Is there another recession around the corner?
Looking at the economic cycles of the past, a noted British analyst sees some grim warnings for the future. And we peek at a British portfolio.
Economists say the darndest things.
Yesterday, we had several quotes from the famous economist John Maynard Keynes. Today we have one more.
“If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.”
Of course it’s not easy being opinionated and humble at the same time (and you may not find your dentist terribly humble when there’s a drill bearing down on you, but that’s another story).
But humble or not, can the theories of economists tell us what to expect in a future that still looks very murky?
Yes they can and we may not like the answers, says one British observer who is pretty well known himself.
His name is William Rees-Mogg, or, to give him his title as a life peer, Baron Rees-Mogg. Over the past half-century he has been a Financial Times columnist, editor of the hallowed Times, a governor at the BBC, a candidate for the Conservative Party and High Sheriff of Somerset.
Writing in The Fleet Street Letter, he looks at the future through the looking-glass of the economic cycles of the past. And he believes we may be staring at recession, or even depression.
But before we turn to those cycles, we’ll take a brief look at a British portfolio.
Still cheap
This English advisory has a portfolio of 20 stocks plus gold (it believes investors should have 5 per cent of their portfolios in physical gold, or gold stocks for the more aggressive).
Four stocks caught our attention. For some time, this advisory has been promoting Russian natural gas giant Gazprom (LSE-OGZD) as the “cheapest blue chip stock” around. Six months ago it was trading at just over US$21. Today, the shares are at $21.89. So it’s still cheap.
There are two big drug firms, one Brit, one Yank. The British giant, GlaxoSmithKline (NYSE-GSK) trades as an ADR at US$38.07 and yields almost 6 per cent on its $2.29 dividend. The Yank is Pfizer (NYSE-PFE), which is trading at $17.25 and yielding 4 per cent on a $0.72 dividend.
Then there is Mr. Warren Buffett’s holding company. This portfolio holds the “B” shares of Berkshire Hathaway (NYSE-BRK.B), which are trading at $81.90 in preference to the “A” shares, currently available for a cool $122,975.00 each.
But how will the stocks in this or any other portfolio hold up against the forces of darkness?
The panic stage
Next to Mr. Keynes and Mr. Milton Friedman, the most noted economist of the 20th century may have been the Austrian Joseph Schumpeter, who fled to America and Harvard in the 1930s.
He worked out the classic theory of economic or business cycles. There is the popular four-year business cycle and a longer 10-year cycle. But these both fall within an even larger cycle of 50 to 60 years, which he named in honour of Russian economist Nikolai Kondratiev, who was executed during the Stalinist terror.
If you start with the industrial revolution of the late 18th century, Lord Rees-Mogg states, you can see that we have passed through four Kondratiev cycles. In short, the theory has held up reasonably well.
At the bottom of this long cycle the economy hits a crisis or panic stage. And many economists believe we are just emerging from this stage in the current cycle. If so, we’re running late, says Lord Rees-Mogg.
The previous trough of the Kondratiev cycle came in 1932, and we all know what was happening then. The trough of the cycle we’ve been passing through came in 2008, with the fall of Lehman Brothers. That’s a gap of 76 years, well beyond the time line of the theory.
Or maybe the trough came with the bursting of the dot-com bubble in 2000. That’s just 68 years. Still, his lordship isn’t about to quibble about being a decade or so off the theoretical time line. He’s more worried about what happens after the initial recovery.
The second shock
If this cycle is going to follow the others, there may be danger ahead. Following 1932, the economy pulled itself back up. For a while.
But Mr. Schumpeter himself was dismayed at what happened later in the decade. After another sharp crisis in 1937, the economy fell back into recession “at a rate surpassing anything we had seen from 1930 to 1932.” It had all the earmarks of a “deep depression.”
This second shock was so great that it led the economist to question the future of capitalism itself.
But that was 1937 and this is 2010. We can’t expect history to repeat itself just to fit the boundaries of a theory. Can we?
“Perhaps the fate of Greece is the warning,” says Lord Rees-Mogg. “Greece is now a depression economy, and it threatens the confidence of Europe in the euro and in Europe’s ability to create prosperity.”
Few of us choose to invest in order to suit a theory. But if there’s any chance this cycle may turn down again, it might be wise to invest as if there were more trouble ahead.
Our theory is, it’s always wise to be wary.
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