Jim Grant: Ringing the Bell at the Top?
In the following Wall Street Journal commentary, “From Bear to Bull,” a long-time critic of the excesses and wayward policies that brought this country to its knees suggests the outlook for the economy is brighter than many people, especially the pessimists, believe:
James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery.
“As if they really knew, leading economists predict that recovery from our Great Recession will be plodding, gray and jobless. But they don’t know, and can’t. The future is unfathomable.
Not famously a glass half-full kind of fellow, I am about to propose that the recovery will be a bit of a barn burner. Not that I can really know, either, the future being what it is. However, though I can’t predict, I can guess. No, not “guess.” Let us say infer.
Though we can’t see into the future, we can observe how people are preparing to meet it. Depleted inventories, bloated jobless rolls and rock-bottom interest rates suggest that people are preparing for to meet it from the inside of a bomb shelter. . .
The Great Recession destroyed confidence as much as it did jobs and wealth. Here was a slump out of central casting. From the peak, inflation-adjusted gross domestic product has fallen by 3.9%. The meek and mild downturns of 1990-91 and 2001 (each, coincidentally, just eight months long, hardly worth the bother), brought losses to the real GDP of just 1.4% and 0.3%, respectively. The recession that sunk its hooks into the U.S. economy in the fourth quarter of 2007 has set unwanted records in such vital statistical categories as manufacturing and trade inventories (the steepest decline since 1949), capacity utilization (lowest since at least 1967) and industrial production (sharpest fall since 1946).
It isn’t just every postwar disturbance that sends Citigroup Inc. (founded in 1812) into the arms of the state or has General Electric Co. (triple-A rated from 1956 to just this past March) borrowing under the wing of the Federal Deposit Insurance Corp. Neither does every recession feature zero percent Treasury bill yields, a coast-to-coast bear market in residential real estate or a Federal Reserve balance sheet beginning to resemble that of the Reserve Bank of Zimbabwe. Yet these things have come to pass.
Americans are blessedly out of practice at bearing up under economic adversity. Individuals take their knocks, always, as do companies and communities. But it has been a generation since a business cycle downturn exacted the collective pain that this one has done. Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: “[T]he most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period.”
Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today’s economists suggest, the economic history of this country would have to be rewritten. Amity Shlaes, in her “The Forgotten Man,” a history of the Depression, shows what the New Deal failed to achieve in the way of long-term economic stimulus. However, in the first full year of the administration of Franklin D. Roosevelt (and the first full year of recovery from the Great Depression), inflation-adjusted gross national product spurted by 17.3%. Many were caught short. Among his first acts in office, Roosevelt had closed the banks. He had excoriated the bankers, devalued the dollar, called in the people’s gold and instituted, through the National Industrial Recovery Act, a program of coerced reflation.
“At the business trough in 1933,” Mr. Darda points out, “the unemployment rate stood at 25% (if there had been a ‘U6′ version of labor underutilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points.” Not even this mighty leap restored the 27% of 1929 GNP that the Depression had devoured. But the economy’s lurch to the upside in the politically inhospitable mid-1930s should serve to blunt the force of the line of argument that the 2009-10 recovery is doomed because private enterprise is no longer practiced in the 50 states . . .”
To be sure, Mr. Grant rightfully acknowledges the folly of economic forecasting and is careful about pinpointing when we might expect to see his anticipated strong recovery.
Yet by citing the work of the Economic Cycle Research Institute, which has recently been suggesting that a major upswing is on the cards, Mr. Grant seems to make it clear that now is the time for optimism.
Unfortunately, his rationale is weak, if not totally wrong. For the most part, his argument rests on the premise that, historically at least, strong recoveries have followed severe contractions.
Aside from discounting the fact that there are aspects to the current unraveling that are historically unique and extraordinarily unsettling (e.g., total credit market debt relative to gross domestic product is well beyond anything this country has ever witnessed), Mr. Grant makes a number of curious assertions.
For one thing, he assumes that the current downturn is near its nadir, instead of a temporary floor built on a massive stimulus injection and a knee-jerk bout of inventory restocking. Among logicians, such an analytical approach might be described as “begging the question.”
Mr. Grant also gives short shrift to the fact that in many ways — see “A Tale of Two Depressions” by Barry Eichengreen and Kevin H. O’Rourke for more on this subject — the economic episode that most closely parallels the current downturn is the one that occurred during the Great Depression, and which lasted twice as long as the latest one has.
