-- Posted Friday, 8 September 2006

Rick’s Picks

For investors who’d rather be smart than lucky 

Is the Second Great Depression on its way? Not according to Bob Bronson, whose downbeat quantitative forecasts have been featured here often. Bob predicted the current housing bust fully two years earlier than most of his colleagues, and I don’t mean to suggest that he was premature. In fact, using rigorous analysis, Bronson Capital Markets Research saw a topping pattern in real estate that most other observers either failed to notice or regarded simply as a bullish plateau in a more or less endless boom. Along with my friend Jas Jain, Bob has been among the most bearish seers around, a K-Wave proponent who sees deep recession persisting until at least 2009.

So why does he believe the property bust currently gathering force will not lead to a full-blown depression? Well, it depends on how one defines a “depression”. Bronson notes that the 1930s downturn was very severe by anyone’s reckoning: “The consumer price index (and the GDP deflator) declined by 24 percent from August 1929 to March 1933, after having been virtually flat from 1921 to 1929. This decline was accompanied by a fall in real GDP of almost 30 percent” and unemployment of almost 25 percent. Now, he says, “although we’re in the next K-Cycle Winter, our work shows that the coming severe recession and its after-shock one(s) will reach only a fraction of those extremes.” By this, he means an approximate doubling in severity of bull-cycle recessions, though no depression.

I Expect Far Worse

Long-time readers of Rick’s Picks will already know that I am expecting far worse, for several reasons. For one, the world had a sound money system when the stock market plummeted in 1929; this time around, all of the major currencies are very nearly worthless. Second, the U.S. economy was based on the production of real goods, not ethereal financial products such as are keeping the global economy afloat nowadays. Finally, neither public nor private debt was anywhere near today’s levels.

Even so, most economists evidently believe that the world’s central banks possess sufficient monetary “flexibility” to head off a deflationary collapse. For an excellent summary of this position, check out a relevant report by the IMF by clicking here.  My take is that there is simply too much debt to be monetized away. Moreover, even if the cental banks were inclined to bail out debtors by effectively destroying creditors as a class, it would require nothing less than a ruinous hyperinflation to do the job. Once you've read the IMF report, then browsed the Rick’s Picks archive on the topic of deflation, you may be better able to judge for yourself.

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