Don't Bet On the Depression of 2008

“The Wall Street domino has toppled just about everything in sight: U.S. stocks large and small, within the financial industry and outside of it; foreign stocks; oil and other commodities; real-estate investment trusts; formerly booming emerging markets like India and China.Of all the dominos that have tipped over, the most psychologically damaging collapse was the last: the very notion of diversification itself..

How much worse might things get?  Let’s consider some of the arguments that have been surfacing lately.

“We’re going into another Great Depression.” The failure on Monday of the U.S. House of Representatives to pass the bailout plan makes those G-D words seem possible for the first time. But I don’t think another depression is likely, for two reasons.

First, when you spend time studying the Crash of 1929 and the depression that followed, what stands out the most is the dearth of doomsayers. Even the economist known to posterity as “the man who called the crash,” did no such thing; he forecast only a 15% to 20% drop, not the apocalypse that actually occurred. Depressions start not when lots of people are worried about them, as we have today, but when no one is worried about them, as in 1929.

Second, the Great Depression occurred before the Federal Reserve Bank had aggressively grown into its role as “lender of last resort.” In the wake of 1873, after a railroad-building boom had swept the nation and then gone bust, companies and consumers alike were left gasping for capital. Nothing but the passage of time could supply it; the Fed would not be established until 1913. After the crash of 1929, when the Fed was still weak, years passed before the federal government could flood the economy with cash.

Today, however, the resolve of the Fed is not in question; nor is there any doubt that the Treasury Department is willing to provide the financing it takes to get the economy moving again. Furthermore, U.S. nonfinancial companies have just under $1 trillion in cash on their books. Even though Wall Street is dead, innovation is not: In the months to come, clever new financial go-betweens will spring up and find a way to get that cash flowing again. It’s hard to see how a depression could get under way when so much capital is waiting in the wings.

That’s what is happening now, but it will not last indefinitely. It never does. 

“Investors hate uncertainty.” Well, that’s just tough. Uncertainty is all investors ever have gotten, or ever will get, from the moment barley and sesame first began trading in ancient Mesopotamia to the last trade that will ever take place on Planet Earth.

If tomorrow were ever knowable with absolute certainty, who would take the other side of a trade today?

The financial future is no more uncertain now than it used to be; in fact, it’s far less uncertain than it was in the summer of 2007, when the Dow shot above 14000, the future seemed bright, and utterly no one foresaw the disaster that would befall the financial system. The absolute certainty of blue skies ahead was an illusion then, and the notion that we all know that worse misery lies in store is an illusion now.

The only true certainty is surprise.

You’ve probably spent a lot more time worrying about negative than positive surprises lately. But we could get surprised on the upside by a further fall in oil prices, a kick from low interest rates — and, of course, untold other possibilities that no one can foresee.

Whatever happens with the bailout, don’t bail out.”

I’m speaking this Friday morning at the Economic Summit in Richmond, Virginia and the message I’ll have for them is the same I give to you now.  No matter what is going on in the world – it is up to you to make the sale – not the government, Palin, Couric, Obama or the weather.  We have got to remain focused on the customer on the phone, walking in the door, sending an email.  Only then can we get out of this hysteria that is making for great ratings and sleepless nights.