This Is Like The Great Depression And Worse

Wellington Letter publisher Bert Dohmen discusses the economy, stock markets, gold, China’s Dubai-style bubble, and forecasts for 2010 and beyond with the McAlvany Weekly Commentary.

Dohmen on the US dollar, stocks, commodities and the possibility of gold finally decoupling from equities and other commodities:

“The dollar is going to be the big story this year, in my opinion. At the end of November we got bullish on the dollar and we said that’s going to be the big surprise from now on - a rising dollar. And a rising dollar really confirms our view on the stock market. As you know, in 2008 the US stock market had a major crash and at the same time the US dollar had a major rally. So, if the same correlation still works and there are good reasons for that correlation - and the same correlations exist in my view - then a declining stock market should be accompanied by a rising dollar.

Then you have to say, what other repercussions? In the January 5th Wellington Letter we said the dollar will rally, the stock market will decline and with the dollar rally all commodities, all of the hot markets of last year will tumble. That means emerging market stocks, emerging market bonds, commodities.

The big question mark is really gold and I would say there is maybe a 30% chance that the precious metals will be able to kind of resist the plunge in the commodity prices, or the decline will be less than other commodities.”

“If we don’t care about what’s going to happen this year, we take the five year view, we think five years from now precious metals should be higher, and I have that belief.”

“Now, it [gold] is really a global play. China has very little gold as a percentage of their reserves, I think it’s about 2%. They would have to increase their holdings of gold at least five-fold to get where other central banks are. So, there is a lot of pent up demand for gold as an alternative to paper money. And that is why I consider the question mark. Yes, you and I can make a guess, but we really don’t know what kind of an effect it will have.

That’s why I say the initial response in gold will be bearish and will go down with commodities. But, I think somewhere along the way gold will part company with the other commodities, and the other commodities will continue to decline sharply, that includes copper which everyone seems to love, and gold will start moving upward.”

Though the timing of it is impossible to predict, it seems that a market crash is brewing. After a major rally like this one, which moved to the upside very strongly and rapidly, we can expect an ever more rapid and powerful decline to the downside.

Gold bugs have anticipated a decoupling of the precious metals from the rest of the stock market, and perhaps that we are almost there. We’ve seen this before, in the last Great Depression, when gold (mining shares) decoupled from the Dow Jones around 1931. Note the significant decline and stagnation in the Dow Jones as Homestake Mining, a major gold producer at the time, exploded.

But that was during the Great Depression, and according to current GDP statistics and President Obama, we avoided depression, didn’t we?

At some point, gold will once again become the world’s reserve monetary unit, and that time is fast approaching.

“If you add those people back in there, people who haven’t worked in a year or more, then you get over 22% unemployment right now. I think we’re already pretty close to what we saw in the great depression.

If you take a look at international trade, in the first year of the great depression, international trade - which is really a very good indicator of global depression - at the time international trade plunged 15%. In the first year of the current recession - that’s the official word, I call it a depression - international trade dropped 32%. Now, that is huge.

When you take a look at credit contraction many of the credit indicators that I look at like commercial and industrial loans, bank credit, retail credit, credit card credit, etc., they have plunged now 20% to 30% in the last year. Usually, other big recessions, if we would see a drop in credit of 2% or 3% it seems horrendous. Now we’re counting between 20% and 30%.

It matters not what the government is saying, what investment bankers on Wall Street are saying, and not what the main stream media is saying. The fundamental economic numbers speak for themselves and they aren’t pretty. This is not a typical recession by any stretch of the imagination. In fact, many economists, analysts and advisers, contrary to popular main stream opinion, believe this depression will be a prolonged event stretching not months, but years.

“The first chance for a sustainable bottom will be in 2017. When you have such wealth destruction as we are seeing now, when you have such a contraction in international trade and credit and everything, you cannot have a big recovery.

You cannot have a recovery if you have no job creation. There is no job creation. You cannot have job creation when you continue to raise taxes, when you continue to - every day our great leader goes on the microphone and has more regulations. What entrepreneur in his right mind would start a new business right now or even higher more people under these circumstances of rising taxes, rising regulations.

