The 21st Century Depression

I live on the first floor so I don’t have anywhere to jump. My potential energy can’t be converted to enough kinetic energy to do any damage. I’ve been looking at downturns to try and see which one this rhymes with and best fit IMHO is 1929. The great depression lasted from 1929 to about 1940 when WW2 intervened. The depression consisted of 2 verses the 1929 verse and the 1937 verse. A good measure of depression is unemployment. This is the picture of unemployment in the 1929 depression.

Unemployment peaked to about 22% and later to about 17% in 1937 following a drop to a mere 14% in between.

Everything will flow from the unemployment graph. Unemployment directly measures productivity and productivity is the engine of GDP so you can bet GDP is going to match unemployment. It took 13 years to get back to 5% unemployment. You may say “what about robots!” What about them. What company is going to capex a bunch of robots in a depression? What bank will bankroll such capex?.

This is the reason it’s different this time. Nobody’s ever seen this before. This chart goes back to 2004 which includes the tail end of the .com bust. This spike is the beginning of the fingerprint of this depression. People have yet to come to terms with reality and are changing chairs on the deck as if the iceberg was just an inconvenient bump, all with full expectation of resuming the trip with minor consequence.

The virus is expected to peak in mid may 6 weeks from now. What does “peak” mean?

Peak is defined when the second derivative of the growth curve goes from + to -. It’s also called the inflection point. It’s where the black line touches the orange curve. Let’s say by “peak” in May, say May 15, there are 3M sick and the peak rate of infection is 100K/day. On May 16 there will be 95,000 additional sick and on the 17th 93,000 and on the 18th 91,000. It will take till July or Aug to get the new case rate down to where it was in January.

I read a frightening stat. 70% to 83% of vented patients die. That’s like picking up a 6 shooter with 5 bullets loaded for your game of Russian roulette. So even if you have a vent it isn’t going to save you. You’re going to die and probably 30% of the health care workers taking care of you are going to get creamed. As I write this there are 207K confirmed cases and well over 1M slated by Easter. People are going to try and assign blame. They will quack about testing or this or that but in reality none of that matters. Strong self quarantine of you and your family for 4 or 5 months is all that matters. Spring break with the invincible’s happened and now they are sick. In march we woke up to tangerine trees and marmalade skies. We no longer reside in Kansas.

I read a blog post by “Our Next Life“. This is a woman, a retired Democrat political adviser with bright red hair and a bone in her nose opining on the way forward. I guess she wrote a book called “work optional” If unemployment is 25% it isn’t “work optional”, it’s Sorry No Work Available. I guess this guru had to cancel a couple of fabulous ski vaca’s

While you’re watching CNBC and them trying to get you to BUY STOCKS and my pillows!! You might consider the unemployment graph. Many if not most businesses will be gone in 6 months due to cash flow and leverage. I have read of people considering renters strikes where they tell landlords to go pound sand. “I don’t have a job and No I don’t have the rent and NO I’m not moving out!” Do you really think COVID cops have any time to deal with that shit? How long can you survive paying that mortgage with no income from the investment? What about if they get sick in your apartment and die? Nothing like passive income to stiffen up the ol bone. A Real Estate crisis usually lags unemployment by 2 to 4 years so that bomb is yet to explode.

15 Replies to “The 21st Century Depression”

  1. The market is pricing in a quick recovery… the unemployment is unlikely to snap back – it’s much easier to lay off people than to hire them (especially once companies figured out how to operate with less staff).

    I don’t think we get to depression level disaster, but another 50% decline from current level is possible, a 30% decline is likely.

    1. The problem is debt. There is way way way too much debt. 2 ways to handle debt. 1 default (1929) 2 inflation (Zimbabwe). The third way is real growth but we haven’t seen real growth in decades only financial engineering and globalization and I don’t think either of think is going to work any more. When debt/GDP crosses 90% the return on debt goes down. Instead of $1 stimulus getting you 2.5 bux of growth $1 gets you $1.20 then $1.10 etc. What’s going to happen to the pensioner who gets 1000/mo and groceries go from 80/mo to 600/mo?

