More Stormy Weather

Do I think we're headed into another Great Depression? No, that is impossible because the Great Depression was a time and place which is now past and can never return. Like every crisis we face, we measure our current prospects by the past. Iraq was not going to be another Vietnam for a thousand reasons. Amazingly, Iraq has turned out to be Vietnam for a thousand reasons no one could have guessed at the outset. This growing global economic crisis will not be a repeat of the Great Depression for a thousand different reasons. However, it looks to be a searing experience for many which will alter the rules to a degree and extent we simply cannot imagine right now.

I remember a conversation I had as a very young man with my grandfather, an old school capitalist who survived the Great Depression and considered "FDR" a curse. When asked about the 1929 crash, he said the Crash was not a huge event in itself. He said the news came slowly and the market rebounded so quickly that it seemed like a blip at the time. He said there was no single memorable precipitating event, rather it was the relentless stream of discouraging news and results -- month after month, quarter after quarter, year after year, that characterized the Depression. He said it just ground down optimism over a long period of time, squeezing confidence out of the markets and the entire system.

I recall this as I look at the markets and wonder what the next 2-3 quarters of earnings will present, how world recession plays out and a world of opaque balance sheets deleverage from among the banking and non-bank sectors. The Fed/Treasury have succeeded in putting a stop to runs on banks and the first panic, but there's plenty to suggest we're in for a remarkable, extended stream of bad news which won't be as susceptible to federal credit extensions.

It seems to me the Lehman shock, as those repercussions spread through the global financial markets, pushed the federal government into a situation akin to what the Japanese government has struggled with since their collapse in the late 1980's. If there are entities which are too big to fail, they can become the "credit zombies" -- effectively insolvent but too costly to unwind -- that still haunt Japan. At the time, it seemed obvious that the Japanese government didn't have the political will to let these giants fail. Robust capitalists in the West smugly discounted the Japanese lack of courage. Events of the past few months make pretty clear that -- when contemplating the consequences face-to-face -- we are similarly lacking.

I find it hard to believe we're facing anything less than a multi-year squeeze. All the talk of attractive share prices based on historical P/E's is just a snapshot out the window of a fast moving car. The earnings denominator is beginning a rapid, sustained decline and, until there's greater stability in overall economic activity, the price numerator is a lagging indicator I view as pure gambling to chase.

Where does it end? Conventional wisdom says the Second World War ended the Great Depression. It might as easily be said the Great Depression ripened the world for that awful war. I'm not saying we face a global depression or that a global war will follow. I'm simply saying we delude ourselves to somehow imagine we know better now. We delude ourselves to think the federal government -- and national governments throughout the world -- didn't do their utmost, with the best intentions and grasp of circumstances they had, to combat the economic collapse of the 1930's. We delude ourselves when we assume we're somehow smarter, more evolved, or wiser than that earlier generation. The proof is everywhere around us. Together, we all drank the kool-aid and accepted unprecedented good times as normal. Together, just as every generation before us, we'll find the challenges we face these next few years are, to some extent, beyond our comprehension because they, too, are unprecedented.