I don't think people just decide to cut consumption, unless something important has changed. A perfect case of that happening was in the summer of 1990 when Iraq invaded Kuwait. It didn't take more than a week to figure out that the US and UK were going to attack Iraq to reverse that action, and to prevent it from invading Saudi Arabia next. People's memory of the big spikes in energy prices in the 1970's were a lot fresher in mind, and the consensus was that once the war started the price of oil would go to $100 per barrel, making gasoline $5 or more per gallon. Consumers and businesses went on strike, not buying anything they didn't absolutely need, to make sure they had the funds to handle the higher costs ahead, and we were in a recession pretty quickly. Actually, spending was subdued in any event due to the collapse of real estate prices and the S&L's that financed them, but this made it worse.
I wouldn't be surprised if the long overdue bear market, whenever it begins, starts the same way, with some unexpected external event with bad implications that put the brakes on consumer spending. Things that come to mind are, on the political front, India and Pakistan lobbing nukes at each other, or China going to war over Taiwan. In the act of God department, a massively destructive earthquake in the US or Japan might do the trick.
Not that we need this kind of thing for a bear market to get started. The raw material is all there, so it could just get started on its own. All sell offs in the 1990's didn't last very long before enough buyers came in to turn things around, always aided by the Fed coming to the rescue. In the real bear market the Fed won't be able to help much. The dollar has been going up and down with stock prices lately, reflecting the fact that so much foreign money is speculating in US stocks. A badly declining stock market would make the dollar drop, raising the risk of inflation. If the Fed tried too hard to rescue the stock market through excessive money creation, that could scare the foreigners into dumping dollars and government bonds, making interest rates go up, the opposite of the Fed's intent.
If the downward spiral I fear does happen, the sequence will be that first people lose lots of money in the market and then, when everyone cuts their spending as a result, they lose their jobs. Profits will collapse because demand has shrunk but the supply is still there. I would expect a vicious price war as many industries turn into a game of "musical chairs". Money funds and bonds that seem so dowdy now will appear quite attractive compared to stocks with no dividends that are depreciating at a rapid pace, and the more people switch, the more pressure that puts on everyone else to do so.
If all this does happen, other things would follow. Right now there is tremendous confidence in the middle classes and above about their ability to retire reasonably comfortably based upon the expected growth in their investments. A severe bear market, and the loss of income in a weak economy that would follow, would dash those hopes and make for a very nasty, unhappy electorate, with unknown and possibly dangerous political implications. I better stop here.
Reminder: As Dennis Miller, the very caustic comic on HBO says, that is just my opinion, and I could be wrong. |
