The Cycle of the Storm

For the past several weeks, and often within the course of a given week, the tone of news about the economy has been like a roller coaster. One week housing starts or corporate earnings are unexpectedly up. The public likes it, and so does Wall Street.

Yet another week a surprising uptick in jobless claims hits. The public turns pessimistic again and the Dow takes a dip. Then Chairman Bernanke says there are strong indications that the economy has bottomed.

So we’ve entered a period of mixed signals and ambiguous indicators. Think back to the first quarter of this year, and it shouldn’t be hard to see the difference. After a brief period of collective optimism as the new administration came took over, the stark realities of an incredible tsunami of layoffs set in. The stories seemed increasingly grim as we stumbled our way through a tough and frightening first quarter.

In keeping with the season, the green chutes stories started showing up in the spring, and early in the summer some of the bolder pundits were among the earliest to pronounce the recession dead.

Against the backdrop of the beginning of 2009, the current mixed signals seem, in contrast, to be a good sign. Recovery doesn’t happen all at once, so it stands to reason that at the beginning of a recovery the signals would be mixed.

Just as there was a succession to the tumbling of the various sectors--starting, of course, with the banks and the big investment houses--there will be a sequence to the recovery. The crisis began with the banks, and the recovery seems to be starting with the banks. There’s really an elegant symmetry to the whole thing. A line from Yeats, “A terrible beauty is born,” comes to mind.

Remember, the signals were also mixed at the beginning of the downturn. Through 2007 and the first three quarters of 2008, the picture was cloudy and confusing. Unemployment began to rise well before the Bear Sterns and Lehman collapses. There were plenty of signs early on that something was amiss with the economy, but most people didn’t really have a clue what was coming.

There were recurring stories in the news about the subprime mortgage crisis, but people were too distracted by the noise of the energy-price crisis. But the true crisis, already well into its formation behind the scenes, wasn’t about energy at all.

Most people who were starting to feel the pinch of a nascent downturn thought it was all about the gas, until the collapse of the big financial firms in the fall of 2008 brought on a storm of a magnitude that no one was expecting. It was an economic equivalent of getting caught off-guard by hurricane Katrina. Few knew how serious the economic storm would actually be, so most of us were unprepared.

Indeed, one could say that the life cycle of a recession is like unto the life cycle of a hurricane. There is a period of gathering clouds, when no one is sure what course the storm will take and how much strength it will gather at sea before making landfall. This was 2007 and most of 2008. Especially given the behavior of the stock market, it would have been just as easy for the casual observer, entering 2008, to conclude that another boom could be in the making rather than a astronomical bust.

But then the storm struck in all of its wrathful, furious glory, leaving an immediate trail of astonishing devastation. This was the fall of 2008.

Then we went “into the eye,” a period of deceptive calm that gives few warnings of the fury that is still to come. This was the period from around just before the election through shortly after President Obama’s inauguration.

Once we were out of the eye, a second wave of fury ensued with the staggering tumult of job cuts as companies were forced to deal with decapitated credit lines, dreadful year-end results, and abysmal first-quarter forecasts.

In the spring the clouds showed some signs of breaking up and the storm signs of weakening. And through the summer bursts of sunlight have begun to show through gaps in the cloud cover. Is it time to send a bird out of the ark to see if it brings back a sprig of leaves?

Let’s just hope, to follow the metaphor through, that this is the end of the current hurricane season, and that there isn’t a Rita building strength in the tropics to unleash a second wave of fury after the economic Katrina. Sphere: Related Content

The New Austerity: How Long Will It Last This Time?

According to a column in the Washington Post, “a growing number of Americans have acquired a voracious appetite for tips on, among other things, how to slash grocery budgets, or how to throw a child's birthday party for under $25, or how to save thousands annually by changing one's own oil, hanging clothes to dry, carrying bag lunches to work, and other everyday lessons in leaner living.”

Before quoting that column, however, I left out one vital piece of information: it was published more than 16 years ago.

You see, those of us who are old enough to have experienced more than, say, one or two recessions that occurred before the current one, can remember (or at least should remember) that something like this, though perhaps not quite of this magnitude, tends to happen around once each decade.

Some big financial catastrophe, like an energy crisis, a savings & loan crisis, or a speculative bubble, causes the stock market and the underlying economy to tank and, suddenly, conspicuous consumption is shunned; frugality becomes hip; coupon queens appear as guests on daytime talk shows, demonstrating techniques that supposedly sometimes even allow them the pleasure of receiving rather than giving money at the grocery checkout; numerous books with titles like How to Live on Nothing materialize from the ether and roll off the presses; and pop-finance gurus suddenly start saying things like “No, silly -- you should never view your home as an investment. It’s a lifestyle choice.”

Yes, folks. Although, due to youth or other factors, not all of us may realize it, what we’re watching right now is a rerun. And the original airdate was not even from last season, by a long shot.

But we Americans, unfortunately, are often viewed as being infamous for our short memories. Just a short time after the years in the 1970s of waiting in line for hours at gas stations and rationing based on whether your license plate number ended with an odd or even digit, here we were driving ginormous SUVs as if OPEC had never existed. For around 25 years, gas prices in the U.S. fluctuated inside a relative comfort zone between $1.00 and $1.99 per gallon, and everyone was happy until the big psychological threshold of two bucks started to break.

And just a few short years after the recession of the early 1990s that ushered in, along with a buyer's market in real estate, “the new frugality” referenced in the Washington Post column I quoted, the conspicuous consumption party was on again. Twentysomething entrepreneurs were spinning lame online business concepts into multi-billion-dollar IPOs, and suddenly the homebuilding industry couldn’t throw up enough fiberboard McMansions to keep up with demand. The guy delivering your pizza was making money day-trading telecom stocks. And no one thought it was a bubble until it was too late.

Is the current recession deep enough, different enough, painful enough, and scary enough to make our memories longer and change our habits, for the better, for the long run? Next time around, will enough of us, finally, be sufficiently savvy to spot the signs of an emerging bubble before it has a chance to destroy trillions of dollars in capital and vaporize millions of jobs? Or will we once again fall victim to the fallacy that “it’s different now -- this is a new economic paradigm?”

Only time will tell, of course. But history teaches us that, unfortunately, like students who manage to ace exams by cramming the night before, we’re not very good at long-term retention of our lessons. Sphere: Related Content