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Thursday, August 18, 2011

Is This Another Great Depression?

John Maynard Keynes
The Dow is down 450 points, the S&P 500 is off 50 points, the 10-year Treasury note yield is close to 2%, and gold is up $31/oz.
As a long time observer of markets, I have studied and wondered about how it felt as the 1930s unfolded.  I 'm not claiming to be an expert on the Great Depression like our esteemed Federal Reserve Chairman, Ben Bernanke, but have read widely on the subject.

I find it ironic that Bernanke et al. find Federal Reserve policies  responsible for the duration as well as the magnitude of the 1930s economic downturn when, today, a well-supported argument is emerging pointing to the Greenspan/Bernanke Fed  playing a major role in today's debacle.  To wit:  look at today's inflation report and anemic employment number, both of which have been heavily affected by Fed policy.

It wasn't long ago that even the mention of the possibility of the U.S. entering a 1930s economic downturn was laughable.  The response was always a dimissive "we know too much today" in terms of economic policy to counter economic downturns.  Implication:  we are a lot smarter than they were in the 1930s!

The fact of the matter is that, at this point, just about everything, including the kitchen sink, has been thrown at the economy; and the response has been pitiful.

John Maynard Keynes, in the General Theory of Employment, Interest, and Money, famously painted the capital markets as a type of beauty pagent judging contest where the goal was to  guess which contestants others would think most attractive-thereby breaking down into an onion-peeling type situation.  Today all eyes are on governments.  What policies will they enact next?  What will be the outcome of the next press conference or Jackson Hole speech?  Investors are worrying about how other investors will react to government policies.  These events--in lieu of future earnings and other company and economic fundamentals.

Having said all this, I don't expect a serious double-dip type downturn and don't  believe a 1930s situation is unfolding.  Instead, I see this is as an opportunity with stocks offering exceptional dividend yields and growth prospects for those with a bit longer of an investment horizon.

Still, with politicians driving the bus, it is hard to hold onto confidence.  Be sure to keep your seat belt on!


  1. Let's hope we will finally turn away from the Keynesian failures of the past two and a half and let the economy recovery naturally. All this government mal-investment is actually retarding economic recovery. The best thing the law-makers could do right now is nothing, or if they feel they must do something start repealing the dizzying maze of regulations they've dreamt up over the past two and a half years.

  2. Such wild swings in the market goes to show how confused investors are.

    I wonder what the super-committee is upto and if anything good will come out of their meetings.

    Let's hope so.