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Rant & Rave Blog

The D-Word: Will Recession Become Something Worse?

Posted by Sunday, March 01, 2009, 07:00PM ET

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The D-Word: Will Recession Become Something Worse?By TOM RAUM and DANIEL WAGNER

WASHINGTON – A Depression doesn't have to be Great — bread lines, rampant unemployment, a wipeout in the stock market. The economy can sink into a milder depression, the kind spelled with a lowercase "d."

And it may be happening now.

The trouble is, unlike recessions, which are easy to define, there are no firm rules for what makes a depression. Everyone at least seems to agree there hasn't been one since the epic hardship of the 1930s.

But with each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way.

"We're probably in a depression now. But it's not going to be acknowledged until years go by. Because you have to see it behind you," said Peter Morici, a business professor at the University of Maryland.

No one disputes that the current economic downturn qualifies as a recession. Recessions have two handy definitions, both in effect now — two straight quarters of economic contraction, or when the National Bureau of Economic Research makes the call.

Declaring a depression is much trickier.

By one definition, it's a downturn of three years or more with a 10 percent drop in economic output and unemployment above 10 percent. The current downturn doesn't qualify yet: 15 months old and 7.6 percent unemployment. But both unemployment and the 6.2 percent contraction for late last year could easily worsen.

Another definition says a depression is a sustained recession during which the populace has to dispose of tangible assets to pay for everyday living. For some families, that's happening now.

Morici says a depression is a recession that "does not self-correct" because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit.

Or maybe a depression is whatever corporate America says it is. Tony James, president of private equity firm Blackstone, called this downturn a depression during an earnings conference call last week.

The Great Depression retains the heavyweight crown. Unemployment peaked at more than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock market lost 90 percent of its value from boom to bust.

And while last year in the stock market was the worst since 1931, the Dow Jones industrials would have to fall about 5,000 more points to approach what happened in the Depression.

Few economists expect this downturn will be the sequel. But nobody knows for sure, and nobody can say when or whether the downturn may deepen from a recession to a depression.

In his prime-time address to Congress last week, President Barack Obama acknowledged "difficult and trying times" but sought to rally the nation with an upbeat vow that "we will rebuild, we will recover."

The next day, Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that the "recession is serious, financial conditions remain difficult." He held out a best-case hope that it might end later this year, with "full recovery" in two to three years.

Despite the tempered optimism, the economic outlook remains grim. Consumer confidence has fallen off the table, stocks are at 12-year lows, layoffs come by the tens of thousands, and credit remains tight.

The current downturn has many of the 1930s characteristics, including being primed by big stock market and real estate booms that turned to busts, said Allen Sinai, founder of Boston-area consulting firm Decision Economics.

Policymakers and economists note there are safeguards in place that weren't there in the 1930s: deposit insurance, unemployment insurance and an ability by the government to hurl trillions of dollars at the problem, even if it means printing money.

Before the 1930s, any serious economic downturn was called a depression. The term "recession" didn't come into common use until "depression" became burdened by memories of the 1930s, said Robert McElvaine, a history professor at Millsaps College in Jackson, Miss.

"When the economy collapsed again in 1937, they didn't want to call that a new depression, and that's when recession was first used," he said. "People also use 'downward blip.' Alan Greenspan once called it a 'sideways waffle.'"

Most postwar U.S. recessions have come after the Fed has increased interest rates to cool down rapid economic growth and inflation. Later, the Fed lowers rates and helps restart the economy, with the housing and auto sectors — both sensitive to interest rates — leading the way.

This time is different: As Senate Banking Committee Chairman Chris Dodd, D-Conn., said, "Our housing and auto sectors are leading us not out of recession, but into it."

What's more, the Fed no longer has the ability to kick-start recovery by lowering interest rates. The central bank has already effectively lowered the short-term rates it controls to zero.

And there are no guarantees the massive economic stimulus package and series of bank bailouts will stave off a nightmare recession, or worse.

"It is certainly plausible that the kinds of policy measures that have been good enough to tame the business cycle are no longer adequate in a fast-moving, highly leveraged, highly networked economy," said Anirvan Banerji of the Economic Cycle Research Institute.

Today's economic indicators don't project a depression. But Banerji is cautious. Economic data in 1929 didn't show that the stock market crash was about to lead to years of economic misery, either.

"It did not look like the kind of plunge that would be a depression until after the recession began," Banerji said. "The Great Depression didn't start out as a depression. It started out as a recession."

The depression that consumed most of the 1870s and followed something called the Panic of 1873 makes a better comparison to what's happening now, said Scott Nelson, a history professor at the College of William and Mary.

Financial markets had become centrally located by the 1870s, notably in London. And nations had not yet enacted the protectionist trade policies that were in place by the 1930s.

The results were not exactly promising. Gangs of orphans roamed city streets as men moved west to pursue cattle industry jobs. Widows struggled to make money by serving unlicensed liquor. Thousands of workers, many Civil War veterans, became transients.

