Cast your vote – recession or depression?

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This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management.

As unpopular as it may have been over the past several years, I have been writing about the impending Recession in the United States and in other nations. I am rather used to criticism as a “perma-bear”, as it relates to our asset-based, over-leveraged mess that we call our economy. It has been no fun whatsoever to be the one to “call ‘em as you see ‘em”, but to be perfectly frank, an outlier view has been a necessary evil, and one that I have been proud to have had the guts to provide.

And so now I will say what the biggest risk of all is in my view. There is no doubt, whether it is in retrospect as most economists suggest or not, that (shhhhhhh …) we are in a Recession … Oh my Goodness, what an unpopular view – that the economy can actually shrink. And shrink it has, it is, and likely will continue to do. The question on my mind, as it has been over the past several months, is if we are going through a traditional Recession or a once-in-a -lifetime Depression? I have actually HOPED that Recession as the result of the unprecedented credit unwind would end up as just a nasty Recession at best. Sadly however, I feel that a Depression is either upon us, or soon will be upon us.

To be truthful or daring is important in markets and other parts of life. To be truthful, you must suck it up. To be daring is to avoid the bad news that is so obvious, but not at all too fun or exciting to focus on. There is no thought clearer in my mind, as I have stated many times over the past year, that we are in a Recession, or quite likely much worse. I hate to say this, as unpopular as it may seem (so what’s new with what I write?), WELCOME TO THE DEPRESSION. For my reasoning, please read on.

Click here for Bennet’s full report.

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.


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14 comments to Cast your vote – recession or depression?

  • Steven Kopits, Princeton, New Jersey

    Can someone define the difference between a recession and a depression for me.

    We have only one example of a Depression, that lasting from 1929-1940.

    The key ingredients:

    – speculative bubble (often in recessions)
    – non-accommodating monetary policy (n/a now)
    – string of bank failures, run on banks (n/a now, except Lehman)
    – very rapid run-up in unemployment to mid-20%’s (n/a now)
    – series of bad policy choices based on Soviet models which prevented adjustment (partially applicable now)
    — wage and price floors (n/a)
    — extensive direct govt involvement in the economy (WPA, PWA, other alphabet soups) (n/a)
    — punitive income and corporate tax rates (n/a)
    — entrenchment of unions (n/a)
    — war on business (n/a)
    — early attempt to balance budget (n/a)
    — instability in policy (n/a)
    — protectionist tariffs (n/a)

    To me, a ‘Depression’ means ‘I am panicking’. How do you define it?

  • Todd Johnson

    Yes it is a depression.

    The ‘everything is fine’ camp can not define what a depression is. I believe this group also stated that a recession was in place on December 31st. Not particularly useful or accurate.

    Of course we are in a depression. I don’t have to have a Harvard Economics PhD to know this is a time of severe layoffs; severe credit crisis; and severe housing crisis.

    Two differences from the 1929 era: tall buildings have windows that don’t open yet the suicides remain; and there are social programs for the poor and disadvantaged.

  • Unfortunately, there are very few people alive today who remeber the Grest “D” from an sdult viewpoint. We are truly in uncharted waters, and hoping that soemone in leadership knows what to do about the problem.
    Equally unfortunate, I can see nothing in error with what Bennet has said in this article.

  • Louis F Hill

    I like Steven’s list. I think there are a couple of things that should be added to it. I see a recession or pull back as a period where the consumer is not going into “hording” mode. I thing a depression as a bad enough recession where the consumer is shut off. After all the consumer and business is responsible for 75% of GDP.

    Because of the change in consumer behavior, I think we are in a depression. Some additional indicators of this are;

    reduced consumer borrowing – auto loans
    reduced consumer borrowing – mortgages
    reduced consumer spending – restaraunt visits
    reduced consumer spending – retail slump
    reduced consumer spending – autos slump
    baltic dry freight index = collapsing trade
    velocity of money collapse
    less driving – less gasoline consumption
    slumping stock volume
    slumping commodities
    slumping S&P 500 earnings
    increasing bankruptcies

  • Just Me

    A recession is 2 quarters of negative growth and a depression is 5…after Q1 09, we will be in an “official” depression. Of course there really is not set of rules, but the 2 and 5 above are considered by me and most economists.

