THE BEAR'S LAIR Ten years of bearishness
By Martin Hutchinson
This week marks the 10th anniversary of the "Bear's Lair" column. The first
such column appeared on November 6, 2000, the eve of the presidential election,
with the headline "Dow crashes, Bush/Gore stunned in polls". Its central thesis
was that whoever won the election the following day would be a one-term
president because of the impending collapse of the economy and the Dow Jones
index falling to 3,800. It thus combined two features of this column in the
subsequent decade: relentless bearishness and bold but completely erroneous
Not all its predictions were erroneous; some of them were merely early. The
column assumed a normal and fairly lengthy recession after the dot-com bubble,
without then Federal Reserve chairman
Alan Greenspan's massive intervention of 2003-06 (though it correctly blamed
Greenspan for the sloppy monetary policies in 1995-2000 that had caused the
Its prediction of a budget deficit of US$500 billion was thus prescient,
although it was a recession too early and did not assume a massive half-baked
"stimulus" from either of the apparently moderate George W Bush or Al Gore.
(The Gore of 2000 was in transition from the "New Democrat" of 1992 to the
environmental fanatic of today. His 2000 campaign bore portents of the future,
which may indeed have lost him the closely fought election - in retrospect the
benignly moderate 1992 Gore would surely have won it.)
Another column, published the following day, was also interesting; it described
the favorable Republican congressional result as a demonstration of public
choice theory because congress, freed from the fiscal discipline of the 1994-98
Newt Gingrich years, had presented the electorate with $92 billion of
free-spending handouts, apparently without any ill-effect since the budget
surplus kept increasing.
As we now know, that $92 billion was just the beginning of the deluge and the
surplus was to be very temporary indeed. Still as we (perhaps) again elect a
Republican congress it's worth bearing in mind that it was the 1998-2006 House
speaker Dennis Hastert, not George W Bush, who set the nation's finances on the
path to ruin.
Finally, from the first Bear's Lair, looking forward: "Hot tip for 2005 -
Gates/Bezos Inc, The bowling alley and dance hall operators." That would have
been fun - though it takes a rather 1930s view of what a long recession might
look like. Of course one had no experience of them back then ...
Overall, I think it's fair to say that the first decade of the Bear's Lair's
life has vindicated the column's relentlessly pessimistic view on the US
economy, although decay has taken a lot longer to arrive than the sharp
collapse the column initially predicted. The more interesting question is the
trajectory of the next decade. Will bearishness again prove fairly prescient
or, as the relentless billionaire broker Ken Fisher keeps telling us, should we
now expect "Good News for the Bulls?"
Unlike in 2000, when bearish commentary was on thin ground, it is now quite
possible to find outlooks a lot more bearish than this column's. Stephan
Richter's piece in the Globalist "The Weimar Republic and the Ominous Rise of
Jon Stewart" is one such - the likelihood of the US going Nazi in the short
term is infinitesimally small, though below I discuss one possible scenario
under which it would become less unthinkable.
It is unlikely that the next decade will repeat the one just past. Such a
repeat, continuing the past decade's trends on a straight-line basis, would
have the stock market in 2020 close to current levels while the US economy is a
tattered relic and the federal budget deficit hovers around 20% of gross
domestic product. That position would be completely unsustainable; the stock
market would only be around the current level in nominal terms if
hyperinflation had ensued, pushing prices through the roof and making the real
value of the stock market much lower. In such an event, the budget deficit
would have become un-financeable, causing the federal government to default.
While I don't have huge confidence in US politicians, I think they're better
than that. The self-indulgent policies of the 2000s, increasing government
spending and particularly waste while allowing consumers to gorge themselves on
debt at low interest rates, were only entered into because the position in 2000
appeared so rosy. Presumably if he had known it would lead to an unsustainable
bubble followed by a decade of economic difficulty, Greenspan would not have
increased the money supply so rapidly in the late 1990s and later. Presumably
if they had known it would lead to trillion-dollar deficits and massive
long-term growth in government the Republican congressional majority of
1999-2000 and later would not have indulged themselves in so much pork-barrel
spending and waste.
