When in the midst of the 2008-09 financial crisis, when the stock market was crashing and the world was falling apart, I said that major bear markets don’t end in a single wave.
It was not going to go straight down and then straight back up with a “happy days are here again” completed recession.
As I listen to politicians describe economic conditions today, most lack an accurate frame of reference. They talk like this is a comparative garden variety recessionary period creating false expectations and that by the force of their will they could just make it all better if we elect them instead of their political opponents.
They are in some kind of virtual reality without the wisdom of economic history or are simple politically manipulative or both.
I believe that I was one of the first to call this period what it was – “the Great Recession.” There is nothing to compare it to other than major economic retrenchments like the Great Depression.
It would be the Great Depression had not the Federal Reserve and Treasury Secretary Henry Paulson acted as aggressively as they did to keep liquidity in the financial system.
It offended the ideology of Tea Party conservatives but better that than an economic collapse.
The problem is, it’s not over yet. We are not across the “Valley of Financial Evil” to the other side, and while an attempt has been made to crawl up out of the valley, it is perilously looking like it will fail.
What I said the first time down was that bear markets form at least three waves – A, B, C. The 2008-09 collapse was wave A The recovery since was wave B. And what is likely to follow next is a severe retest of the 2008-09 low, if not a new leg down in the bear market in wave C.
The Fed and other global central banks have been buying the politicians time to do the right things with fiscal reform with accommodative monetary policy. They are providing liquidity keeping the cost of ballooning public debt as low as they can.
The trouble is that the politicians are not making use of the opportunity. They are foolishly wasting it.
A problem is that central banks lack the power to fix the core issues. They can’t make the EU into a Federal Union with a common fiscal policy. They can’t make the Washington politicians do the right thing steering us away from a fiscal cliff.
President Obama is smart enough to know that he is screwed. Right now he is trapped politically in a box and has not found a way out. The political impasse is so dire that they are willing to risk letting the country fail than allow the other party credit for fixing it.
Business and consumers are going to look at this political morass and retrench. More accommodative monetary policy will have continually diminishing returns until they fix fiscal policy. I think that had the country been run by the Tea Party instead of George W, wave A may have never happened.
I think that they best understand what is wrong with the economy today. Ironically, however, they are the least prepared to know what to do to fix it and in fact may be the most responsible for wave C.
When I listen to Mitt Romney, the hot business dude who is supposed to fix the country, I think that his perception of the economic reality and condition is drastically miscued, so therefore his policies would be, too.
The kind of draconian austerity being proposed would precipitate a worse wave C than is necessary.
The bottom line here is that most likely the global economy is heading toward another contraction. That is what the precipitous weakness in the CRB is heralding. This is just not the garden variety kind of economic recession that comes and goes.
The tools that were used by the Fed and Treasury to get us out of wave A will not be as effective, nor will they be politically acceptable, for mitigating wave C. Things like TARP and QE have become focused on as evils when they were what saved our bacon and created the conditions, that if Congress produced rational wise fiscal direction, wave C would be tolerable.
The real situation is that if the economy starts to slide again to any similar degree, as to what occurred in wave A, Washington will be too gridlocked to stop it. The eminent global risk is the EU. The Greek election Sunday may or may not produce a resolution.
Around the world the lack of resolution to all these fiscal problems is weighing on Main Street and consumers. It is a headwind to growth and it is tiring.
Growth in the rest of the world economy is not going to be able to stave off a contraction in the EU if the U.S. economy stalls.
India is in trouble and both Brazil and China are now employing stimulus to spur growth again.
If wave C gets rolling down the valley again, where is there safety? A Federal Reserve Board study released this past week showed that Americans lost 39 percent of their median net worth in aave A.
Most of it was in plunging home values. While prices may be bottoming, it took record low mortgage rates to stop the hemorrhaging that are unsustainable. How much of the loss have they recovered during the bave B recovery? Some, but not much.
American net worth is still far under water from the economic high preceding the bear market, and is frankly heading toward another fiscal cliff at the end of this year that the politicians don’t fear enough.
Agriculture rolled right through wave A. I doubt that will be the case with wave C.
No wealth is safe during wave C.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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