What Looks Like, Smells Like and Certainly Feels Like a Depression, Is A ___?

I have danced around the edge of this for a while but not committed myself. Well, I am doing so. As with my predictions at the beginning of the year, I hope I am wrong. I feel now that we are heading into a depression. The only question remaining in my mind is how severe it will be. One common definition of a depression is a decrease in GDP of over 10%. I don't see how we can avoid that. But how bad can it get. In the Great Depression GDP went down 33%. It recovered but then we had another 18% drop in the 1937-1938 time frame. I am currently thinking we will be close to the latter this time around before all is said and done.

I am by no means alone in this thinking. More predictions along these lines are being made daily. I probably read four today and I had little time today to read. Don't take my word for it, listen to Ray Dalio. Don't recognize the name? Maybe it is because he is not a big headliner doom-and-gloomer. He speaks instead with his results and he has produced good returns for his clients in good times and bad. Last year his funds made money - around 9% - and he does even better in good times. So when Dalio talks, it is worth listening and listening very carefully.

http://online.barrons.com/article/SB123396545910358867.html

His interview with Barron's is a must read in my opinion. He spells it out in terms pretty much anyone can understand.

The increased depression talk of late also suggests that the market is poised for another significant leg down soon. Yes I did see the drop today, but that is not the drop I am talking about. Today's market drop was due to Geithner doing poorly. The markets are mostly still trading in the same range they have been for some time. We are close to the bottom of the range after today's drop but still above support levels. I suspect we may soon break through those support levels and set a new, lower, trading range.

I am not saying that the markets will drop due to fear caused by increased depression talk. Rather, I think they will fall more due to reality setting in. And the reality that is setting in is that this is, as Dalio puts it, a D-Process. This economic downturn is different, much different, than what most people have seen in their lifetimes, and that reality is just setting in for many. We are in a depression cycle. Dalio explains it quite well, but it starts with too much debt and too little ability to pay it off, both on a corporate and individual level.

Disclosures: None