Yes, there’s a new economy and a new stock market, too
Economic recovery won’t be what you expect, says this Wall Street analyst, because this crisis came after three decades of big changes.
Is it really different this time?
When the economy and the markets are flying high, we often hear from experts who insist that they will go on like this forever.
In the 1990s, we read that the market was floating on so much money from savings and pension plans that it couldn’t possibly crash!
Dig up newspaper files from 1920s and you’ll read much the same thing. Now that the average Joe is in the market and not just the bigwigs, they said, it can’t possibly fail.
And when the whole thing inevitably does come tumbling down, it eventually goes right back to where it was.
Not this time, says Mr. Raymond DeVoe, Jr. This is not a cyclical economic recovery. This is a new economy. We’re not going back.
Last fall, this Wall Street veteran told us why the stock market crash of 2008 was not like the great crash of 1929 (see Daily Buy-Sell Adviser, November 9, 2009).
In the latest issue of The DeVoe Report, he tells us why the future cannot be a replay of the past.
America has changed forever, he says, and the rest of the world is looking a lot different, too.
Now there are none
The last traditional business cycle dragged to a close in 1982 after a severe recession. But thirty years of changes “have dramatically altered the economic landscape,” Mr. DeVoe insists. This is not the same economy.
He makes many points in support of his argument. We scarcely have room for them all, but we’ll take a deep breath and dive in.
First and most dramatic is the collapse of U.S. manufacturing. We all know how much work has been shipped off to countries with lower wages. And we all know how North American automakers were left in the slow lane by overseas competition.
But some of the tales are still telling. Once there were over 100 American producers of radios. Now there are none.
This has undermined traditional patterns of employment. Many lost jobs aren’t coming back. The “discouraged worker” who has given up searching is prominent enough to have a new name, the “99 and Outer.” In other words, his or her 99 weeks of unemployment benefits have run out.
Closely tied to the decline of American manufacturing is the very real fact of globalization. If you doubt that, consider how the world reacts to every move China makes.
CRIBs and computers
Back in 1982, there was still a Soviet Union and a Cold War. Now Russia has joined Brazil, China and India in a select group of competitors (known as ‘CRIB’ to Mr. DeVoe, ‘BRIC’ to others).
Not to mention South Korea, Indonesia, Malaysia and a host of other emerging countries ready to leave the old “Third World” behind. Back in the Old World, European debt has reached near-catastrophic levels.
Next in line is the vast new world of information. Thirty years ago, who had a personal computer? Today, who hasn’t?
Indeed, is there any greater shift that has taken place in our lives? Information technology has radically changed the way people talk to each other and work with each other.
Expletive Deleted
If all of these things have altered the economy at home and abroad, the stock market has changed as well, often in more insidious ways. The past three years have been littered with some of the worst effects.
We have all seen how easy money and credit has created a series of dangerous bubbles, not the least of which was the U.S. housing bubble.
But many are still not clear as to just how Wall Street “miraculously created AAA rated fixed-income instruments out of ‘Expletive Deleted’ subprime mortgages,” as Mr. DeVoe puts it.
We know there was a lot of sleight-of-hand going on, by the investment banks and the credit rating agencies. Yet if it takes experienced pros years to unwind the strands of debt wrapped up in those derivatives, how can the average investor get a grip on it?
And there are hundreds of trillions of dollars worth of them still out there, this analyst reminds us. “No one is sure of the size.”
The Long Depression
That leads to another stark truth. “The stock market has changed drastically from its investment function and has acquired elements of a casino,” Mr. DeVoe states flatly.
No amount of financial regulation will prevent another flash crash as robotic computers dash off trades in microseconds. It’s all about exploiting a tiny difference in price for short-term gain, not about the long-term health of companies and their stocks.
As a result or this market mayhem, the analyst observes, America’s Baby Boomer generation heads into retirement with underfunded pension plans, significant portfolio losses and often, negative home equity.
The last time America lived through such an economic shift, Mr. DeVoe says, was not in the Great Depression, as many might expect. It was in the period after the so-called Long Depression of 1873, when the exodus from the farms to the factories began in earnest.
Rural America became urban America — and much the same was happening on a smaller scale in Canada.
You may or may not agree with all of this analyst’s conclusions. But you’ve got to admit that after the last three crazy years, things just ain’t what they used to be.
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