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Why It's Worse Than the Great Depression, and Other Reasons to Be Bullish

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I spent last week in Vancouver at the 11th annual Agora Financial Investment Symposium, put on by the folks of The Daily Reckoning newsletter. This was a truly wonderful event, for a couple of reasons. One, while beneficial, debate conducted impersonally over the Internet has a tendency to turn unproductive. When people debate face-to-face, it's a much more rational, orderly affair. Two, the speakers were first-rate. I was able to profile David Walker, Vitaliy Katsenelson, John Mauldin, Andrew Lowenthal, Marc Faber, and Bill Bonner -- all respected experts in their fields.

But there were many others I wasn't able to fully profile (I can only type so fast). In this article, I want to share a few of their thoughts I was able to jot down.

Barry Ritholtz on market cycles: Everyone says the market went nowhere from 1966-1982. But that isn't true. There was tremendous volatility. There were 40% sell-offs followed by 75% gains.

It's no different this time. During the 2008-2009 market crash, stocks fell 55% over 17 months. That was faster than usual, but not atypical. If you look at a composite of 29 bear markets, there's a clear pattern:

  • During the initial drop, markets fall an average of 56% over 29 months.
  • Next comes a recovery rally, with markets surging 70% in 17 months.
  • Then comes a second fall, with markets dropping 25% in 13 months.
  • After that, you get range-bound markets, trading in a range that's 52% wide and lasts 5.6 years.

Your goal today should be to preserve capital for the next bull market, which will probably start around 2017, or something like that.

Frank Holmes on international opportunity: In countries that are extremely poor, there is hope. And when there is hope, there is tremendous upside. You go to India, and it's so poor. But the people are so optimistic. You go to Europe, and it's nothing but fear. Same in the U.S. The most dangerous situation is when people become humiliated. Their confidence becomes destroyed, and then they want to get even. They become bitter, not better.

Frank Holmes on changing international landscapes: In 1998, Russia blew up, and Greece was a very strong country. Today Russia is strong, and you know about Greece. Indonesia was a basket case 10 years ago. Today it's one of the best economies in the world. It all changes so quickly. These countries have learned from their mistakes and they're ready to thrive.

Right now, China has a real estate bubble. It will crash. But the key difference between China and America is that the Chinese hardly have any mortgages. So prices will fall, but then jump right back to all-time highs. You can have a quick recovery if you don't have a huge debt load.

America produces more sports trainers and lawyers than engineers. When things like that get out of whack, you get problems. You get bubbles.

Frank Holmes on market volatility: It's a nonevent for stock markets to swing 15% peak-to-trough every year. That's the average. For emerging markets it's 40% per year. Same for gold stocks. That's what you should expect. It's just what markets do: They fluctuate. This scares so many people. But it's important to realize that when they fall, mean reversion becomes a powerful force. The big money to make is when markets are down. Growth is three times greater in emerging-market economics, but there's three times as much volatility. Don't let that scare you. It's normal. Use the volatility to your advantage. Don’t become bitter. Become better.

Addison Wiggin on government intervention: We don't have a beef with social justice, but we ought to be able to pay for it. And we need to have a way for price-movers, small businesses, to create the jobs. We do need government: to enforce contract laws, for security, etc. But I don't believe the government needs to be making decisions for us at the base level.

Chris Mayer, editor of Mayer's Special Situations, on cheap stocks he likes: Mentions Foster Wheeler (Nasdaq: FWLT  ) , Zhongpin (Nasdaq: HOGS  ) and A.O. Smith (NYSE: AOS  ) .

Byron King on the oil disaster: The insurance industry rated the risk of a large deepwater rig [like the one associated with BP (NYSE: BP  ) and Transocean (NYSE: RIG  ) ] sinking at zero percent. Zero percent! It was just like Titanic, or the Space Shuttle Challenger. People thought it could never happen. It was a failure of imagination.

Doug Casey on the Great Depression: Our future will not just be worse than the Great Depression in the 1930s. It will be much worse and much different. This will be the biggest thing since the Industrial Revolution. It's that big.

How can I make that assertion? It's a shocking assertion. But let’s look at the Great Depression. There was very little debt in the world back then. Importantly, there was almost no consumer debt. There were no credit cards. If you wanted to buy something, you used the layaway plan. Today there's a huge amount of consumer debt. During the Great Depression, real estate fell 90% in some areas. But real estate taxes were de minimus back then. Banks required 20% down for mortgages back then. And these were five-year mortgages -- not 30-year mortgages like we have today.

Even the government had very little debt back then. You know how it is today. It's out of control. And I'm not even talking about Social Security's unfunded liabilities. I'm talking about debt needed to bail out the FDIC. Debt we'll need to bail out SBA loans. Guarantees for General Motors, Fannie and Freddie. There are scores of debt promises that will all come due. There also weren't any wars in the 1930s. Now we have two major wars. That's a drag on the economy we didn't have back then. There were also hardly any income taxes to speak of back then. There were no sales taxes. Now we're talking about a VAT tax. The government today is sucking the productive life out of the economy in ways we couldn't dream of back then.

[Please note: Doug Casey has been essentially saying the same thing for 30+ years. He brings up interesting points, but his track record should be kept in mind.]

Me, thinking to myself: The main gripe at this conference are deficits caused by runaway entitlement benefits. Fine. But the average attendee is at least 65. How many of these folks used their Social Security check to come to an event to complain about Social Security checks? Makes me wonder. Long live the Tragedy of the Commons.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (43)

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  • Report this Comment On July 28, 2010, at 5:23 PM, Gorm wrote:

    Just wait til late this summer and fall. Shocks are coming that will stir America and instill fear among many.

