Is Business Cycle Broken This Time?

by Sy Harding, StreetSmartReport.com | March 27, 2009

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The U.S. national debt soared in the 1980’s on the record deficit spending of the Reagan Administration to get the country out of the panic of the 1970’s recessions and stagflation. There was no way to escape the consequences. Economists competed with each other with dire forecasts of how this time was different and the nation was headed inevitably into bankruptcy. Remember that huge electronic clock set up somewhere that they’d periodically show us on TV, as it kept track of the millions that were being added to the national debt every minute - or was it every second?

However, the laws of business and economic cycles had not been repealed, had not been replaced with an endless trend in one direction. The economy began recovering nicely even as the deficits grew.

Then in the 1990’s, rather than government bankruptcy, the continuing strong economy and booming stock market produced record tax revenues, and not only a balanced Federal budget, but several years of large budget surpluses.

As usual, at that opposite extreme of the pendulum swing, in 1999, it was also thought that this time was different, and the good times could roll on endlessly.

Not surprisingly, Congress began making plans to spend the surpluses it expected would continue well into the new century. Economists then predicted that not only would the national debt be completely paid off in ten years, and Social Security easily funded, but there would be plenty left over for tax cuts, and for Congress to spend more on its favorite projects.

But economic and business cycles had still not been repealed. The stock market bubble burst in 2000, and the economy soon plunged into its next recession. The Federal budget surpluses turned to deficits in a hurry. Unexpected events and situations took place, this time a terrorist attack and a couple of wars, and conventional wisdom was that we could not help but wind up in the next Great Depression.

Huge government stimulus packages and record low interest rates eventually reversed the cycle again. A new bull market in stocks began in 2002, and the economy pulled out of the recession in 2003. However, the stimulus was overdone or left in place too long, particularly in the area of low interest rates, and another bubble formed, this time in housing. The bursting of that bubble brought on the current recession, bear market in stocks, and new record high budget deficits.

And with that has come the return yet again of certainty that this time is different. We can’t get out of this mess.

The pendulum has certainly reached extremes, not just in the economy and bear market, but in just about any area you choose to look. Some bring smiles of satisfaction to Main Street.

Executives previously paid tens of millions in annual salaries and bonuses to run the nation’s financial institutions, praised and favorably treated with tax cuts for the wealthy, are now working for $1 a year salaries, being vilified as crooks, and having their bonuses taxed at 91% (if they dare to keep them).

Congress and the White House, previously believing a hands-off, trust them to regulate themselves approach to business and Wall Street was the way to go, have swung far to the opposite extreme. They are now convinced government, now that taxpayers are major investors, knows better how to run banks, auto-makers, and a myriad of other businesses, and will provide instructions to managements.

The pendulum has certainly swung to an extreme for investors. The euphoria and confidence of 1999 as the Nasdaq soared above 5,000, and the relief during the new 2003-2007 bull market, when even their homes were increasing in value at a record pace, has swung to the opposite extreme of shock, confusion, and despair.

And conventional wisdom is that, here’s that phrase yet again - this time is different. This time investors, the nation, and probably the world, are stumbling down the road to ruin because this crisis has set off a massive unwinding of leverage and shrinking of balance sheets in the private sector, which the government is trying to get us through by temporarily winding up its balance sheet, taking on the assets and debt the private sector is getting rid of, to keep the system operating. There is, says conventional wisdom, no way the government involvement can be temporary, no way the cycle can swing the other way and return any of the taxpayers’ ‘investments’, no way this is just another swing of the economic cycle. This time the pendulum has broken from its stanchion and is flinging us all over a cliff.

Perhaps. But are those glimmers of a turnaround showing up in some of the economic reports?

I have been saying in my daily blog since the beginning, that the problems began in the housing industry and spread to the financial sector, and then out into the overall economy, and the eventual recovery will begin in the housing industry.

And in the last two or three weeks have come reports that new home ‘starts’ rose a big and unexpected 22% in February; permits for future starts rose 11%; ‘existing home’ sales rose 5.1% in February, the largest monthly gain since 2003; U.S. home prices rose 1.7% in January, the first monthly gain in 12 months; and ‘new home’ sales rose 4.7% in February, the first increase in 8 months.

And after two down months, and five down quarters in a row, the stock market is on track for one its most positive months in years.

It doesn’t change my forecast (accurate so far) of a significant bear market rally, and then a resumption of the bear market.

But they are encouraging signs that the economic cycle is not broken.

 

Copyright © 2009 Sy Harding
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Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

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