How Long Will Recession Last? The Commodity Bottom, Dirty Dividends, iPod Index, and More!

by Addison Wiggin & Ian Mathias

  • Drama in the details… predicting 2009 recession with 1929 charts
  • Forget the market and GDP… the real economic data point that threatens the U.S.
  • How are banks spending your bailout bucks? “Dirty dividends,” says Jim Nelson
  • Crisis causes global purchasing power shake-up… where your “iDollar” goes furthest, below
  • Frank Holmes on the commodity “inflection point” and how to buy in coming quarters

  Two weeks ago, we asked how low can the market go … last week, we asked how long before you would see “real” returns again if you invested at the top… today, we begin by asking how long will the “recession” or “depression” last?

Since 1954, the average recession in the U.S. has lasted 17 months. But this is no ordinary garden-variety recession. If we’re entering an economic cycle that Maestro Alan Greenspan last week called, “a once-in-a-century credit tsunami,” then we have only the 1930s — the last time a credit bubble burst — to compare it to.

  According to the wonks who get really technical about this stuff, an “official” recession is two quarters of negative growth. A depression is five quarters of negative growth. Here’s what happened in the ’30s:

The U.S. economy was officially in recession from 1929-33 . Followed by four years of stagnant to limited growth. Then 13 months of recession again, in 1937 and 1938.

In terms of GDP (or GNP, as they referred to it back in the day), it took 10 years to return to pre-1929 output — around $100 billion annually. Again, history doesn’t repeat exactly, but in economics and politics, we often have to learn the same lessons over and over.

  But the data point to watch will be unemployment. The real danger economically, socially or politically speaking in the ’30s was loads of young men without jobs.

Unemployment leapt up to 25% in a very short amount of time between the stock market bust in 1929 and 1934… the end of the official recession.

Even adjusted for modern methods, unemployment climbed to 23% in 1933. Friday, we get the latest reading from the Bureau of (be)Labor(ed) Statistics. Most wonks are expecting a jump to 6.3%.

By that account, we haven’t even begun to see a retraction in the economy yet. The market has already priced in over 200,000 lost jobs in October.

Here’s one reason: American manufacturing is in the doghouse. The Institute for Supply Management (ISM) index of manufacturing activity plummeted to a score of 38 in October — the lowest since 1982.

Economists were prepared for a small drop from 43 down to 41. A score of 50 or above is where you really want to be.

  Manufacturing in China doesn’t look much better. In fact, it contracted by the most on record in October. The country’s Purchasing Managers’ Index fell to a score of 44.6, the lowest since the survey began in 2005.

Chinese investors responded to the report by selling the Shanghai Composite to a 26-month low. The index is now down over 70% from its 2007 high.

  Australia reported early this morning that its manufacturing sector contracted in September by the widest margin since they started keeping track in 1992.

Most of Europe will teeter on recession next year too, the European Commission said today. The E.C. altered its 2009 forecast, this time suggesting that the 15 euro-using nations will grow an average 0.1% next year.

Economies in Germany, France and Italy will shrink or stand still. The U.K., Estonia, Latvia, Ireland and Spain, say commissioners, will fare even worse. The group forecast 15% unemployment in Spain by 2010.

  Last week, the Dow rallied 946 points — its best week ever pointwise. By percentage, at 11%, the index logged its best performance since the recession of 1974.

Alas, for the entire month of October, the Dow ended down 14% — its worst month overall since 1987. Year to date, it’s fallen almost 30%.

  “Major U.S. banks are using their bailout billions to prop up dividends,” reports our intern cum research maven Jim Nelson.

“Bank of America, JPMorgan Chase, Citigroup and the rest of the crew are starting to cash in their government bailout checks. And in a ‘you gotta be kidding me’ moment, we find out that they aren’t using all of that money to repair bad assets or offer more loans. Instead, these banks are continuing their dividend payments, which otherwise would probably have been cut.

“Wells Fargo, one of the few banks to swim through this mess with little problems, is using $4.4 billion of its $25 billion bailout to hand over to shareholders. Not loosen the credit market, not invest in small businesses or financially sound homeowner hopefuls… Nope, to keep their

“News of these schemes is finally hitting Washington, and the likes of Sen. Chuck Schumer are speaking out. But it’s too late. These dividend plans are already in effect, and our money is lost…

Here’s the shortlist of the offenders:

  Bank of America CEO Ken Lewis won the “Banker of the Year” award last week. (There’s a coveted honor this year.) American Banker gave its annual award to the Mississippian CEO for the second time in seven years.

If you’re looking to get the title in 2009, you’ll only need to beat this record: cut at least 10,000 jobs, slash profits by 68%, consider writing down $27 billion in bad loans, raise $30 billion in emergency capital, overpay for the world’s biggest and most controversial mortgage originator during the worst housing bust since the Great Depression and pick up an overleveraged balance sheet of a broker like Merrill Lynch.

After all those acquisitions, by the way, 50% of the population — one in every two people you meet on the street — is in business with Bank of America.

  The U.S. dollar arrested its recent fall Friday and has since rebounded. The dollar index is back to 85.7, after sinking as low as 83 early Thursday.

  In light of the dollar micro-rally, commodities aren’t faring all too well. Gold has been trading between $720-750 for the last week or so. Oil is down another $2, to $64 a barrel.

  The national average gas price, however, fell again today — its 47th straight day of decline. The average is now at $2.41, over 40% lower than its mid-July record.

