms of severity, which could be warning that the coming decline will also be historic. [ccxcv]

  A healthy bull run for the stock market must come from rising prices and rising volume. This is an old and time-honored stock market analysis concept, and probably one of the most profound insights into market behavior. Thus, a rally lacking volume is at least suspicious. And a rally with declining volume is a sign of a weak market and usually a harbinger of a correction if not an outright trend change. Have a look at the S & P 500 chart below. As you can see, the whole rally off of the March 2009 low is characterized by low volume. Hence, I see a high probability that this bull run will finally end and prove to be just a huge bear market rally. [ccxcvi]

  Do you see the problem with our rising stock market, as related to the last two quotations, in this picture? Do you see where the trading volume, indicated by the purple area near the bottom, goes up as the stock market is declining, represented by the black line above, and then goes down as the stock market is going up? As you probably know already, this is further evidence of the PPT manipulating our US stock market - similar to Marxist/Communist controls.

  In my estimation, there is still close to an 80% probability (Bayes' Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we've observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Meanwhile, valuations are clearly unfavorable here, and even under the “typical post-war recovery” scenario, we are observing an increasing number of internal divergences and non-confirmations in market action. [ccxcvii]

  The good news so far is that the stock market got down to pretty much fair value or even, possibly, a tickle below it, at its March bottom. But now it has gone up… we probably have a market which is, roughly, 40% overpriced. In order to assess value, it is necessary either to calculate the level at which the EPS would be if profits were neither depressed nor elevated, or to use a metric of value which does not depend on profits. The cyclically adjusted P/E (CAPE) normalizes EPS by averaging them over 10 years. It thus follows the first of those two possible methods. Using even longer time periods has advantages, particularly as EPS have been exceptionally volatile in recent years - and using longer time periods raises the current measured degree of overvaluation. The other methodology we use measures stock market value without reference to profits: the q ratio. It compares the market capitalization of companies with their net worth, also adjusted to current prices. The validity of both of these approaches can be tested and is robust under testing - and they produce results that agree. Currently, both q and CAPE are saying that the U.S. stock market is about 40% overvalued. [ccxcviii]

  You are also intelligent enough to know that all of these quotations and still more don't only substantiate how our US stock markets are highly manipulated. They also support the quotations at the start of this section on the US stock market. Surely, you agree that recent stock market activity "is in no way typical of 'standard' market conditions." Don't you also feel that "the traditional tools to manage a portfolio have been thrown out the window?"

  [ccxcix]

  Even if the recession is over, the historical record shows that downturns induced by asset deflation and credit contraction are different than a garden-variety recession induced by Fed tightening and excessive manufacturing inventories since the former typically induce a secular shift in behavior and attitudes towards debt, asset allocation, savings, discretionary spending and homeownership. The latter fades more quickly. This is why people didn't figure out that it was the Great Depression until two years after the worst point in the crisis in the 1930s; and why it took decades, not months, quarters or even years, for the complete transition to the next sustainable economic expansion and bull market. [ccc]

  The question of timing continues to haunt us despite all the sound information and indicators relayed so far. You probably know already that our trigger for the start of this economic storm will be a sharp and sustained stock market decline. But when? The FBT and others continue to say any day now.

  Get ready to buckle up! The road ahead for the stock market is about to get volatile within the next 60 to 90 days. How do I know? We can look to the Volatility Index (VIX), often referred to as the "fear index" or the "fear gauge." It measures the put and call option activity on the S & P 500 to see when the market has gotten overdone to the upside. [ccci]

  Please remember this author feels all sources quoted or contributing to this book are very smart. After all, it was some of these persons who first alerted me to the likelihood of America’s Second Great Depression. As such, don't you agree we would err if we ruled out that possibility - and were unprepared for it? In fact, short of some rather miraculous and highly unlikely steps by the Federal government, such a depression seems unavoidable.