  • Robert Loest

    I don’t see how we can avoid a depression, given the sheer level of destruction of debt and credit. It is comparable in this respect to other depressions, global or national. I suspect what makes something a “great” depression is that it is not restricted to one country, like Japan, but affects a majority of the productive capacity of the global economy. But to me anyway, it’s clearly a depression, but hopefully not a great depression, even if Europe follows the US. That will depend on the developing world economies.

  • Comment from Bart Hall, De Soto, Kansas: In my personal definition, recessions are simple inventory adjustments whilst depressions are balance sheet adjustments. Everything else is merely symptomatic.

    The current balance sheet adjustment is likely to be particularly wrenching because it involves, for the first time since 1837, the simultaneous collapse of three bubbles — equities, real estate and commodities. The 1873, 1893, and 1929 depressions included only two.

  • Gerold Becker

    As always, Prieur, I cannot fault your blogs or the bloggers you select. I just wish they weren’t right so damn often…
    Still, it’s good to know the license number of the truck that’s running us over.

  • Frank Lotrario

    We have raised a generation of people living out of control, accumulating masses amounts of debt through credit cards and home equity loans, etc. If you want it, buy it !!! The only consideration was, ” can I afford the monthly payment ? ” The banks, car dealers, retail stores, appliance stores, boat dealers, travel agencies, jewlers, etc. were all masters, through clever advertising, at making the stupid public feel that not only they could afford anything they wanted, but they deserved it. Everyone wanted to live and feel like the rich and famous. People earning $30,000 a year lived over their heads and people earning $1,000,000 a year lived over their heads also. Credit card limits exploded, with many people using their cards for living expenses so they could invest more money than they could afford in their 401K plans and private equity accounts to take advantage of the ever increasing stock market without realizing that all the debt they were accumulating was fueling the earnings of the stocks they were buying and it was all doomed to collapse. With stock accounts, 401K accounts, home prices, etc. all skyrocketing, everyone felt rich and thus secure to borrow more and spend more and invest more because it would be simple to sell off some stocks and eliminate the debt quickly !!

    -Now people are under water on their homes, cars, boats, vacation homes, etc.
    -People are maxed out on their credit cards with credit limits being lowered rather than increased.
    -Brokerage accounts and 401K accounts are devestated.
    -The job lay-offs are exploding.
    -Retired people that are fortunate to have significant savings are getting 2% or less on one year CD´s and under 1% on treasuries, drastically decreasing their income.( for someone with $1,000,000 who was getting only 5% interest before, he has a reduction in income of $30,000-$40,000. )
    -With the potential company bankruptcies out there, what will people do if they lose company pensions?
    -With the devastation in the stock market, and the resulting drop in the accounts of state pension funds throught the country, what will happen if they are forced to lower payouts to their pensioners in the future ?

    I can go on and on, but I know you are all aware of everything I´ve written above and much more. Whether one will call it a Recession or a Depression, there is going to be blood on the streets and we are only at the beginning of a long period of PAIN !!! Americans have been living in a fantasy world for many years in COMPLETE DENIAL OF REALITY and now unfortunately will have to pay a PAINFUL PRICE FOR THEIR STUPIDITY !!! For those who are predicting that there will be a recovery in the 3rd quarter of 2009, many of them are the same people that were predicting in April 2008, when the Dow was 12,500, that it would reach 16,000 by the end of 2008.

    I ask this question. With all the problems I listed above and many more out there, WHERE THE HELL WILL THE MONEY COME FROM TO FUEL THE ECONOMY THE WAY DEBT OVERSPENDING FUELLED THE ECONOMY AND BUsINESS GROWTH OVER THE PAST 20 YEARS ????…..THE GOVERNMENT CAN´T DO IT IN MY OPINION. THEY ARE ONLY PUTTING BAND AIDS ON AN OPEN HEART SURGERY WOUND. I hope someone has an answer, because if no one does, we in store for a catastrophe, and you can call it whatever name you like !!!!!!!!!

  • Paul C Sandison

    As well as the aspects dealt with by other contributors, the exact length of time of negative growth is certainly one of the most important.