Perhaps our economy will rebound sharply in 2011, but from what level? Should we really be preparing for the best right now — instead of the worst — given how many dangerous icebergs –like the accelerating meltdown in commercial real estate and the mortgage reset timebomb — are only just floating into view?
History suggests that time is not on the side of the optimists when it comes to episodes like the one we are going through right now. As I’m sure Mr. Grant is aware, Professors Carmen M. Reinhart and Kenneth S. Rogoff have published a research paper, “The Aftermath of Financial Crises,” based on data going back more than a century, which concluded that post-crisis downturns tend to be “protracted affairs.”
To bolster his allegedly contrarian argument, Mr. Grant points to the swollen ranks of pessimists preparing to meet the future from “inside of a bomb shelter.” But after decades of bubble-induced euphoria and an economy built on massive debt and unparalleled overconsumption, I wonder if he is engaging in a bit of dot-com era relativism — where the Nasdaq was “cheap” at 4,000 because it was down 20 percent from its peak (it is now 2,132).
If savings rates, debt levels, and the share of the U.S. economy accounted for by consumer spending were to return to, say, pre-Greenspan era norms, then one bomb shelter might not be enough to handle the economic onslaught that is still headed our way.
Finally, Mr. Grant makes the cardinal error of many ivory tower economists. He credits equity investors with the wisdom of crowds. Those are the same people who bid share prices to new all-time highs in the fall of 2007, just as credit markets were unraveling, home prices were collapsing, and the bottom was falling out of the real economy. Hmmm.
That said, it is certainly not my intention to lump Jim Grant with all those clueless strategists, economists, and policymakers who failed to see things coming. In fact, I think he is a very smart guy and I’ve always enjoyed hearing what he has to say. But the fact is that bull and bear markets frequently have one thing in common: turning points marked by the public capitulation of one or more prominent contrarians.
Given what Mr. Grant has just written, I can only ask: Did one of the world’s best known bears just ring the bell at the top of the great dead cat bounce?
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Source:
From Bear to Bull
JAMES GRANT
WSJ, SEPTEMBER 19, 2009
http://online.wsj.com/article/SB10001424052970204518504574420811475582956.html
De.li.cious
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September 20th, 2009 at 12:43 pm
I think I have found a video of Leftback.
http://www.youtube.com/watch?v=wxPQTa1JhBQ&feature=player_embedded
The Dollar Carry Trade – Dollar Danger Zones
September 20th, 2009 at 12:55 pm
We have way… way many more [sic] ‘bears’ to go, note:
Corporate-Bond Sales at 6-Month High
“…Companies sold the largest amount of dollar-denominated corporate bonds in roughly six months…”
http://online.wsj.com/article/SB125327976210522975.html
So much for the “credit is impossible to get” meme… and on a further, related note:
“…Foreign central banks held $2.08 trillion of Treasurys in custody accounts at the Federal Reserve Bank of New York on Sept. 16, a rise of $31.4 billion from the previous week. That is the second-largest increase on record, after the $43.9 billion jump to $1.513 trillion recorded in the wake of the Lehman Brothers Holdings collapse last year, according to research firm Wrightson ICAP…”
http://online.wsj.com/public/page/news-wall-street-heard.html
So much for “the bond market is bearish” meme… the bond market is in the hands of the world’s Central Banks and their quantitative easing, that is unless you think the CBs are great traders. Wait until the Fed starts raising rates…
“…you best get out of the way…”
— Ted Nugent, Stanglehold
http://www.lyrics007.com/Ted%20Nugent%20Lyrics/Strangle%20Hold%20Lyrics.html
September 20th, 2009 at 1:09 pm
Grant makes a terrible argument. The whole V-shaped scenario only works if the downturn is a case of overheated expansion amidst real, bona fide demand, i.e. the fundamentals were there, but we got ahead of ourselves. And the more abruptly and severely managers adjust output, the more demand that gets pent up. On the other hand, the current downturn is a case of artificial demand based on bloated asset prices. That wealth destruction is still with us. Unprecedented liquidity is only serving to mask the problem. It may even make it “feel” like a sharp recovery for a little while — long enough for shorts to get squeezed out and suckers to file back into the market. But double digit unemployment is actually (IMO) something that will be with us indefinitely — years and years. Two side notes: (1) Interesting how all the people who railed against short-sellers in 2008 are totally fine with near bankrupt companies and doggy retailers quadrupling on no news, and (2) Within the next five years, as more people in this country realize that Starbucks and Walmart are their only job opportunities, while middle-classes overseas swell in numbers enjoying the jobs that people here used to have, the backlash against globalization in this country will reach totally unanticipated levels.