  By late 2012 or early 2013, world stock markets should be in the infancy of a massive plunge, the worst stock market drop in centuries. This implies world economies will be in recessions and headed fast for depressions . [cccii]

  With respect to a sustained recovery, the Tudor Investment Corporation has doubts. The firm cited the weakness of household income growth as a concern as well as the impact of the crisis on growth in many countries.... The firm said that policy stimulus will peak around the first quarter of 2010 and liquidity facilities and credit guarantees will be discontinued. At that time, “markets will have to assess the sustainability of growth. ” [ccciii]

  To err on the side of prudence, let’s now consider what America might be like in another Great Depression. Please know that these conditions will be felt, in some part at least, by most every other country on this planet. As the Dubai loan concerns and the more recent Libyan conflict affected world stock markets, we must recognize that more than ever – in large part thanks to technology and our interlaced economies, we are an interconnected world, “for better or worse.” While originating in 1929, the words still ring true today: “ When America sneezes , the rest of the world catches a cold . ”

  [ccciv]

  The American economy is so massive it always affects the entire world economy in a huge way. What happens economically in the USA determines in part wha
t life is like in much of the industrialized world and beyond. The more a country is dependent upon the American economy the worst will be the impact on them. They will also be experiencing the economic impact of lost trade with the USA during the depression. [cccv]

  In order to develop a logical economic scenario for the United States, three basic assumptions must be considered. Our first assumption is that the upcoming depression will be deflationary in nature and should follow the same basic scenario as the three prior complete Kondratieff Waves. All the elements are in place for the emergence of a fourth period of long term deflation. Our second basic assumption is that the social and economic trauma of the upcoming depression should be much more violent and pervasive than any seen before, including the Great Depression of the 1930s. Our third and final assumption is that the upcoming depression could prove to be much more prolonged than expected. As we prepare to enter our next depression, we find an unprecedented level of government involvement in the economy. [cccvi]

  Bear markets engender labor strikes, racial conflict, religious persecution, political unrest, trade protectionism, coups and wars. In the area of personal behavior, part of the population gets more conservative, and part gets more hedonistic, and each side describes the other as something that needs reform. One reason that conflicts gain such scope in depressions is that much of the middle class gets wiped out by the financial debacle, increasing the number of people with little or nothing to lose and anger to spare. Given the projected size of this bear market, look for nations and states to split and shrink. Look for regional governments to challenge national ones. There is no way to know exactly where such splits will erupt, but they will erupt somewhere. International politics will become increasingly dangerous. The number of annual nuclear explosions, whether for testing or attack, waxes and wanes inversely with the stock market. Look for an increased number of nuclear explosions during the bear market. [cccvii]

  Eventually our credit economy will turn into a pure printing press economy. Sooner or later, the American currency will collapse, creating chaos in the marketplace. The government will probably make one or two abortive attempts to issue a new currency by “fiat” (official order) and this “fiat” currency will be rejected. Eventually things will get so bad that the government will be driven by desperation to re-establish a gold-backed currency, but because it has disposed of much of its gold hoard, gold will have to be revalued upward to a price adequate to back the new money - perhaps thousands of dollars per ounce. [cccviii]

  [cccix]

  I call the coming disaster in America the Plaque of the Black Debt. The world will be changed, totally and permanently, [and] things will never be the same again. Social Security benefits [will be] cut to the bone [and for] only the [neediest]. I see at least 40 million make-work public assistance jobs. Sick elderly will be cared for at home [as] almost no one will be able to afford nursing care. I see millions of homeowners upside down with a mortgage bigger than the market value of their home. Banking industry problems will return, much worse than anything we’ve seen. And much too big next time for the government to bail out. Either your savings will be wiped out or you'll be paid in worthless paper dollars. I expect to see extended families of 10 to 15 crammed into three-bedroom houses. [cccx]

  Yes, it should prove quite the storm and so tough on so many families, businesses, and governments the world over, because of so many hands holding so much debt right now! Wouldn’t you like to avoid living through such a grim scenario? Well, so would I.

