Having studied financial markets for several years, it’s fairly clear to me that the U.S. economy runs in boom and bust cycles. Nobody drives that point home better than famed investor Ray Dalio in his now legendary video How the economic machine works. In this presentation Dalio explains how interest rates and liquidity run in clycles. Dalio masterfully points out how the Federal Reserve attempts to balance inflation and interest rates by constantly tweaking the nations econmic knobs. This leads to boom and bust cylces in the US economy.
The time has seemingly arrived for another one of Dalio’s predictable ‘bust’ cylces so to speak. Except this time feels different, accelerated and drastic. Other factors such as a raging pandemic, trade wars and international supply chain disruptions have many Americans wondering, what if this bust cylce is the ultimate bust?
Unemployment numbers off the chart
Over the past six weeks the nation has experienced deep losses across the economic board, in what is seemingly only the beginning of the crisis. Interest rates have been slashed to near zero. The pandemic has sent unemployment numbers to heights not seen since the 1930’s, at the peak of the great depression.
Over 17 million Americans have been laid off or lost their job since the COVID-19 pandemic/restrictions began. Last week alone 6.6 million Americans filed for unemployment benefits. April’s data is only beginning to come in, however the chart below illustrates the drastic rise in unemployment America saw in March. At this rate America’s April jobless figures will rival the heights of the worst economic crisis the nation has ever seen.
One noteworthy hindrance to the overall figures is the fact that many Americans report not being able to file for unemployment benefits, becuase the lines are so overwhelmed with calls.
Similar to the 2008 recession, the early 1920’s was a time of great finacial turmoil. Industrial production had fallen by almost 30 percent. By 1921 unemployment was as high as 19 percent by some accounts.
Let the good times roll
The recession of the early 1920’s was short lived. Followed by a period of economic prosperity very similar to the 2010’s.
The mid 1920’s saw a surge in investments fueled by low interest loans and speculation. America’s stock market flew to new heights, an unprecedented boom and the roaring 1920’s was born.
The mid to late 1920’s are famously known as an era of excess, materialism and unprecedented financial prosperity. Money was cheap, electricity was becoming the norm in households and quality of life improved for the majority of Americans. For the first time (certainly not the last) in American history the average citizen began taking on large amounts of debt to speculate with in the stock market. From 1921 to 1929 the market grew by more than 4 times, similar to the the economic boom of the 2010’s
The Begining of the End
By 1929 many savvy investors were out of the market. Joseph Kennedy once famously said that he knew it was time to get out of the market when the shoe shine boy was giving him stock tips. The top was in and in September of 1929 the markets began to stumble. This became a self propelled downward spiral, fueled by declining wages and over-leveraged banks. A lost decade ensued, marked by bread lines that stretched for miles and an impoverished nation.
Welcome to the new age
Mark Twain once so elegantly said ‘History doesn’t repeat itself, but it often rhymes.’ Fast forward to 2019 and life is good. The stock market has grown by over three times since the 2008 financial crisis. Home prices have not only recovered but achieved new, unheralded heights, especially in densely populated suburban areas.
But under the facade of stability, similar circumstances that caused the 1929 crash were festering ever closer to the surface. By 2019 U.S. comsumer debt had reached an all-time high of over 14 trillion dollars.
Most American’s are saddled with enormous amounts of debt. Student loans, mortgage payments and car loans leave the majority of people with very little to save. Any event that jeopardizes the next paycheck risks the entire house of cards falling for the average American citizen.
The Black Swan
The coronavirus pandemic and the ensuing lockdowns are the type of catalyst that can kick-off an economic downturn. Similar to the market crash in 1929, the brief recession after the 2001 attacks and the housing bubble in 2008. COVID-19 caught the entire planet off-guard, accelerating Dalio’s unavoidable bust cylce. Most of the world’s nations are locked down. COVID-19 is ravaging the planet as scientists and doctors scramble to find a cure. With each passing day the world’s economy slowly unravels.
By definition a depression is characterized as
- A dramatic downturn in economic activity in conjunction with a sharp fall in growth, employment, and production.
- Depressions are often identified as recessions lasting longer than three years or resulting in a drop in annual GDP of at least 10 percent.
By some accounts America is already in a depression. But, by definition that’s not possible, the recent decline would have to continue for several years. However, the severity of unemployment claims, loss of GDP and historic demand at food banks already paint a bleak picture.
Economist Stephan Moore warned that if the coronavirus lockdowns are enforced past May first that the world could be heading for an economic catastrophe.
Famed Wall Street institution Goldman Sachs is predicting that the U.S. economy will shrink by 24 percent next quarter. This loss would be 2.5 times bigger than any single decline in US history. Dwarfing the 10 percent decline the nation saw in one quarter in 1958.
Now that we’ve had a chance to compare today’s economic situation to the one almost 100 years ago. We can see that the risky financial habits of the past are still prevalent, as the world’s economic outlook turns dim. This creates the perfect recipe for disaster, unrest and poverty unseen in America for almost a century.
Is the world driving head-on into a depression? Nobody can predict the future. The one conclusion that can be drawn from the data we have, is that the human race stands at a crossroads. One between saftey and security. Between poverty and prosperity. Between the future and the past.