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Posted: March 12, 2012

The economic doomsayers

Even a broken clock is right twice a day

Jeff Thredgold

I do not think much of those economic forecasters whose only message is, and nearly always has been, that U.S. economic and global collapse is just around the corner.

They do sell a lot of books and high-priced newsletters…after all, bad news does sell newspapers.

A recent story in USA Today noted three authors or writers (I won’t insult them by referring to them as economists) who all predict economic devastation pretty much just around the corner.

Harry Dent, author of the new book, The Great Crash Ahead, says another stock market crash is coming because of a bad end to the global debt bubble.  While he did predict some major stock market hits last fall (didn’t happen), and had focused on a domestic and global meltdown in 2012, he now sees the crash coming in 2013 or 2014.

Dent suggests the combination of aging Baby Boomers exiting their big spending years and a shift toward debt reduction and austerity around the world will cause the economy to suffer another leg down, making it more difficult for the government and Federal Reserve to avoid a new meltdown.  Surprisingly, Harry used to be on the other side, writing The Great Boom Ahead in 1993, as well as other books focused on stocks going to much higher levels.

Gerald Celente, a trend forecaster at the Trends Research Institute, says Americans should brace themselves for an “economic 9/11” due to policymakers’ inability to solve the world’s financial and economic woes.  The coming meltdown will lead to growing social unrest and anti-government sentiment, a U.S. dollar with far less purchasing power and more people out of work.

He won’t rule out a panic that could spark enough fear to cause a run on the nation’s banks by depositors.  That risk, in his opinion, could cause the government to invoke “economic martial law” and call a “bank holiday” and close banks as it did during the Great Depression.

Note:  My view would suggest that a bank run is a virtual impossibility.  As long as the Federal Reserve has the ability to “create” money, banks will have sufficient access to funds

And then there is Robert Prechter.  He is always bearish, and makes a very nice living scaring people all of the time.  He says today’s economy has similarities to the Great Depression and warns that 1930s-style deflation is still poised to cause financial havoc.  Prechter predicts that the major stock indexes, such as the Dow Jones Industrials and the Standard & Poors 500, will plunge below their bear market lows hit in March 2009 during the last financial crisis.

The Consensus View

Note that these doomsayers obviously do not represent the more optimistic view of dozens of seasoned forecasting economists.  Yes, risks are out there.  Yes, the European sovereign debt crisis could end in a very ugly way.  Yes, Iranian actions to destabilize oil flows in the Strait of Hormuz could impair the economy by forcing oil prices temporarily higher.  Yes, an Israeli or U.S. (or coordinated) attack on Iranian nuclear facilities could sharply raise global tensions.

Here is a mostly useful piece of advice.  Ignore the forecasts of economists.  After all, forecasting the future is not easy.  Economists make forecasts of the future not because we know what is going to happen, we make forecasts because we are asked to. Big difference.

But do look at what the stock market is saying.  This is where the real brains are.  The stock market, with the Dow Average at 13,000, a four-year high, suggests that there is enough underlying strength in the U.S. and global economies to weather the storm…weather the risks that the market can see.

Very bullish views of Dow 15,000, or Dow 17,000, or even Dow 20,000 are starting to appear.  Perhaps these overly optimistic views should be rubbed against the “doomsday” view of the few.

Predicting the Great Recession

It is amazing how many economists, and stock market watchers, and people I meet on airplanes, and people who come up to me after I speak, tell me they correctly predicted the timing and the depth of the Great Recession, which officially ran from December 2007 – June 2009.  As you know, the Great Recession led to the Dow falling by more than one-half, with an economy losing more than eight million jobs.  Housing prices are down 35 percent from the 2006 peak.

I have traditionally been an economist who thinks of myself as “realistic and long-term optimistic.”  Yes, we have some very major decisions to make in Washington about reining in the growth of government spending and associated damaging budget deficits.

One of my banking clients is a top Colorado bank.  As a result, I get called frequently by The Denver Post for quotes or analysis on news stories.

Over the years, the Denver media would many times contrast my reasonably optimistic view against those of the “Duchess of Doom" -- a very nice, now largely retired economist whose views were always negative…whose constant forecast was that economic disaster was just around the corner.

She was right -- finally -- in 2008 and 2009.  Without any disrespect intended, even a broken clock is right twice a day.

Back to the “Doomsayers”

While each of the three aforementioned “doom and gloomers” have similar views, their recommendations differ like night and day.  Harry Dent says to invest in short-term U.S. Treasury bills, where the current annual return is effectively zero, as well as the U.S. dollar, whose value will benefit from safe-haven cash flows.

Prechter simply says keep your powder dry and buy when things get really bad.  No doubt he will let us know when that is, for a princely sum.

Celente’s advice centers on survival.  He says buy gold so you don’t lose purchasing power when the U.S. dollar plummets.  Buy a gun to protect your family against desperate people in search of food and money.  He says plan a getaway to places with more stable finances and governments.  Again, such places can most likely be had for a fee.  Not sure if the airlines will be running in such devastating times, but maybe he knows something.

The Tea Leaf is a weekly economic and financial update by Jeff Thredgold, economist for Vectra Bank Colorado. He has been writing an economic update every week for the past 31 years and is the only economist in the world to have received the designation of CSP, or Certified Speaking Professional. Republished with permission from the Tea Leaf by Jeff Thredgold, whose site address is www.thredgold.com/html/leaf.html.
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Readers Respond

there is no doubt that we are headed for an economic disaster. You CANNOT continue to have a dollar that's worth anything with this sort of debt. facts are facts and it doesn't need to come from an "economist" that the author seems to dislike. It's their business and their expertise and the author blows it off like it's nothing. In fact, sticking our heads into the sand won't work. The dollar has to become worthless if we continue in this entitlement society and that CANNOT be argued. By John Wray on 2012 03 12
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