Why It's Not 1982 Again -Part 1

Two Cases For A Continued Bull Market, Ronald Reagan style. Both cases made by two very qualified and sane men. Both cases based upon the 1982 Economy and Bull Market begining. But, as much as I wish it to be true, I'm afraid I must agree with other less optimistic economist and Novelist Thomas Wolfe, who wrote "You Can't Go Home Again".

Still, the Perma-Bears need to face the 3.5 trillion dollar fact. There is 3.5 trillion dollars inside money market mutual funds earning less than 1/2% looking to be invested on any little pull-back. Yes, it's possible we stay in Bull mode through year-end on are way back to pre-Lehman Brother levels based upon the points made in my article in SeekingAlpha.com. However, the 2001-2002 market is fresh in my memory and my worry. But, even I'm willing to bet that may not come into play until January 2010.

In Why This Is Not 1982 -Part 2, I will outline details why the Bulls who say 2010's economy will be similiar to the 1983 boom economy are wrong. And why the Bears who say 2010 will see run-away inflation like the late 70's are also wrong.

Excerpts from James Grants Sept. 19th, 2009 article: From Bull to Bear. James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery. Even more amazing is the fact James Grant (a student of financial history and Perma-Bear) just converted from the Bear to Bull religion.

"...Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "The most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period." "Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today's economists suggest, the economic history of this country would have to be rewritten. ... At the business trough in 1933," Mr. Darda points out, "the unemployment rate stood at 25% (if there had been a 'U6' version of labor under utilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points.
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Our recession, though a mere inconvenience compared to some of the cyclical snows of yesteryear, does bear comparison with the slump of 1981-82. In the worst quarter of that contraction, the first three months of 1982, real GDP shrank at an annual rate of 6.4%, matching the steepest drop of the current recession, which was registered in the first quarter of 2009. Yet the Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5%."

Excerpts from Economist Michael Mussa Sept. 20th, 2009 presentation: Ex-IMF Chief Economist Rosy View as viewed by Kevin Hall -

"The recession is over and a global recovery is under way," he began, unveiling a pile of data and historical charts to support his view that forecasters regularly underestimate recoveries – and are doing so again. Where the IMF foresees just 0.6 percent year-over-year growth in 2010 in the U.S. economy and 2.5 percent globally, Mussa sees 3.3 percent growth in the U.S. economy next year and 4.2 percent growth globally. He projects a U.S. growth rate of 4 percent from the middle of this year through the end of 2010. All forecasts tend to under predict the recovery. … I think that's what we are seeing this time," said Mussa, now a senior fellow at the Peterson Institute for International Economics, a leading research organization in Washington.
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Mussa pointed to forecasts made at the end of the 1981-1982 recession, the closest approximation to today's deep downturn. ...

The Reagan administration projected a growth rate from December 1982 to December 1983 of 3.1 percent, as did the Federal Reserve. In fact, the real growth rate turned out to be 6.3 percent."

This was the begining of the Great American Bull Run baby-boomers remember. Now just to prove you can't peg any generation into one stereotype mold, I have a confession to make. I voted for Jimmy Carter and Ronald Reagan. And to the total confusion of friends and family BOTH men remain two of my heros. So, this is no political promo blog post. Relive this moment in history in the video below.

In Why This Is Not 1982 -Part 2, I will outline details many money managers and economist under age 45 do not understand about that moment in financial history. Those looking to expand their education can go back in time to hear what President Jimmy Carter warned us about. Listen to what he said about our energy policy on national television over 30 years ago.


I'm no financial Psychic or Prophet so please add any insights you may have. While you're waiting for Part-2 chime in on why you agree or disagree with any point made. One interesting point of American energy policy trivia: President Carter had solar panels placed on the White House and President Reagan removed them.