    As states put their "balanced" budgets together they'll be forced to either make severe cuts or increase taxes. Why? Because things have changed for the worse. Using MI as an example, and it is NOT among the worst:

    1) Business tax revenue is down. The ailing have less income on which to pay taxes. To retain the healthy ones, the State and municipalities are giving tax abatements for modernization, expansion, etc. The job quest is supreme but how long can government make tax concessions without totally restructuring? Government does NOT proact, it simply reacts!!

    2) MI is mired in the old "manufacturing" world when increasingly there is less stuff produced but more services. Our inept legislature, like so many others, deferred to others to deal with that change.

    3) MI already heard the Feds are expecting state to assume Medicaid costs, ie an increased $300M to $500M unplanned expense to add to the cost side. This could be a backend Fed approach to reducing their deficits while piling onto states.

    4) MI skirted through last year using stimulus dollars. Not going to happen this year. All the hurting MI cities are painfully aware revenue sharing will be DOWN and they to must CUT.

    5) Also, these pressures exacerbate the underfunded pension liabilities these entities have, ie earn 80% of wage after 25 years service.

    So, how does the state ask the hurting to pay more so the legislators don't have to make tough decisions? Find it difficult to believe NEW taxes will be the solution. So, given all the layoffs, decreased services, increased suffering, it will be painfully aware how dire are our straits - not to mention that these cutbacks and layoffs serve to hurt others who sell to the state / municipalities or those who used to work for one!!


  • Report this Comment On July 28, 2010, at 10:23 PM, HectorLemans wrote:

    Hey Doug Casey...let me know how that kind of thinking works out for you and your investments 30 years from now. You're probably right - the only way we can make this world better is going back to the golden pre-depression age. Where men were men, and women and colored folk weren't allowed to vote. Good times...truly good times

  • Report this Comment On July 29, 2010, at 7:54 AM, ner25 wrote:

    'There also weren't any wars in the 1930s. Now we have two major wars.'

    Given that the worst war the world has ever known started in 1939, I'm inclined to take the rest of Doug Casey's comments with a pinch of salt, too. The two major wars he's claiming right now don't even come close.

  • Report this Comment On July 29, 2010, at 1:50 PM, mpendragon wrote:

    Our public debt situation is mostly due to borrowing money to pay for tax cuts that primarily benefited the wealthy (aka: supply side stimulus for the last recession), two long wars, and a decline in tax revenue caused by the decline in GDP.

    The stimulus to get us out of this is really quite small, I would say too small, in comparison.

  • Report this Comment On July 29, 2010, at 10:23 PM, Pat4Ra wrote:

    About social security's unfunded liabilities, what is the real truth? I received an email which purports to debunck 5 myths about social security as follows:

    Myth #1: Social Security is going broke.

    Reality: There is no Social Security crisis. By 2023, Social Security will have a $4.6 trillion surplus (yes, trillion with a 'T'). It can pay out all scheduled benefits for the next quarter-century with no changes whatsoever.1 After 2037, it'll still be able to pay out 75% of scheduled benefits—and again, that's without any changes. The program started preparing for the Baby Boomers' retirement decades ago. Anyone who insists Social Security is broke probably wants to break it themselves.

    Myth #2: We have to raise the retirement age because people are living longer.

    Reality: This is a red-herring to trick you into agreeing to benefit cuts. Retirees are living about the same amount of time as they were in the 1930s. The reason average life expectancy is higher is mostly because many fewer people die as children than they did 70 years ago. What's more, what gains there have been are distributed very unevenly—since 1972, life expectancy increased by 6.5 years for workers in the top half of the income brackets, but by less than 2 years for those in the bottom half. But those intent on cutting Social Security love this argument because raising the retirement age is the same as an across-the-board benefit cut.

    Myth #3: Benefit cuts are the only way to fix Social Security.

    Reality: Social Security doesn't need to be fixed. But if we want to strengthen it, here's a better way: Make the rich pay their fair share. If the very rich paid taxes on all of their income, Social Security would be sustainable for decades to come. Right now, high earners only pay Social Security taxes on the first $106,000 of their income. But conservatives insist benefit cuts are the only way because they want to protect the super-rich from paying their fair share.

    Myth #4: The Social Security Trust Fund has been raided and is full of IOUs

    Reality: Not even close to true. The Social Security Trust Fund isn't full of IOUs, it's full of U.S. Treasury Bonds. And those bonds are backed by the full faith and credit of the United States. The reason Social Security holds only treasury bonds is the same reason many Americans do: The federal government has never missed a single interest payment on its debts. President Bush wanted to put Social Security funds in the stock market—which would have been disastrous—but luckily, he failed. So the trillions of dollars in the Social Security Trust Fund, which are separate from the regular budget, are as safe as can be.

    Myth #5: Social Security adds to the deficit

    Reality: It's not just wrong—it's impossible! By law, Social Security's funds are separate from the budget, and it must pay its own way. That means that Social Security can't add one penny to the deficit.

  • Report this Comment On August 04, 2010, at 11:48 AM, cmfhousel wrote:


    "Retirees are living about the same amount of time as they were in the 1930s. The reason average life expectancy is higher is mostly because many fewer people die as children than they did 70 years ago."

    I beg to differ. In 1935, life expectancy for someone who reached 65 was 12.4 years. Today, it's 18.1 years.

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