    A lengthy passage of time with a depressed production output and depressed national income spreads a cold hand across almost all economic sectors in the national economy. Through global trade and finance the harsh freeze also spreads to most other countries in the world and the resulting reciprocal negative economic pressures make it further unlikely for any affected country to get a pull up from anywhere else. The overhanging risk is that all will then sink down far deeper than in a recession and for far longer.

    Secondly the sheer rapidity of the present downturn and the effect it has had in quickly transforming it into a synchronised, global one would indicate that the length of time of the malaise is likely to be severe.

    The question becomes whether any country, large or small, can avoid it at all, and ultimately how any larger country or group of countries can begin to stand steadily and grow, providing a positive effect on others to do the same. Theories of development economics will be tested again as the focus shifts from the academic discussions on how to help the developing world, to how the developed world can begin to grow once more.

    A recession is at least two quarters of negative growth i.e. 6 months. The only example of a depression was the Great Depression which lasted for 42 months, exactly 3 and a half years, or 14 quarters of negative growth. For an equivalent scenario this time, and assuming that the downturn began in mid 2008, then a depression would end in December 2011.

    However the Alt-A resets will continue until the end of 2012, so some would say that it will be worse this time, since the US housing defaults and the UK ones which are also increasing in volume, will keep coming.

    Yet other people cannot get their heads around the idea of at least another 36 months of negative growth, for mind simply boggles at it. It is like having one’s life put on hold by going into hospital for 6 months. The prospect of 3 and a half years in hospital is a heavy one. So too is a global depression.

    There could be plenty of time to review how the world got into this sorry pickle in the first place. Plenty of time also, to call to account those who abused the normal accepted practice for setting interest rates. Many other facts will rankle and demand to be addressed.

    It will be interesting to see how future years will judge the culprits of the last ten years.
    The deficit spending both then and now, and a whole range of other malfeasances like the fraudulent mortgage mis-selling to the poor, the total absence of due diligence when rating securities as well as the lack of enforcing the regulatory and legal safeguards that were in place, will remain festering sores and the general population will begin to learn economic facts at a rate not seen since the 1930s.

    Called into question is also the personal abolition by powerful individuals of any normal professional ethics and social responsibility to their companies, employees, customers, shareholders, their own countries and billions of fellow human beings across the world.

    Can the lure of greed through astronomical salaries and bonuses really be cited as a mitigating factor in malfeasance, or as an added indictment? And an indictment of whom? Of such stuff are great plays written.

  • Frank W

    I have mentioned a number of times on this blogsite that the computable bottom for the S&P500 during this cycle is just above 400. We are way above it. This number is determined by the late 2007 peak and the low of the previous cycle which occurred in 2002, if memory serves me correctly, as that probably constitutes the major support level. Yet the market ain’t doing nothing, but bumping along sideways. One economist or analyst or advisor after another keeps telling us how bad its going to be this year and maybe next. But the market just keeps going sideways. Maybe it will finally fall. However, Hussman says that in half the recessions since WWII the market has bottomed early, gone sideways for quite a while and then gone up. It may not be a bad idea to keep one eye open and your mind not completely closed and even possibly bet against yourself a bit. It is very difficult to predict the future.

  • kdc

    Pieur, I respect your opinions and the quality of the writers. When Bennett Sedacca, changed his prediction of the market from bullish to depression in two weeks time I became alarmed. His insight is amazing, sometimes early, but always right. Now, within days you have another person seeing us sliding into a depression, this scares me. I now see why so many wealthy people are stock piling physical gold, not to mention the fact that ammunition is getting hard to find, from what I read. I try to think positive, but anyone who doesn’t prepare for the possibility of a coming storm is fooling themselves. Both my parents were adults during the depression and they are still alive, I feel bad they may have to go though this twice in a lifetime. Their depression era insight has made it so I am financially prepared for the coming rout, god be with those who are not. I look forward to each and every posting you send. Thank you.

  • I like to call it the Great Regression. Regression to the mean will get us all.

  • Frank Lotrario

    Pieur….Thanks for all the valuable information you provide us to help us navigate through these difficult times and thanks also to all the contributions of your readers above !!!!!!………FL

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