Corona Virus vs Financial Depression

I hate to be the bearer of bad tidings, but my niece sent me a comment on the low gas prices. This will probably be one of the shortest posts I have ever written mainly because I have covered it all many times on my blog, I feel I should share my reply. Over the last nine years I have written numerous posts shouting my gloom and doom. Just type the word “Depression” on my search bar and you will get a dozen posts on the topic. While in college I majored in Business Management and took all my elective courses and free time to study the Great Depression.  As I listened to the tales from my parents and grandparents of how they survived the Great Depression it inspired me to understand what caused it.

Most of you have heard of the Great Depression, well I think we are in the start of one. Unemployment is the lowest it has been since back then. Back then the economy was booming and crashed because of uncertainty. That is why the market is crashing now, uncertainty, it may get to where gas is $1 a gallon but no one will be able to afford it. Nobody will be buying luxury items like potato chips. My niece who asked me the question works making potato chips for a living. My reply was. “You better fence your property and start growing some beef. This has a long ways to go, it took the market 3 years to hit bottom back then. The first 4 cases of the Corona virus happened in Washington state on March 5th, it has only been going on for 10 days but it seems like forever and we already have almost 4,000 people confirmed and sixty-five dead. A year from now it may be 4 million, where do you think the market will be then? Just since I originally wrote this just 120 days ago, an additinal 138,000 people have died.

A trip today to Walmart proved to me that the panic is everywhere. The shelves were bare, no bread, no eggs, and very little milk. I did get the eggs at a local chain store, but they were about out. The funny ones were the lack of toilet paper and most popular brands of dog food, and oh yes the main staple of the American diet, Pizza. There were a few but they were all the high dollar ones.

I am sure the market will not take it well. I heard a lot of people trying to be upbeat, because Friday was a good day. The reality is that the market has lost almost 20% of its value in the last week or so. Like I said earlier the Great Depression took three years to hit bottom. When it did hit bottom it had lost 89% of its value. Based on our most recent high the bottom would be around 3245. Kind of scary. The market did not lose all its value in one day. However, the day it did crash the losses for the day were three times the national debt at that time, and yes there were some good days on the way down. To keep things in perspective, The market was at 7949 when President Obama was sworn in.  By the time Trump took office it had grown to 19,804, but fell to 18,917 on election day, It managed to close the day at 19,372. On March 16 of 2020 the market had fallen from a high of 26,671, back down to below what it was when Trump took office. That high was  3.5 times what it was when Obama took office. Sounds impressive, but is appearing to be a bit of a balloon. It was only around 280 when I was born in December 1946. The thing to remember is, it is just a number.

So what makes this a depression versus a recession. It is world wide and there is no end in sight. That uncertainty will drive the market down. During the 08 crisis my wife was due to retire,  Her retirement account at one point lost 60 % of its value. Fortunately, for us, a year and a half later when she actually retired it had recovered all but about 10% of its value.  Fortunately for us her annuity fund recovered the other 10% over the ten years she was drawing on it,  It managed to get back to where it was.. We were Blessed.

The scariest part is that during the Great Depression the government had virtually no debt. The government used their good credit rating to try and bail the situation out. The reality of that is that when World War II started the market still had not recovered. Hoover reacted to slowly and his actions led to the uncertainty that caused the market to fail, a bit of Dejavu as I seeit. By the end of World War II the national debt was 125% of the national GDP. Being the only major country that was not devastated during World War II America quickly recovered by supplying the world’s needs. This time it is the government that is bankrupt, not big business.

 With almost 40 million people unemployed and the benefits the government handed out to stop the market crash set to expire at the end of July, the hand writing is on the wall. If the market recovers it will be a miracle, and probably a temporary one at best. The government can not spend its way our of debt, and it can't print enough money to stop a depression. Not without causing major inflation and a total collapse in the value of the dollar on world markets.

Even depressions have their upside though. My Grandfather did very well during the Great Depression. That story is in one of my posts. He really did sell the family farm twenty years before the Depression, which allowed him to use the money he had in the bank to take advantage of the situation. He ran his own insurance company and saved many people from losing their homes. That story is in one of my posts you will find it by typing depression in the search bar.  Heard and upside to this one. Dominoes stock is the highest it has ever been and they have hired 10,000 people, Walmart is the highest its stock has ever been also.

We will know very quickly if I am right about the market. I find it very hard to find a reason why the market might go up. As long as the uncertainty lasts so will the wavering market. I pray I am wrong, but doubt very seriously I am. The low unemployment rate will not save the situation. All the news this weekend was about how everything was shutting down. Definitely not a good sign. Especially with almost 40 million people unemployed and the Covid outbreak turning into a tsunami.