Today, the US economic position is obviously much more difficult and so it is
at least probable that, if politicians and the Fed don't behave themselves
economically, the populace will replace them with some who will. The economic
outcomes of the decade can indeed be examined based on two factors: the
responsiveness of the electorate to economic hard times, and the responsiveness
of the US economy to changes in monetary and fiscal policy. On the political
side, this week will show how sharply the electorate has reacted to the current
economic mess; determining economic responsiveness will take a little longer.
However, there are essentially four scenarios:
At one extreme, we can postulate a situation in which electoral responsiveness
to economic difficulty is low, while economic responsiveness to mistaken fiscal
and monetary policies is also low. In that case, an electoral swing somewhat
smaller than expected, with the Democrats retaining both houses of congress,
could be followed by a continued very slow economic recovery, allowing current
lax fiscal and monetary policies to continue for several years even though
unemployment remained stubbornly high.
With electoral responsiveness still low, that could allow President Barack
Obama to be re-elected in 2012 in an apparently modestly improving economic
environment (albeit with inflation already beginning to surge). In that case,
the likelihood must be for a second 2008-style financial crash early in Obama's
second term, from a bursting of the bubbles in commodities, junk bonds and
other financial assets. The policies of zero interest rates and fiscal stimulus
would not then be available to re-start the economy, since inflation would
already be substantial and rising and the budget deficit would already be at a
level causing Greek-style difficulties in the bond markets.
That's the situation in which the Weimar Republic analogy begins to be
appropriate. Germany in 1931 was less than a decade away from hyperinflation,
its borrowing capacity in international markets was zero and its banking system
was defaulting. In such a situation, severe economic hardship is inevitable. If
the political system is unresponsive (as was Germany's coalition-bedeviled
Weimar Republic) an extremist figure who appears to offer a way out of
difficulty through economic autarky and invasion of countries with raw
materials becomes electorally irresistible.
In a second scenario, electoral responsiveness is low, keeping the current
policies in place, but economic responsiveness is high. In that event the
inflationary crash comes well this side of 2012. That would produce an economic
environment sufficiently unpleasant for even a low-responsiveness electorate to
change horses in 2012. With better policies, in place (because of low electoral
responsiveness) until 2020 even if unemployment remained high in 2016, economic
recovery would presumably be assured thereafter.
The third, opposite scenario has high electoral responsiveness, producing a
Republican House and senate next week, but low economic responsiveness. In
2012, that would bring modestly lower budget deficits and modestly tighter
money (with Fed chairman Ben Bernanke continuing in place but being badgered by
an assertive GOP congress). Since economic responsiveness is low, no crisis
would occur before 2012, making that election something of a wild card,
depending on who got blamed for continued economic sluggishness by a
high-responsiveness electorate. Beyond 2012, the crystal ball gets murky in
this scenario, as the wild card of the 2012 election would have an enormous
effect on the economic trajectory.
Finally, there's the possibility of high economic and electoral responsiveness.
In this case, an assertive GOP congress reduces the federal deficit, but
Bernanke's continuing lax money causes the current bubble to burst and
inflation to surge well this side of the 2012 election. At that point, Bernanke
would presumably be removed, possibly by impeachment, and a monetary policy in
line with the anti-inflation thinking of former Fed chairman Paul Volcker would
The 2012 election would still be uncertain - the Volkerite monetary policy
would itself cause economic pain, and the electorate might blame congress and
the Volckerite Fed for its effects. However, whoever won the 2012 election,
tighter monetary and fiscal policies would be likely to remain in place, since
in a responsive economy they would already be showing positive effects before
the 2013 administration and congress had time to change them.
Two of these four scenarios will be eliminated by Tuesday's election, although
it is of course possible that some intermediate outcome will make the position
unclear. As for economic responsiveness, and the outcome to which it leads, we
will only determine that by experience, probably as usual unpleasant.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-10 David W Tice & Associates.)