Two Cases For A Continued Bull Market, Ronald Reagan style. Both cases made by two very qualified sane men based upon the 1982 Economy and Bull Market begining. But, as much as I wish it to be true, I'm afraid I must agree with other less optimistic Economist and Novelist Thomas Wolfe who concluded "You Can't Go Home Again". Still, the Perma-Bears need to face the trillion dollar fact. There is a trillion dollars inside money market mutual funds earning less than 1/2% looking to be invested on any little pull-back. Yes, it's possible we stay in Bull mode through year end on are way back to pre-Lehman Brother levels. Still, the 2001-2002 market is fresh in my memory and my worry.
Excerpts from James Grants Sept. 19th, 2009 article: From Bull to Bear. James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery. Even more amazing is the fact James Grant is a student of financial history and Perma-Bear who just been converted to a Bull believer.
"...Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "The most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."
"Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today's economists suggest, the economic history of this country would have to be rewritten.
...
At the business trough in 1933," Mr. Darda points out, "the unemployment rate stood at 25% (if there had been a 'U6' version of labor under utilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points.
...
Our recession, though a mere inconvenience compared to some of the cyclical snows of yesteryear, does bear comparison with the slump of 1981-82. In the worst quarter of that contraction, the first three months of 1982, real GDP shrank at an annual rate of 6.4%, matching the steepest drop of the current recession, which was registered in the first quarter of 2009. Yet the Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5%."
Excerpts from Economist Michael Mussa Sept. 20th, 2009 presentation: Ex-IMF Chief Economist Rosy View as viewed by Kevin Hall -
"The recession is over and a global recovery is under way," he began, unveiling a pile of data and historical charts to support his view that forecasters regularly underestimate recoveries – and are doing so again.
Where the IMF foresees just 0.6 percent year-over-year growth in 2010 in the U.S. economy and 2.5 percent globally, Mussa sees 3.3 percent growth in the U.S. economy next year and 4.2 percent growth globally. He projects a U.S. growth rate of 4 percent from the middle of this year through the end of 2010.
All forecasts tend to under predict the recovery. … I think that's what we are seeing this time," said Mussa, now a senior fellow at the Peterson Institute for International Economics, a leading research organization in Washington.
...
Mussa pointed to forecasts made at the end of the 1981-1982 recession, the closest approximation to today's deep downturn. ...
The Reagan administration projected a growth rate from December 1982 to December 1983 of 3.1 percent, as did the Federal Reserve. In fact, the real growth rate turned out to be 6.3 percent."
Two excellent articles -with one common comparison flaw. They both use the 1982 Ronald Regan bull market beginning to make their case but ignore what happen in 2002 after a much smaller recession ended in 2001.
Both point to how Economist were too pessimistic in their growth forecast and correctly pointing out how the actual recovery starting in 1983 had six quarters of outstanding GDP growth (5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%).
They make an excellent point about Economist forecast but even rosy glasses Ex-Chief Economist Mussa is forecasting only 3.3% GDP for the USA next year.
This leads me to ask three questions:
1. How can 3.3% 2010 GDP led to six quarters of quarterly growth like the 1983 time period they reference?
2. Why do they ignore what happen in 2002 when the market declined for three straight quarters back to the 2001 lows, after the recession official ended in 2001?
3. Is America's 2009 economy similar to 1982-83?
Unfortunately (for me) 2009 is not like the 1973-83 stagflation economy. Back then Treasury Secretary Paul Volcker's needed to crush inflation with the highest interest rates in American history. ( I wishes this was 1982 so my savings would be earning 9-12% in my MMFs instead of 0.25%. I feel like I've been robbed by the 2001-2009 federal reserve policy ) .
If you are under 40 and think mortgage rates are a little high take a look at the 1979 to 1981 Bank Prime Rate in America. Notice how in 1981 the banks started lowing the Prime Rate (resulting from the Federal Reserve lowering the discount rates) from 20%to 11% in 1983. Yes, I said 20%.
This move alone allowed Stocks to rise as the value of each dollar of revenue or profit became more valuable in a lower inflation and interest rate environment. This phenomenon is call P/E expansion. You can see the proof from 1982 to 1999 as the average Standard & Poor Stock P/E rose from 7 to 32 as inflation and interest rates declined and the economy became more robust.
The decline from 20% in 1981 to 11% in 1983 also generated that fantastic six quarters of high GDP growth. I'd conclude that cannot be repeated in this environment.
Now just think about Car, Clothing and Appliance sales in 1982. The big three were all American. Imports were a much small percentage back in 1982. Today most appliances and clothing (just to give two examples) would be made outside America. In 1982 as those lower interest rates increased sales, American factories employed more American workers, who in turn had more money to buy more stuff (of which a much higher percent was made in America and nothing was made in communist China or Vietnam).
Now flash forward: Federal Reserve discount rates are already close to ZERO (no spending is being held back by high interest rates like 1981-82). Consumer debt is still at high levels and a recession like this causes even dual income employed families to want to spend less. Today when Americans do spend more money a much larger percentage goes to employing people outside America (than 1982-83).
Janet L. Yellen President of the Federal Reserve Bank of San Francisco (far more qualified then I) sees no comparison. And Nobel Prize Economist Paul Krugman explains why there is no comparison using the same logic.
"A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again.
... Post-moderation recessions haven’t been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand. And that means that the Fed can't just cut interest rates and boost housing. This recession is very different than the early '80s".
The Bottom Line
NO, this is not the beginning of the 1982-87, Ronald Reagan, Bull Market style economy. No I'm no Bear, just a Bull (on tip toes) who remembers the 2001-2002 market. Yes, we can defy gravity and remain in Bull mode for the remainder of the year. Still, this decade will not be remembered for the great American Bull Run. This decade will be remembered as the decade for emerging market stocks.
1982 will be remember for many things like the Jackson Thriller album.
July 27, 1982 | GetBack Media
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