September 20th, 2009 at 1:15 pm
The comparisons with former Depressions & Panics is tiresome when one of the other main unspoken assumptions is that all else is equal. Manufacturing & farming vs. services & financial services no longer occupy the same respective percentages of economic activity as they did in the referential periods. Yes, former bankers now make beer (re WSJ article) or what-have-you but one of our legacy engines of growth, industry, has successfully been destroyed through the combined actions of every public & private player thinking they can cook up a 5-year plan ridding ourselves of the risks, hidden opportunity costs, and other downsides of manufacturing.
I’ll believe a bounce when I see it, not when I see charts or fairy tales written by PhDs.
September 20th, 2009 at 1:27 pm
Yes Barry…and there are other signs of a top…but then again I’ve thought that for awhile. They just get more and more overbought. Like NYSE Bulls…Nasdaq 100 Bulls. What about gold speculators nearing highest long position in history as demand for the physical metal plunges?…
http://www.technicalindicators.com/gold.htm
How about bankrupted companies soaring on the pink sheets?
http://www.ft.com/cms/s/0/4da6c6d0-9b0d-11de-a3a1-00144feabdc0.html?referrer_id=yahoofinance&ft_ref=yahoo1&segid=03058
The US government is also going deeper into debt…basically raising the burden on every citizen, whether we want it or not, at a time when we need to lower our debt burden. That’s the easiest way to explain why, longterm, you can’t solve a debt problem by creating government debt.
~~~
BR: You mean Mike — this is a Panzner piece . . .
September 20th, 2009 at 1:42 pm
Given what Mr. Grant has just written, I can only ask: Did one of the world’s best known bears just ring the bell at the top of the great dead cat bounce?
_________
Dead cats bounce much higher when they’re full of hot air.
September 20th, 2009 at 2:02 pm
The 1930s were “politically inhospitable” to business? Ha! How soon we forget that business *wanted* some of the New Deal’s failed programs like the cartel-embracing National Recovery Administration, and they *fought tooth and nail against* successful programs such as the Federal Deposit Insurance Corporation.
It’s no historical accident that the economy rebounded as strongly as Grant correctly notes that it did after the New Deal got going!
September 20th, 2009 at 2:02 pm
@Bruce-
i thought LB was a Brit ;-)
September 20th, 2009 at 2:08 pm
Some of the arguments are straight out laughable.
«Amity Shlaes, in her “The Forgotten Man,” a history of the Depression, shows what the New Deal failed to achieve in the way of long-term economic stimulus.»
The Schlaes book is full of errors and stretched arguments. It is just Republican Movement propaganda.
«“the unemployment rate stood at 25% (if there had been a ‘U6′ version of labor underutilization then, it likely would have been about 44% vs. 16.8% today. . . ). »
That is even more ridiculous, because the unemployment rate measured in the 30s was indeed much the same as the current U6; the definition of “unemployment” has changed a lot since, becoming ever narrower. Actual U6 unemployment in the 30s was not and could not be 44%; after all how could 44% unemployment (from around 1%) be compatible with the “just” “27% of 1929 GNP” drop, a drop which was from an absurdly high level including a colossal amount of fictitious financial profits?
September 20th, 2009 at 2:26 pm
I decided to take out my ragged “Total Credit Market as a % of GDP” Chart, since BR mentioned it above. We are now at 373%, basically flat from the 375% as of 1Q09. The highest ever before this run was 260% in 1935. The level at which the market crashed in 1929 was only 170%…the spike to 260% came as GDP plunged and the New Deal started. Total credit has basically been up non-stop since 1953, going really nuclear starting in 1980 at 160% up to 373% now. We will soon find out if deficits and debt don’t matter (low likelihood)…or perhaps we are in deep, deep trouble. BTW, debt crashes should be DE-flationary…I’m with Pomboy and Mauldin.
