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Signs of Life…But Not for Long
08/16/2011 7:30 am EST
We’re on brink of a nice little bump from the data coming in, but on the whole, a 1930s-style depression seems to be on track, notes Jon Markman of Trader’s Advantage.
When the market is as oversold as it was late last week, it most often gets even more oversold in the next few days and week because brokerages need to clear out margin calls.
But if you can buy your favorite stocks at a low close, and just wait for six months to sell, you have a very good chance of making 8.5% going forward, according to research that I have seen.
Indeed, while the public was selling, a lot of insiders were buying, as there were 50 buys recorded last Monday afternoon by corporate leaders, versus a quarter of that level on a normal day a month ago.
This is one of the avenues we will explore to find great opportunities, as companies with high insider buying, and corporate buybacks, tend to spring higher the fastest.
Some of the top insider buys last week were recorded at KB Home (KBH), Winthrop Realty (FUR) and MF Global Holdings (MF). The latter buy was by chief exec Jon Corzine, a former Goldman Sachs (GS) leader and senator.
Double-Dip or Single Depression?
This buying was the exception, and there was a lot of talk about the markets resetting to account for what some people are calling a "double-dip" recession.
I think that’s wrong, but not for the reason you might imagine. It’s important for you to realize that the term is a complete misnomer that hides the truth of the situation.
A "double dip" occurs when there’s a defined period of recession, let’s say 12 quarters. And then there are two or three quarters of recovery, or growth, followed by more economic contraction. In other words, a "double dip" occurs when there are two periods of economic contraction back-to-back, with three or fewer quarters of growth between them.
Yet in the present case, if a new recession were to occur, as the markets are forecasting, it would actually be its very own, new recession. And unfortunately it would not have a cute, alliterative name. Collectively with the first recession, it would probably be seen in retrospect as a depression.
You see, the trouble with having two recessions back-to-back, separated by more than a year of growth, is that it shows that the period of growth was the result of some sort of stimulus that failed.
And what typically happens is that a government has spent a lot of time, treasure, and credibility fighting the first recession; then spends a lot of time crowing about the growth in the middle; and later finds itself incapable of at first recognizing, acknowledging, and then dealing with the second recession.
And this is how depressions happen. Not a "big-D" recession, like the 1930s. But more of a "garden-variety" depression, such as were common in the late 1800s during the Gilded Age.
What we are seeing now looks a lot like the 1930s, though, I hate to say. Not zig-for-zig and zag-for-zag, but in a broader way. I’m going to repeat some history here, and may not get every date right, but bear with me on the broad outline.
NEXT: It Could Have Been The Roaring Thirties|pagebreak|
It Could Have Been The Roaring Thirties
Back then, we had a massive move higher in the late 1920s that peaked with incredible optimism over corporate earnings in late 1929. Then came a crash, followed by a recession that took the market lower into 1932.
Then President Roosevelt came to power, and joining hands with Congress, the country spent a lot of money on very useful fiscal stimulus—you know, the WPA, the CCC, the TVA—and by 1936, the stock market had tripled, the unemployment rate was cut in half, and the country was looking and feeling strong again.
That is when fiscal conservatives in Congress decided that the country had overspent on the recovery, which was so strong it seemingly could not be stopped. They wanted to pay down the deficit, and President Roosevelt was roped into an agreement to not just cut back on fiscal spending, but also to raise taxes.
Marginal tax rates arched toward 90% on upper-income individuals, who then proceeded to do exactly what you would expect: They stopped working as hard to make money, since there was no incentive.
Businesses cut back on investment, and pretty soon the economy snowballed and the market crashed again, forecasting a second recession…which was on the nation’s doorstep by 1937.
The era that we now call the Great Depression was thus actually two crashes and two recessions sandwiched around three years of growth—which is eerily reminiscent of what we are seeing now.
The country managed to muscle its way out the trouble by borrowing to invest in the industrial capacity needed to fight World War II. Let’s hope that we don’t need to repeat that part of the history.
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