So read the e-mail I received from the old Phantom Trader on Monday.
He was referring to a piece in the Wall Street Journal, written by perma-bear Jim Grant.
If you’ve never heard of Jim Grant, let me just say this: he makes Ebenezer Scrooge look like a party animal. That’s how pessimistic Grant has been. . . for as long as I can remember.
In the September 19 article titled "From Bear to Bull," Jim writes:
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.: "[T]he 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.
Bears and doom-and-gloomers the world over could always count on Grant as their sage on Wall Street.
And while Grant has always been and will continue to be counted on to be a bear, he’s also an astute historian of Wall Street.
In his heart of hearts, Jim wants to be a bear. But even he can’t reject precedent.
And for those bears that are arguing that this time is different. . . let me remind you that that argument has been used in every bull or bear market. During the dot-com mania of the late 1990s, every bull was arguing that technology has made obsolete the business cycle.
Party on, Garth!
Nobody knows if a robust recovery is coming. Even Grant will admit that. But if past economic downturns offer clues for future recoveries, there’s reason for optimism.
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%.
I’ll bet you dollars to donuts that if we go back and read the newspapers of the 1981-82 downturn, the negativity would be as prolific as it is today.
But there is a silver lining in all of this, as Buffett points out: "Buy when people are fearful."
That’s what I did last December. I bought stocks.
I was a nervous wreck putting cash back into the market. . . but I look like a genius now.
Truth be told, I was just plain lucky.
As Grant concludes. . .
I promised to be bullish, and I am (for once)-bullish on the prospects for unscripted strength in business activity. So, too, is the Economic Cycle Research Institute, New York, which was founded by the late Geoffrey Moore and can trace its intellectual heritage back to the great business-cycle theorist Wesley C. Mitchell. The institute’s long leading index of the U.S. economy, along with supporting sub-indices, are making 26-year highs and point to the strongest bounce-back since 1983. A second nonconformist, the previously cited Mr. Darda, notes that the last time a recession ravaged the labor market as badly as this one has, the years were 1957-58 -after which, payrolls climbed by a hefty 4.5% in the first year of an ensuing 24-month expansion. Which is not to say, he cautions, that growth this time will match that pace, only that growth is likely to surprise by its strength, not weakness.
And that is my case, too. The world is positioned for disappointment. But, in economic and financial matters, the world rarely gets what it expects. Pigou had humanity’s number. The "error of pessimism" is born the size of a full-grown man-the size of the average adult economist, for example.
For once in my investment career, I hope Grant is correct.
Party on, Jim!
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