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So, what’s the deal with the economy?

Published: September 4, 2009
Section: Opinions


By the end of Spring ’09 after the collapse of several banks and insurers, the dozens of Chapter 11 filings, the more than $30 trillion that got vaporized on Wall Street (or a decade worth of gains), the huge stimulus package by the government, the Ponzi schemes, and of course, the media paranoia, everyone was talking about the coming depression and the end of the world, at least the financial world. Now, everything seems to be coming back to normal. So what is really going on?

Well, it is really hard to explain what is going on. The best economists are always trying to explain why everything happens after it happens, not before.

But one thing is for certain; we were never close from reaching an economic decline similar to the one from the Depression Era.

The decline in real GDP (Gross Domestic Product adjusted for inflation) since the beginning of the crisis was “only” 3.8% and we reached an unemployment rate of 9.5%. During the 1937-1938 Depression, the decline in real GDP was 18.2% and unemployment a mind-blowing 20%.

Don’t get me wrong, the economy did in fact get sick, but not as much as the media made it seem to be. The crisis was very similar to the one 30 years ago (73-75) where decline in real GDP was 4.9% and unemployment reached 9% and 20 years ago (81-82) where real GDP decline 3% and unemployment reached 10.8%. None of this crisis brought about the end of the world, so do not worry, yet.

In the table above you can clearly see how fast the major indexes reached bottom during this crisis. It is finally beginning to stabilize, at a fast, bullyish speed. But is it a real recovery?

Although the chart seems to be heading for good grounds, many financial gurus are suggesting that the end is not near, but rather, that the economic decline will continue for at least one more year. Robert Rodriguez, chief executive of First Pacific Advisors in Los Angeles, says that in March, investors feared getting crushed in a further decline. Now all they seem afraid of is missing an even greater rally. Therefore investors worldwide are buying up stocks at bargain prices right now and pushing the stock market to a recovery. But that does not mean that the actual economy is recovering. Factories keep shutting down, and people are still being fired. Add to all of this the increasing inflation due to the constant printing of money to keep the American (and the rest of the world) economy afloat.

Economist Jason Zweig writes for the Wall Street Journal: “The Dow had an uncannily similar 46.5% gain in the 117 days that ended April 9, 1930; it lost almost 51% over the next year. Another 47% upswing in 1971 led to a long, choppy decline of more than 37%.”

And don’t forget about the American economy addiction to oil. Right now, a barrel of crude oil is trading at around $67, but it will surely go up as demand worldwide goes back to a pre-crisis level. Will this stop the recovery? This is just another reason to go green and create jobs while doing so.

It seems like investors worldwide are following the advise of Baron Rothschild, a British banker, who famously said “The time to buy is when there’s blood on the streets”. And indeed, Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. People always tend to move in flocks, and it is common knowledge for investors these days that going against the stream (and being risk-loving) usually brings high dividends. This is contrarian investing at its heart – the strongly held belief that the worse things seem in the market, the better the opportunities are for profit. Or, in the words of investing guru Warren Buffett “You pay a very high price in the stock market for a cheery consensus.”

This basically means, that if everyone agrees with you in the stock market, then you are most likely to gain very little, if anything, from it, as everyone else is doing the same, and the opportunities for profit would be gone.

Therefore, I just hope that the people investing now are aware that this economic recovery may be a “W” shaped recovery, with an impending decline on the way, or a square-root (√) recovery, or even be followed by continues ups and downs for a couple years.

It is good to go against the crowd, just be sure to hold on to your horses and be prepared to have the ride of a lifetime, because this ride is far from over.