September 20th, 2009 at 3:12 pm
Is this Jim Grant doing his own portrayal of the evil Kirk from “The Enemy Within”? It’s kind of funny.
September 20th, 2009 at 3:32 pm
@BnT
Thanks for the vid. Looks like Leftback in my mind’s eye, but I was expecting a bit more of a mellowed Cockney or hybrid Geordie/Northeastern US accent.
Watching it, I was struck with an important question, “Which is more patriotic – shorting the U.S. equities or shorting the U.S. dollar?” I ask the question because the Dennis Kneale types seem to think that those who short U.S. equities are somehow unpatriotic, although the corresponding irony is that the current equity market rally is a result of heavy shorting of the U.S. dollar.
September 20th, 2009 at 4:18 pm
I think we should look at it from top down.
1. The developed world is over leveraged and consumers are tapped out.
2. The US is a net importer and many countries in the world are net exporters.
3. On a macro basis, the US needs to bring the different between imports and exports closer to 0.
Problem with this:
1. Americans can’t overnight become exporters and the rest of the world can’t overnight become consumers.
2. Strong forces are in place to maintain the status quo. Why would the developed countries want to share resources with the other 5 billion on this planet. In the spirit of self preservation, they would want to keep it all for themselves before sharing.
So what are the possible scenarios:
- Status quo for a while longer: Americans net importers, RWO exporting
What is needed for this: Inflation. For the game to keep on going, America needs huge inflation so households can keep on borrowing to consume. All the Fed has to do is print a lot of money but the problem is that this could infuriate more than a few countries (including some oil producing ones) plus it could cause such large disturbances in their own market that could cause their own system to come crashing down.
- Move towards equilibrium:
1. Americans increase exports, ROW increases consumption: ROW needs to gain purchasing power for this to happen. So either US household income declines or general price level increases.
2. Americans keep exports equal but shrink imports: if Americans cut imports: ROW won’t be able to afford their exports, need purchasing power to increase. So either US household income declines or general price level increases.
3. Americans reduce exports and cut imports by even more: I guess this is the deflation scenario where world trade just tanks. The thing is the ROW is going to do everything in its power to keep its exchange rate low, by printing, to keep America buying. Investors world wide will be buying commodities to protect themselves from their central bank policies. Americans as net importers of oil will be stuck buying commodities at higher prices so inflation will enter their system.
September 20th, 2009 at 4:43 pm
A factor unspoken but vital to understanding is that the Greenspan-encouraged collapse of interest rates accomplished nothing more than a borrowing of future demand. The future from which that demand was borrowed is now upon us. There is no pent up demand – we already spent it.
Without demand, supply must decrease. And that is a deflationary event.
The Bernanke/Keynes philosophy is to utilize government debt to fill the demand void. What is unclear is whether that policy can be sustained without a world war to bomb excess supply into oblivion.
My bet is that government debt will hit a solvency limitation on borrowing just as does personal debt. Until that happens, artificial demand created by government debt will lead to an economy that is stuck in mud up to its hubcaps – the necessary cleansing will be postponed as long as possible, or at least until the next election, whichever comes first.
September 20th, 2009 at 5:16 pm
I really thought James Grant was more thoughtful than this. His argument would have merit if we had completed our trip to the bottom as would have happened without extraordinary govt intervention. To think that we’re in a position to bounce this way from here the way the economy bounced from the extreme bottom of ’33 is absurd.
We’re quite likely to be either in a ’30 situation or a Japan scenario. We’ve only held off the huge debt monster for a while with great mounds of govt debt. The piper still has to be paid.
The best anybody can really hope for is another ’03-’07 type bounce, but we don’t have a major sector inflate like we did finance and housing. Not even close. But some think we can actually do even that. Which obviously only leads to another, bigger crash.
September 20th, 2009 at 5:19 pm
Winston
Well said. The pulling forward of demand has hit the limit. There’s no getting around the fact that we now go through a stagnant period (at best) to allow things to come back into balance. The quicker way would be to realized the debts and cleanse it all out quickly, but that would of course be quite painful and cause much turmoil and social unrest (to say the least). And so we will muddle through.
September 20th, 2009 at 5:24 pm
Dilbert!
http://dilbert.com/strips/comic/2009-09-20/
September 20th, 2009 at 5:27 pm
but we don’t have a major sector inflate like we did finance and housing
———-
Yes we do. Government and then infrastructure.