  2. What’s the solution to this coming Great Depression for the regular person like me?

    I have a job, I save 15% of my income, I live below my means, have no car payment, have a 15 year mortgage that is no more than 25% of my take home pay.

    Do I just give up or is there something I should be doing?

    1. I have 2 cars I have no mortgage. I live below my predicted WR. I went to cash last month. A couple months ago pre-virus I thought about selling my house, now it’s too late. I didn’t sell at the peak but presently I own damn little risk except my concern is inflation, but I think we are still in deflation. So I took a little hit to miss a big hit. I’ll buy some kind of inflation protection at some point and start to rebuild my portfolio into companies that will supply the nation, like Utilities or suppliers of utilities but I’m in no hurry to start buying any shit. I like waking up and seeing my portfolio steady as she goes. Yesterday the S&P dropped 114 pts and I made $4K in BTC. Couple weeks ago I made 13K or so on a gold trade. I try to make a few hundred on down days by shorting the S&P on day trades. My biggest advantage is I turned off the TV. CNBC and FBN spew nothing but BS all day long. I trade a few probable successes, book the profits and cut the losses.

      There will be no easy way forward. There will be no V recovery. There will be absolute permanent destruction of wealth for many people who own mis-priced risk. There is too much debt in the world and not enough collateral and that means default will occur.

      1. Forgive me if I’m reading it wrong, but are you saying there’s no future for me or future generations?

        I’m not old like you with only a few more years to live. I’m in my early 30s with a young child. But with this current pandemic and I’m reading a lot of stuff like this telling me the world is over and then global warming is coming too. My wife and I were thinking of having another kid one day, but it seems like there’s no hope for us or the human species anymore from all the stuff I’m reading.

        Is there anything I can do to salvage a future for me, my wife, and my child or do we give up and get out of here?

        1. You want me to say it will be OK. It might be OK but just as likely not. People will play along in the delusion right up to the moment they don’t. When bread is $50 a loaf and unemployment is 20% you will see some intensely pissed off people.

          How can I possibly tell you what to do? For my family, I cut my risk and went to cash after assessing the likely future. The worst that can happen is I miss out on some gains. The best that can happen is I miss out on another 50% draw down. If there is a 50% draw down I will be positioned to buy low in a diversified way if there is anything left to buy into. You make money buying low and selling high. So I look at my risk as asymmetric with a greater downside than upside right now. I don’t need to get rich. I do need to not get poor. Given reality there is a much bigger chance of me getting poor, than rich, in this environment.

          1. No, I don’t need you to say it’ll be okay, but I was hoping you’d give me some advice about how young folks like mes should move since you seem more knowledgeable compared to a lot of the libtards I keep seeing on my Facebook. I’ve still probably got another 50 years to figure out how to live. My kid has 80+ years maybe. You only have another 10 or 15 years so you’ve won the game already. Me and my kids are the ones that are screwed.

            Right now, I’ve sold everything and am moving it all to cash. Not sure what to do about my house – don’t think I could sell it now. I’ve started buying more food and storing it away and have a few hunting rifles for protection. And I’ve stopped contributing to my 401k obviously (I know, I should have stopped this a long time ago, but I stupidly kept listening to the idiots that told me the stock market always goes up).

            My job isn’t necessarily secure though and I’m probably going to be one of the 30-50% that are unemployed soon. I have enough cash now to last me a few years after selling everything, but what do I do after that? The world’s been going to shit for so long and now I have no idea what I’m supposed to do for the next 50 years.

            Everything the traditional financial media has told me (save money, avoid debt, invest for retirement, etc) works on the assumption that cash I save and invest will continue to grow, and it’s pretty clear that’s not going to be the case.

          2. You can’t make a plan at this point in time. I’m old, you’re not. I worked 57 years, you have not. I’ve survived 10 recessions you have not. Another big difference between you and me is you can work and I’m at the end of my road. There is something called human capital, look that up, that you possess that I no longer possess. Expending human capital in a wise way is how you will get through. Early in this blog I wrote this A graphical view of retirement This is how it works.