The downturn lasted more than five years, according to the economic research bureau — four times as long as what the United States has endured so far in this downturn.

Today's recession is already longer than all but two of the downturns since World War II. But for now, public officials are being extremely cautious about the D-word. Alfred Kahn, a top economic adviser to President Carter, learned that lesson in 1978 when he warned that rampaging inflation might lead to a recession or even "deep depression."

When presidential aides asked him to use another term, Kahn promised he'd come up with something completely different.

"We're in danger," he said, "of having the worst banana in 45 years."

Get My Widget

Posted by Sunday, March 01, 2009, 07:00PM ET

Read 977 times

Get My Widget
Our Very Own Nicholas Santiago, Chief Market Strategist, Interviewed By

Posted by Saturday, February 28, 2009, 07:00PM ET

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Our Very Own Nicholas Santiago, Chief Market Strategist, Interviewed By


Posted by Saturday, February 28, 2009, 07:00PM ET

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Buffett's Worst Year

Posted by Friday, February 27, 2009, 07:00PM ET

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Buffett's Worst YearBerkshire Hathaway reports a rough, down 2008, cheered up by preferred-stock investments Buffett likes.

By Carol Loomis, senior editor at large
Last Updated: February 28, 2009: 9:16 AM ET

NEW YORK (Fortune) -- Berkshire Hathaway reported today that its net worth fell in 2008 by $11.5 billion, a decline reducing its per-share book value by 9.6%. That was Berkshire's worst result in the 44 years that Chairman Warren Buffett has run the company and, in fact, only the second decline in that period. The other drop was 6.2% in 2001, a year hurt by 9/11 and other problems in Berkshire's insurance operations.

Per-share book value changes are the customary way that Buffett reports the company's results because this method incorporates all of Berkshire's capital gains and losses whether they are realized or not. A large decline in the value of Berkshire's stock holdings was indeed the central reason that Berkshire reported a down year.

Under the more commonly used yardstick, earnings (which do not reflect unrealized gains or losses), Berkshire reported profits of $3,224 per share for 2008 against $8,548 in 2007.

Berkshire's profits stemmed mainly from interest and dividends on its investments and the earnings of its 70 operating subsidiaries. Berkshire has extensive holdings in two industries, insurance and utilities, whose earnings are not closely correlated with those of the general economy.

Even so, the total pretax earnings of all Berkshire's operating businesses (not including insurance for this calculation) fell by a bit, from just over $4,000 per share to just under that figure. The decline reflected the sagging results of the many Berkshire operations that are being hurt by a sour economy, among them those in housing-related businesses (Johns Manville, Shaw Industries) and retail (including furniture, jewelry, and candy companies).

Berkshire's (BRKA, Fortune 500) shares have taken a beating. The A stock dropped from $142,000 at yearend 2007 to $96,600 a year later, and in 2009 it has fallen further, closing at $78,600 yesterday. From its top of $151,000, hit in late 2007, the stock is down 48%.

In his chairman's letter, Buffett states that 2008 had good points mixed in with the bad. But in an unusual admission for the opening pages of the letter (a point easily recognizable by this writer because she has edited Buffett's letter for 32 years) he says bluntly, "During 2008 I did some dumb things in investments."

The dumbest, he said, was buying a large amount of Conoco Phillips stock when oil prices were near their peak and in no way anticipating the dramatic drop in prices that subsequently occurred. Buffett said he still thinks the odds are good that oil will sell in the future at much higher prices than the $40 to $50 per barrel now prevailing. But even if prices should rise, he said, "the terrible timing" of the Conoco purchase has cost Berkshire several billion dollars.

Berkshire data show that the company entered 2008 with 17.5 million Conoco (COP, Fortune 500) shares and ended with nearly five times that many, 84.9 million shares. At yearend, when Conoco stock was about $52, Berkshire's unrealized loss on all its shares (both those bought in 2008 and earlier) was $2.6 billion. But the stock closed yesterday at $37.40. If Berkshire still owns all its Conoco shares, the unrealized loss has grown to $3.8 billion.

That hammering may psychically bother Buffett the most -- he detests making faulty judgments about stock prices -- but Berkshire's biggest financial blows in 2008 came from two of the company's long-time holdings: The market value of Berkshire's American Express (AXP, Fortune 500) shares fell by $5 billion, and its Coca-Cola (KO, Fortune 500) stake sank by $3 billion.

Berkshire's huge position in Wells Fargo (WFC, Fortune 500) suffered very little in 2008, but has been hammered this year. The 304 million Wells shares that Berkshire owned at yearend 2008 have lost well over half their market value, falling from $9 billion to $3.65 billion. Berkshire's stake in U.S. Bancorp (USB, Fortune 500) is down by around $800 million.

