I have been way too optimistic. I admit it. I didn’t see the extent to which the bursting credit bubble would impact our financial system and the stock and bond markets. Real estate price declines were easy to predict, what we like to call a no brainer, and I went on record warning of that pending disaster back in 2005.
I’m being told how bad it is by the media and by every passer-by who heard it in the media as well. I think they are right. In recent memory; this is the worst it has been. The tiny recession in 2001 caused the smallest rise in unemployment of any of the last five years except for the one starting in March of 1981.
Do you remember 1981? The prime rate and most home mortgages spent that year in the high teens, in fact, close to 20 percent. The unemployment rate was close to the mid- 7 percent range we currently have here in the U.S. The Consumer Price Index measure of inflation in 1981 was a solid 13 percent. Today the Prime Rate is 3.25 percent, and inflation will probably clock in for 2009 at about 1 to 2 percent. Which climate would you rather have?
Today, the battle cry is that banks aren’t lending. Back in 1981, the banks were lending. Of course they would lend. If you could lend money at 20 plus percent to reasonably well qualified borrowers wouldn’t you? The problem back then wasn’t the borrowing, it was making the payments at the high rate levels. Today, we have some of the lowest rates in history, but the bank’s capital ratios are making them scared to lend.
The other side of the equation we don’t hear about is that maybe there is a shortage of borrowers. Most people aren’t looking to make major acquisitions right now, so the demand for loans is down even if the banks were ready to lend. In true effect, is it any different than 1981?
We have arrived at a situation, via a different path, than we have observed during most past recessions. I suppose one reason this one feels tougher is that, with the exception of the mild recession of 2001, we have to go back to 1990 and then to 1981 to find experiences close to what we are experiencing today. We are just not used to recessions, with only three of significance occurring in the last 27 years. But, in fact, this slowdown is not worse, at least in terms of job loss so far, than many other recessions.
An economic textbook printed in the 1980s would highlight the trend of a 4 to 5 year business cycle with recessions or slowdowns considered normal to end each of these cycles. Between 1900 and World War II, the U.S. spend as much time in recession as it did in expansion cycles.
Could this recession we are currently engaged in become worse? Yes, it could. The reason it will likely become at least a little worse is that with no previous recessions of significance since 1991, there was a lot of excess capacity and business inefficiencies which were able to exist as long as the credit-driven business cycle continued its ways. The purge of that capacity and inefficiency is now taking place.
Like in most recoveries, we will emerge at a high level of efficiency, and begin the job creation process once again. I think it is realistic to expect a return to the shorter business cycle in the post-credit boom world we will find ourselves in, but that may not be so bad after all. At least we’ll consider it more normal and won’t spend so much time being distracted with how bad things are. Perhaps we’ll be more positive and focus on opportunity rather than the financial news channel’s spewing of doom and gloom.
There I go again. That darn positive attitude is still getting me in trouble. But, I’ve got 10 things going for me (1948, 1953, 1957, 1960, 1970, 1974, 1980, 1981, 1990, 2001), the 10 years when recessions occurred and we survived the experience. During four of those years, more jobs were lost faster than during the present one. For those of you looking for Great Depression #2, just keep watching. It’s not going to happen this time around, but at least you’ll have something to do.
For the rest of you, whether optimist or pessimist – hang in there. This too shall pass.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.