            You have to plan from now until death, not from now to retirement. There is no way to know what kind of economy awaits but it’s very unlikely to be a continuation of what just passed because I think there will be too much disruption. It does not mean the template in the article doesn’t apply. It does mean the simple brain dead approach to retirement of sticking all your dough in some fund and crossing your fingers while spouting a narrative is dangerous. Buffett says use funds but notice how HE doesn’t use funds. Munger owns like 3 stocks not a bunch of funds. Mark Cuban owns a few stocks and a bunch of cash. BRK.B owns a bunch of cash, so what’s so great about owning a bunch of risk other than some dumb ass on CNBC who get paid to sell you stocks tries to sell you stocks? Wall street is full of some of the most brainiac and aggressive people in the world desiring to eat your lunch. Why would you think there is a simple narrative using 4th grade math that will beat them? We have a FED that has totally hosed the underpinnings of the market and in my opinion every maneuver they do makes the risks worse. This idea that you can go up forever simply by printing money doesn’t make sense. It works till it doesn’t

            So you have to do some work and dig in and start to understand the reality. It’s good you turned off the TV. I started investing in 1975. I’ve lost PLENTY of money, but I made plenty more. You want to start read a book or two on how to win at poker including how to bet. Poker is all about winning more times than you loose and adjusting your bets so when you loose you don’t get wiped out. You of course realize most of these blogs (except mine) Get paid for your clicks, so what they publish is designed to get you to click. They advertise and they are not going to publish anything that embarrasses their advertisers. They typically don’t know beans about investing except they read a pop culture book. This is how you sell snake oil. Every aspect of the financial industry is designed to separate you from some percent of your cash. That’s how they make their cash. In the end it’s up to you to make your cash. There’s money to be made, but this idea it just falls off trees is nonsense. It just so happened to fall off the trees for the past decade.

  3. Regular guy,
    Please do not concern yourself with global warming. I am not an expert in the area, but I am a Chemical Engineer, and I think this whole man made climate change is a bunch of b.s. You are too young to remember, but in the 70’s they said we are facing an ice age. They also said the oceans would be dead by year 2000. I suggest spending your energy on issues you have control over. Conserve cash. Try to have at least 2 years of living expense in cash to continue paying mortgage and all other expenses. Protect your family’s health. Stockpile basic food items for many weeks of lock down. For $20 you can buy 25 or so pounds of spaghetti from Costco, for example. You are young – don’t give up ! Make a plan and implement.
    Eric

    1. Good point. I need to stop watching CNN and the Greta Thunberg idiots.

      I sold my investments before it dropped to rock bottom, so I’ve got a few years of cash now that I can pay my mortgage and other expenses. Gonna go to Costco and pile up on pasta and all that stuff, you’re right about that.

      My worry is what I do when we’re 10 years into the new great depression and none of us can get jobs and there’s no end in sight. By then I’ll be in my 40s with maybe another 40 years or more to live and support my family. Not sure how I’ll do that. Seems like a lot of this stuff is written for the older folks who have already got the money to last them to the end.

  4. Regular guy,
    I would definitely stop watching CNN and Greta. Why should anybody listen to a 16 year old child regarding global warming ? When all is said and done, this period will be looked upon as one big brainwashing used to control the masses. I used to own a condo at the beach in Florida. The “experts” said it would be underwater in a few years. That was 16 years ago and I don’t see any change on the beach. It’s a load of crap.

    As far as investing, even if we are going into a depression there will be ways to prosper. Stocks are not the only game in town. Study past recessions and depressions to see what worked and figure out what might work in the current environment – gold ? gold stocks ? Bitcoin ? Commodities ? shorting equities ? etc. There are a lot of us older boomers retiring. There will likely be some pharma/healthcare opportunities no matter what. But not index funds, individual companies. It will require more work than the past. Take care.
    Eric

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