Guest Author: Ted Kavadas has a BS in Finance from the University of Indiana and an MBA from the University of Chicago. He has corporate experience in many areas including finance; analysis; pricing; strategy and business planning; marketing management; market analysis; and new product development. He has 22 years of investment experience in equities, forex, futures and options. Ted has publishing credentials including a Director’s Monthly article and Barron’s, and is a Seeking Alpha contributor. He was a contributor to the book “The Art of M&A Integration” -McGraw Hill (see pages 282 and 409). Ted also writes at his own blog EconomicGreenfield.
The vast majority of economists, market professionals and other commentators currently believe that we will be experiencing a long period of slow economic growth.
Will this consensus scenario actually happen? My analysis indicates that it will not, unfortunately. My analysis indicates that the current economic strength (dating back to roughly mid-2009) represents the type of intermittent economic strength that is often seen during periods of prolonged economic weakness. In other words, although it may seem as if the economy is experiencing a sustainable recovery, in fact we are in a Depression.
Gary Shilling wrote an analysis, featured in The Big Picture blog post of September 18 that indicates the commonality of intermittent economic strength during longer periods of economic weakness:
“Sure, real GDP grew in the last four quarters, but it’s common to have quarters of gain within recessions. In the 11 post-World War II recessions so far, seven, including the 2007- 2009 decline, had at least one quarter of rising real GDP within the recession. In fact, two – the 1960-1961 and the 2001 declines – didn’t even have two quarters of consecutive decline. Even in the 1929-1933 economic collapse, GDP rose in six quarters.”
If this is indeed a Depression, as I believe it to be, the implications are immense. We will experience further significant economic weakness. This weakness likely will be severe in nature. As to what factor may trigger and inflame this further economic weakness, I believe that we will experience what is commonly called a “shock.” As Shilling says in his commentary:
“Historically, however, recessions have been propelled by shocks. The post-World War II downturns prior to 2001 were caused by Fed tightening in response to threats of economic overheating and the resulting higher inflation. Since then, other shocks have been responsible.”
Many will disagree with this “Depression” categorization for a number of reasons. A likely argument will be that the strength of the financial markets argues against such. However, I would counter this argument by saying that one should consider whether such strength is truly representative of underlying fundamentals, or is such strength caused (at least in part) by the existence of asset bubbles? I have written extensively about the existence of asset bubbles as they are very pernicious on many levels. Traditional theory dictates that ultra-low interest rates as well as other presently existent conditions foster the formation of asset bubbles.
Another likely argument against our being in a Depression is that such a classification has been voiced by very few. I would counter this argument by saying that over the last few years, consensus forecasts have proven vulnerable to error.
In many ways, I wish my analysis proves completely incorrect, and that we are instead well on the road to a sustainable recovery. However, my analysis indicates otherwise.