I don’t normally incorporate politics into my commentaries but this week I need to make an exception. Fans of US Presidential candidate, Rep. Ron Paul may want to look away now...
Recently I saw a promotional video (I am not sure if it was authorised) that heralded the 76 year-old Paul as the only politician to correctly predict the Global Financial Crisis. What amazed me was the very first quote from a younger Paul in 1983: "...in a couple of years you will see the recession, if not the depression...” This call proved to be spectacularly wrong for the next 17-years. The US had just come out of the 1982 recession and didn't have another until 1990, which was very short-lived. In reality, the market powered along for the next 17-years to 2000 and the Dow went from 1,260 to 11,500, an increase of 812%, a yearly average of 47%. Some prediction!
“Now hold on a minute,” you say, “what about 1987?” Certainly 1987 was a sharp decline but this reversal lasted only 2-months and essentially halved a market that had doubled in the previous 12-months. And it was not accompanied by a recession.
Chart 1 shows the Dow Jones 30 from 1910 to 2011, using a logarithmic scale that displays percentage increments equally rather than point increments equally. It is immediately apparent how strong the US stock market (and economy) was from 1982 to 2000.
click to enlarge
I was really surprised that this was the first piece of evidence presented to support the video’s claims. Making predictions that a significant economic downturn is just around the corner for 25-years hardly qualifies as successful forecasting and shouldn’t be promoted as such. It is akin to a weather man saying it may rain some time this month or predicting a hail storm every day. Sooner or later he will be right but the forecast doesn’t help you decide when to bring your umbrella or whether to park your car under cover. As the old saying goes, ‘Even a broken clock is right twice a day.’
Another thing that really stands out in Chart 1 is that the stock market decline during the Great Depression was massive and makes the Dotcom and GFC reversals look subdued by comparison.
Some of Ron Paul's concerns about the Federal Reserve and FIAT currency may well be valid and he certainly comes across as likeable from what I've seen. A positive fourth quarter and positive surprises in general over the next few years seem more likely. In terms of the case for the negative, I think something similar to the Great Depression is unlikely. More plausible is another sideways period, similar to that which occurred from 1966 to 1982 and which is highlighted grey on the chart. My next article will offer a deeper analysis of this scenario. Until then...