And, the inability to get credit. That’s the second thing you need is credit growth. Without credit growth you cannot have economic growth.”

When will we have a recovery? As Mr. Dohmen points out, in a credit based monetary system, there will be no growth without credit.

Take a look at what happened in the stock market in the last 12 months. The rally has been fueled by what? Speculators who borrowed money from the government in the form of TARP funds or direct Fed stimulus lending.

So yes, the equities markets actually grew as a result of a massive infusion of credit.

The economy, however, has seen no such credit growth, because as we and others have pointed out, lending between banks and consumers/businesses is essentially at a standstill.

For now, this standstill in lending will continue, because the economy still needs to deleverage and wipe out all of the bad debt sitting in the system. Right now, no one trusts anyone’s assets, loan credentials or collateral, which means no one will lend to anyone.

The system will not bottom until all the bad debt has been flushed out of it. The more the government intervenes, the longer they will prolong the crisis.

You know what? We’re all so friggin’ spoiled it ain’t funny.

Yes, we’re miserable (by design, I believe). But go rent “The Grapes of Wrath” and watch it.

There is NO comparison between The Great Depression and what we’re going through now. If we had to endure anywhere close to what they did, I dare say more than half of us would rather commit suicide.

Well, no, it isn’t worse than the Great Depression.

People forget that about one-third of the US workforce was employed on farms in the 20’s and 30’s, and US ag output was a huge component of the US economy still. When the Dust Bowl hit, there was a huge and severe impact on a lot of people in ways that are not being duplicated now.

Money lost? You can make more.

Farming land lost due to desertification? That takes far longer to recover than re-funding a retirement account. As an example, farmland in some midwest counties most affected by the drought of the 30’s didn’t regain pre-1930 valuation until the 1980’s (when adjusted for inflation).

While this is very much a situation where our levels of debt, the banking system and other aspects have elements of the Depression in them, we can thank the Almighty that we don’t also have the Dust Bowl.

Great analogy. (And one of my favorite movies/books)

Given the high population of the urban areas today and the high concentration of farmland in corporate hands...if a perfect storm like that of the Great Depression occurred today..it would bring us to our knees.

And you are right..most of our population would not be able to cope.

Right after helping the democrats do it.

This is a ‘’Depression’’? Anyone who believes that bunk I’d suggest you find some member of the Greatest Generation. A WW2 vet or the widow of one and ask them if this looks like a ‘’Depression’’ to them. Guarantee they’ll laugh in your face and say “Sonny, you have no idea what a ‘’depression is’’. My 89 year-old mother knows what a depression is.’’ As bad as things are now’’, she told me, ‘’they can be a whole lot worse’’.

Your post is perfect!
When down and scared about our financial situation, the terror of this administration and it’s attack on this great country, and fear for my nephew and his future (in other words, when I’m feeling sorry for myself), I tend to put “The Grapes of Wrath” on to remind myself how great I actually have it in the good old USA-—and, if I need MORE, I’ll watch “The Good Earth”, with Paul Muni.
They both make you want to “man up” and trudge on.

>There is NO comparison between The Great Depression and what we’re going through now.

Even so, during the Great Depression there wasn’t the epidemic of mass starvation that would mark other countries’ depressions; but this upcoming one may well involve mass-starvation. Just think what would happen if suddenly it cost too much to transport food to big cities like LA, Chicago, Dallas or NYC.

Take this for whatever it is worth to you:

Here on the Georgia coast, my Man On the Streets guesstimate is one in five jobless. Can’t find work, lost a job, ( sometimes several in a row ) or just gave up trying.

20%, in other words.

Among young black folks? Closer to 50%.

My city is 58% black, and you’d be surprised at how much high-fiving, thumbs-up, hat-waving and hoo-rahing my “Don’t Blame Me, I voted for Sarah” bumper sticker keeps getting. Not all black folks are fools.

Hope. Change. Etc...

Elections have consequences...

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