Will we ever pull out of the Great Recession? Why is it taking so long?
Let me tell you about a hedge fund group that has the best way to think about it that I’ve ever read. But first, some history.
The Summer of 2008 is when things really started to hit the fan.
And now as the Summer of 2012 comes to a close, we’re four years into the Great Recession. We’re also approaching the four year presidential administration mark, the point at which people ask themselves the famous question “Am I better off now than I was four years ago?”
The passage of time, combined with the rockiest financial markets anyone under 80 has ever experienced, makes me look back with admiration at one of the finest pieces of financial analysis written about the Great Recession. With 20/20 hindsight its worth taking a moment to admire Bridgewater’s ‘Deleveraging Studies.’ They deserve Bankers Anonymous’ First Prize for a Great Recession Framework.
Now, as a rule, when another professional investor produces market research for outside consumption, it’s a good idea to affix your sceptical goggles firmly on your face. This rule, after all, is what investors should have known before Eliot Spitzer had to spell it out for them in the wake of the Internet Bubble popping. Research by other investors, or your broker, is about as useful as table talk in poker – you may choose to pay close attention but the speaker is not necessarily trying to help you make money. It’s what typically makes Wall Street research of dubious value to investors.
So an exception to the above rule such as Bridgewater’s ‘Deleveraging Studies’ deserves praise. Released in early 2011, ‘Deleveraging Studies’ increases in value with each passing month. As the events of The Great Recession increasingly hew to the Bridgewater view of the world, it’s hard not to acknowledge that, frankly, they nailed it.
The Bridgewater view may be summarized like this:
- Business and market cycles occur every 5 to 8 years, and may be addressed by policy makers with a typical mix of fiscal and monetary policy.
- What Bridgewater calls Long Wave Debt or Deleveraging Cycles occur once in a lifetime, every 50 to 70 years, and do not typically respond to existing fiscal and monetary policies.
- On the contrary, Deleveraging Cycles are characterised by massive wealth destruction and shifts, dramatic changes in monetary regimes, and unsettled political environments, including wars. They tend to have very slow recoveries (about 10 years) and end with debt restructuring and repudiation, inflationary policies, and substantial increases in risk premiums.
- The Great Recession that began in 2008 is the first US Deleveraging Cycle since the Great Depression. As such, it is immune to the usual policy responses, and can be expected to continue its path of wealth destruction through debt restructuring and inflationary redistribution of wealth up to 2018!
Bridgewater cites the ancient Jubilee tradition of debt-forgiveness every 50 years, and while acknowledging that cycles are not deterministic, provides evidence that human societies and their leaders tend to respond in predictable ways that lead to long-term cyclical debt crises.
Their believable case for the long cycle, in my mind, comes down to the idea that every generation needs to experience, and hence, learn for itself, the problems of over-indebtedness. For those of us who did not live through the Great Depression, this is our time to learn, unfortunately. For the dedicated student of Deleveraging Studies, Bridgewater’s in-depth month-by-month review of both The Great Depression and the Weimar Republic catastrophe in the 20th Century provides excellent perspective on what we are experiencing and possibly can expect to experience in the years ahead.
This is not pretty and it isn’t fun, but understanding it may prevent you from ‘buying on dips.’
 Who is Bridgewater, you ask? They’re only the largest hedge fund the world. It’s thought processes like they display in ‘Deleveraging Studies’ that explain how they got so big.
 Now technically, ‘Deleveraging Studies’ was not really for outside consumption, as they only made it available to their customers, but still a degree of scepticism is usually warranted.
 You’ll notice the document I linked to isn’t supposed to ever be made public. I’m hoping that after 18 months Bridgewater is not going to sue me. Also, I’m Anonymous! So there.
 If you are at all a student of markets, and you need a framework for understanding the Great Recession, I highly recommend you click through and print out and read pages 1-20. Those pages are very worth your while.
 Which explains why the Federal Reserve and US treasury at this point are totally flummoxed by the persistently high unemployment rate and crappy housing market despite throwing everything they have at the problem.
 This sounds a lot like Greece, Portugal, Spain in the Eurozone
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