We traveled to middle of nowhere Maryland over the weekend and filled up for $2.04 a gallon. In the time it took us to get a full tank, three people stopped to take pictures of the gas price with their camera phones. When grown men start taking pictures of gas prices to text to their friends… we can’t be too far from a bottom, right?

  “Based solely on global economic indicators,” perennial Vancouver favorite  Frank Holmes said in a recent interview , “commodities should be in a cyclical bear market with no bottom in sight. But there’s intense pressure on policymakers to fill the deflationary vacuum that’s been created by both Main Street and Wall Street. Main Street’s plummeting housing prices stretched the limits of the financial system, but lawmakers in an election year will find it easier to blame Wall Street than Main Street.

”It appears we are now going through that inflection point moving from deflationary forces to an inflationary cycle. We had a little bit of run-up in inflation when oil ran to $150 a barrel, which was very excessive. What didn’t make sense was the fact that gold didn’t rise along with oil. On the historic 10-to-1 ratio, gold should have gone to $1,400-$1,500. That leads to suspicions that a few people were manipulating the price of oil, because gold failed at $1,000 per ounce.

“On another note, it is important to remember policymakers will do everything in their power to create liquidity and, historically, liquidity is bullish for commodities. However, our research suggests it’ll take several quarters before this will affect commodity prices. You’ll have to be a very selective buyer for another couple of quarters. The price correction should lose downward momentum and create a U-shaped bottom as the capital markets begin to reflect the policies being implemented.”

 The Commonwealth Bank of Australia released its latest rendition of the iPod index over the weekend. Like The Economist’s Big Mac Index, it tracks the typical cost of an iPod in every country… a simple example of purchasing power parity, if you prefer stuffy terminology.

Stewards of the study say prices have declined about 20% across the world since the index’s 2007 inception. And at the top and bottom of the index, it’s easy to see the survivors and victims of this credit crisis… nations with the most distance from the U.S. fared best, commodity countries got slammed.

“The Australian dollar is very cheap, and oversold!” declares Chuck Butler. “The last time the index was printed, Australia had the 14th cheapest price… Guess when that was? Yes, July, when the A$ hit 98-plus cents! Now, this doesn’t make up for the fact that the A$ has fallen from the sky, and fallen very hard, causing some major losses since July, but it does give a glimmer of hope that the selling could be coming to an end.”

  “Republics never have been and will never be perfect,” writes a reader, with an unconvincing attempt to make us head to the polls tomorrow. “Politicians have been prone to money handouts and quick fixes since Roman times. The cliche about politics being the second oldest profession is all too true. History and current political gyrations are much more understandable if you accept the fact that all people act in their own self-interest and that has not fundamentally changed since we started walking upright.

“The problem is that if you don’t vote, we can’t throw the bums out. If we can’t throw the bums out, we’ll never have a Republic worth building (or rebuilding). It’s that simple. I can only encourage those sitting on the voting sidelines, waiting for a more perfect republic to magically appear, to recognize that the enemy is us. If you are too discouraged by national politics, try the local races. It takes just a few people at the right place and time to make a difference in those.”

  “I have decided that the problem is incumbency,” adds another. “We so rarely elect a new senator or representative that they are simply assimilated into the faulty group. The newly elected briefly express their concern and shock of what they discover once on the ‘inside,’ and then the more experienced members take them aside and have the ‘talk’ about the crazy uncle locked in the closet. They are informed that they can simply go along and do well or scream into the wind with no coverage by the media and be ostracized into irrelevance.

“I think it is obvious that if a significantly large group of new members hit Congress all at once, there would be illumination and chaos that just might get us started on the path to solutions.

“There needs to be a grass-roots revolt against the incumbents. After all, these are the people that have been driving the bus, and now the bus is hanging off a cliff. I don’t care who they are… if they are in office now, they simply have to go. Their time is up. On Election Day, I plan to vote accordingly. Sorry to my long serving senators and their House comrades, but I don’t see why they should be given another minute in office.”

The 5: This suggestion would at least get us closer to the “citizen representatives” we described on Friday.

  “To not vote would be more supportive of this country and the economy,” writes the last most perturbed and vociferous, “than to vote for either of the main party candidates. This is because anyone who knows anything about what is going on knows that both McCain and Obama will continue the course of destruction of this land (the economy, freedoms, etc.) and to support either of them to any degree is essentially suicidal, downright stupid and really quite nauseating. Anyone who supports — or even votes for — either of the two is simply uninformed, or a real idiot.

“Bottom line: We must abolish the Fed, the fiat currency, fractional reserve banking and the IRS and quit policing, manipulating and exploiting the rest of the world, end the empire building and seriously reduce the size of the government to at most a quarter of the current. But alas, this will not happen until there is a major, or complete collapse — which is where we a headed — keep your seat belts on. Any candidate who does not address these issues — the foundation of our problems, social and economic — is not worth listening to.”

The 5: “This is America,” David Yepsen, the political reporter for The Des Moines Register, says in our film (and in the trailer ). “We don’t do anything until there’s a crisis.”

"With respect to the fiscal crisis looming out there in the future," adds Paul Volcker, "We’ll see whether a democracy can deal with an obvious problem that’s going to be present within not too many years. The earlier we take action, the better."

Amen and good luck tomorrow,

Addison Wiggin
The 5 Min. Forecast

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