September 20th, 2009 at 5:40 pm
As a long time reader of Grant, I found this a little surprising too, but it is not really couched as a prediction of when, but contrary forecast of what it will look like when it does occur. I would say though, there is a consistency here with the permabear attitude on central banks and their currencies.
If people do think we are headed to some kind of accelerating depreciation for paper money, what do you think measures of the nominal economy are going to look like when that happens? Do you think that increasingly worthless cash is going only to be chasing gold or maybe instead a whole range of goods, services, labor, whole companies, etc.
September 20th, 2009 at 5:47 pm
@ellidc:
Never really thought about the details of “worthless cash”…just know that debasing your currency cannot be a good long term growth strategy. I see the dollar rallying as the market tanks anyway with gold plunging soon.
September 20th, 2009 at 6:55 pm
BR: I see now that this was written by Panzner…I thought it sounded overly bearish for your current viewpoint…but the writing is similar to yours!
September 20th, 2009 at 6:56 pm
What Bernanke and Co. are attempting is an inflation to spur aggregate demand. The hole in their doughnut that prevents it from being a viable Danish is that demand is a natural result of shared productivity. Their attempt is really to create an inflation to protect supply pricing – it is really a hidden attempt at price controls – and it is something that has never worked.
September 20th, 2009 at 7:05 pm
world trade collapse
http://www.voxeu.org/index.php?q=node/3998
September 20th, 2009 at 7:23 pm
«Greenspan-encouraged collapse of interest rates accomplished nothing more than a borrowing of future demand.»
That is physically impossible. What has actually happened is that the USA (and the UK) have borrowed demand from someone else (e.g. China).
«The future from which that demand was borrowed is now upon us.»
That depends on whether those who have lent demand to the USA want it back yet.
«There is no pent up demand – we already spent it.»
There is a lot of pent up demand in the place where the past demand has been borrowed from.
I find much better the comments beginning:
«I think we should look at it from top down.
1. The developed world is over leveraged and consumers are tapped out.
2. The US is a net importer and many countries in the world are net exporters.
3. On a macro basis, the US needs to bring the different between imports and exports closer to 0.
Problem with this:
1. Americans can’t overnight become exporters and the rest of the world can’t overnight become consumers.
2. Strong forces are in place to maintain the status quo. Why would the developed countries want to share resources with the other 5 billion on this planet. In the spirit of self preservation, they would want to keep it all for themselves before sharing.»
September 20th, 2009 at 7:53 pm
I think I’m going to sum it up for everyone…sometimes bears and bulls give out an opinion just because they have to and want one that is different than the crowd of other opinions. Right now, there are about 2309434 predictions out there. You can’t take anything from anyone’s mouth as gospel.
Personal story…today, I met with Peter Schiff this afternoon @ a private client meeting he had here in Philly. I am not a client, but am on the mailing list so figured, might as well go meet the guy. The room was PAAACKED. At least 350+ people on a goregous Sunday with an Eagles home game going on and a Phillies game on as well. To me, that means there MAY be a top in foreign stocks/gold/precious metals coming to us soon. He was saying his usual stuff, but the level to which people were all about Schiff was a bit over the top. I wish him well in his Senate race, but wonder how his message is going to work if the dollar all of a sudden finds strength.
September 20th, 2009 at 11:25 pm
Is there a way to invest in bullshit, because I would love to short it by the truckload.
September 21st, 2009 at 2:21 am
VennData: “So much for “the bond market is bearish” meme… the bond market is in the hands of the world’s Central Banks and their quantitative easing, that is unless you think the CBs are great traders.”
Oh no, there’s nothing at all bearish about the Fed blatantly manipulating interest rates in the open market. I mean, it’s not as if they perceive the global financial climate as so precarious that such unprecedented intervention is critical to preventing total systemic collapse. Nope, they’re just a bunch of dumb suckers, always on the wrong side of the trade! Why aren’t they buying stocks, like all the smart people?
September 21st, 2009 at 12:48 pm
Good observations, Winston Munn. Gotta destroy some supply somehow, as you say, if we are to ever coax our secular God of growth out of the temple. How convenient a war would be in doing so.
September 21st, 2009 at 1:08 pm
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