The good points about 2008 for Berkshire? Well, Buffett had been long looking for places to invest the company's bulging granary of cash, and the tumbling prices in 2008 provided him opportunities (a word obviously not fitting the Conoco purchase). In the fall, inking a deal announced earlier in the year, he put $6.5 billion into Wm. Wrigley Co., by means of 11.45% subordinated notes (that was $4.4 billion of the investment) and preferred stock that pays a 5% dividend ($2.1 billion) and carries upside possibilities that have not been disclosed. The investments helped finance Mars Inc.'s purchase of Wrigley.

The preferred stock opportunities expanded after the financial world fell apart in September. On October 1, Berkshire bought $5 billion of Goldman Sachs preferred paying a 10% dividend and acquired warrants -- exercisable for five years -- to purchase 43.5 million common shares for $5 billion, a price per share of $115. Goldman has been well under that price most of the time since and closed yesterday at $91.

In a similar deal, carried out on October 16, Berkshire purchased $3 billion of General Electric 10% preferred and acquired warrants -- again, good for five years -- to buy 134.8 million common shares of GE for $3 billion, a price per share of $22.25. GE's stock, weighed down by GE Capital (which, in loans, is effectively the fifth-largest bank in the nation), has been a general disaster since and closed yesterday at around $8.50.

To finance all those purchases, store up for a $5 billion acquisition of utility Constellation Energy that fell through, and keep Berkshire's operations well supplied with cash, Buffett felt obliged, he said in his letter, to sell some portions of holdings that he would have preferred to keep. Principally, he said, the stocks sold were Procter & Gamble, Johnson & Johnson, and Conoco. Berkshire's positions in all three were established in the last few years, though the P & G holding materialized when that company merged in 2005 with Gillette, whose stock Berkshire had owned since the early 1990s.

The paradox of Buffett's investment year will be evident: To put Berkshire's pile of cash to work at prices he considered attractive -- "I like those preferreds," he said recently -- he had to endure a terrible stock market that savaged many of the stocks the company already held. He has always declared, though, that he is perfectly content to see Berkshire's stocks fall in price, because that allows him to buy more of them cheaply.

CHANGES IN THE ANNUAL MEETING: Buffett also announced in his letter that new procedures will be used in the question periods at Berkshire's annual meeting on May 3, in Omaha. Three journalists will collect questions e-mailed to them by shareholders; choose the most interesting and important; and ask them of Buffett and Berkshire vice chairman Charles Munger, neither of whom will have been told what the questions will be.

The questions the journalists select will be alternated with others asked directly by shareholders chosen by a drawing held the morning of the meeting. Previously, all questions were asked by sleep-deprived shareholders who lined up at the meeting arena until the doors were opened and then raced to microphones to establish a priority position. Buffett said in his letter that he had concluded "sprinting ability" was not a good determinant for who should get to ask questions.

The three journalists are the writer of this article, Carol Loomis of FORTUNE (who, as previously noted, has long edited Buffett's annual report letter -- without pay, by the way); Becky Quick of CNBC; and Andrew Ross Sorkin of The New York Times.

Buffett said in his letter that the new system will ensure that at least half of the questions -- those selected by the journalists -- will be Berkshire-related, which too many have not been in the past. To top of page

First Published: February 28, 2009: 8:06 AM ET

Weekend Technical Guidance - Could Panic Cause A Rally?

Posted by Friday, February 27, 2009, 07:00PM ET

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Weekend Technical Guidance - Could Panic Cause A Rally?
Government Changes Preferred For Common Shares. CitiGroup Plunges.

Posted by Thursday, February 26, 2009, 07:00PM ET

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Government Changes Preferred For Common Shares. CitiGroup Plunges.

RealTick graphics used with permission of Townsend Analytics, Ltd. ©1986-2009 Townsend Analytics, Ltd. All Rights Reserved. RealTick is a registered trademark of Townsend Analytics, Ltd.

The U.S Government today took almost a 40% stake in CitiGroup through common shares.  CitiGroup premarket saw lows around $1.15. However, after gapping below the low on February 20th, 2009, it has since pushed up nicely.  Not the double bottom possible on the CitiGroup 60 minute chart above. Initial panic at the open in the financials has since turned into a nice buying opportunity so far.  A long day ahead though. Stay tuned.
Put/Call still to low for a rally

Posted by Thursday, February 26, 2009, 07:00PM ET

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Put/Call still to low for a rally

Key Levels Working Perfectly On The SPY Intra Day

Posted by Thursday, February 26, 2009, 07:00PM ET

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Key Levels Working Perfectly On The SPY Intra Day

RealTick graphics used with permission of Townsend Analytics, Ltd. ©1986-2009 Townsend Analytics, Ltd. All Rights Reserved. RealTick is a registered trademark of Townsend Analytics, Ltd.
Market Technical Analysis Video - Death Spiral or Massive Rally?

Posted by Thursday, February 26, 2009, 07:00PM ET

Read 902 times

Market Technical Analysis Video - Death Spiral or Massive Rally?
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