  Virtually all businesses will suffer as Americans overall are replenishing savings amid fading confidence and greater uncertainty about the future. Companies and individuals will also be hit with rising taxes and user fees of all kinds, because in the early stages, before hard-pressed citizens begin to aggressively fight back, state and local governments will look to fill the gaps caused by falling property values, softening retail sales, and unfunded retirement liabilities. Competition, especially from businesses based overseas, will be more cutthroat than ever, no matter what happens in the foreign exchange markets. Moreover, members of the Federal Reserve, like others inside and outside of government, will almost certainly not have a clear strategy. At the same time, a growing list of scandals and the fallout from the change in retirement accounting standards will add to rising public hostility towards both Wall Street and Main Street. [cccxi]

  The bigger picture to me, though, comes from the benefits in this US-lead Depression. Let’s look at the benefits – that’s right, benefits ! - from the last Great Depression as well as the other things we’ve learned since that time. In fact, America is already experiencing some of these benefits from the deflationary aspects of our current economy. Here are those benefits:

  1. Individuals should save more as the chart that follows shows began happening after the 2008 downturn.

  U.S. citizens have been saving less and less since the early 1980s. And the saving rate even turned negative during the height of the real estate bubble. But in April, the personal saving rate in the U.S. surged to 5.7 percent, a 15-year high. That represents a massive trend change and has important consequences for the future. Bottom line: Saving is the precondition to wealth generation. Baby Boomers are now facing retirement and don't have much time left to close the gap between their current assets and their retirement needs. So they will have to cut back their spending, which does not bode well for the economy or the stock market. [cccxii]

  2. Households have been paying down their debts.

  3. Businesses have begun liquidating its debts.

  4. Banks have been extending less credit.

  5. Governments have been extending less credit.

  Consumers, small and medium-sized businesses, city and state governments, hospitals and schools, even entire countries are caught up in a similar downward spiral; slashing their spending, laying off workers, dumping assets, losing revenues, and slashing their spending still more. [cccxiii]

  6. Household borrowing has been falling.

  By and large Americans are knowledgeable, independent-minded people. When they have exceeded their borrowing limits and sense a slowdown in the economy, they traditionally cut back on borrowing, concentrate on repaying some of what they owe, and generally get more conservative financially. [cccxiv]

  7. Worldwide corporate borrowing has been declining.

  8. Worldwide government borrowing has been slowly decreasing.

  9. Worldwide governments are beginning to try and pay down debts.

  10. Consumer prices should fall across the board.

  11. Everyday items should become cheaper for those buying them.

  12. Consumers are beginning to pull back on their purchases.

  The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007. Global estimates are less reliable, but certainly in multiples of that figure. And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%. [cccxv]

  13. Upheaval will allow for worthwhile political changes.

  14. Humility should return to individuals and communities.

  15. Debt liquidations will lead the World to a new era of prosperity.

  16. Families can lay a better foundation for the future generations.

  A depression creates fantastic opportunities as surely as it creates devastating losses. Moreover, the sooner the debt liquidation begins, the sooner the world can embark on a new period of prosperity. [cccxvi]

  Do these features of a deflationary depression sound so bad to you? Accepting that the price for the massive debts must be paid for here in these United States as well as most of the world at some point, why not a deflationary depression - and as soon as possible?

  Deflation means an increase in the value of money. You can only increase its value by
having less of it. You can only have less of it if politicians and money managers suddenly … kick us into a deflationary depression. [cccxvii]

  [cccxviii]

  I, for one, want America’s Next Great Depression to come and have for years now, as I do not want to send the massive debt build-up during my generation down to my children, grandchildren, and other future generations. It’s high time each US citizen, business, and our government came to grips with these outrageous debts once and for all! Under no circumstances whatsoever should one cent of this generations’ debt be borne by any following us, for they are innocent and deserve a clean slate! It’s the fair and decent thing to do.

  Can you picture how powerful this financial storm will be when the US, as just one of many national examples, runs out of money? You can be sure that this time is imminent and draws closer with each passing day.

  [cccxix] The citizens of Squanderville, as Warren Buffett calls them, are a happy bunch. They believe happy things; it doesn’t bother them that the things they believe are impossible. [cccxx]

  Are you ready for examining the likely economic paths ahead of us? By most every source read, studied, and consulted by me, opinions pretty much agree that America is headed first into years of economic deflation or inflation or hyper-inflation.

  While my research suggests that both economic scenarios are likely to be experienced by America in the not-too-distant future, our ideal path should prove to be a period of economic deflation before the certain inflation or hyper-inflation to follow. If deflation sounds unpleasant, know that the research suggests that it should lead America and the world towards financial soundness most effectively, because it will serve the world’s creditors as well as future generation’s best.