It’s Different This Time

I heard the same four words used to support divergent opinions last week. The first time they were uttered, “Jack” was concerned that the current economic situation was dire and that this bear market was different than all others, or at least the one that he lived through in 2000-2002. A day later, “Ira” weighed in, saying that he vividly remembers the 1970’s and that this bear market was far different—and not nearly as bad as what he went though that time! Both of these interpretations are true.

Part of the difference between the two has to do with age. Jack only started investing in 1992, when he received a large inheritance. He knows that his first bunch of years spoiled him because the market moved up by so much and the gains far outweighed any of the pull-backs that occurred. When the tech bubble burst, Jack said he was scared, but he trusted that we would get him through the pain, which we did. “Things just didn’t seem as bad then as they are now! It’s different this time!”

This is of course the benefit of a healthy dose of amnesia. I had to remind that Jack that the stock market dropped by 55% during the last bear market and the economy was pretty grim. That said, I think what Jack meant was that today’s economic weakness feels more pervasive, as stocks and housing are falling as consumer prices are on the rise. In other words, there is just no place to hide. This may be why some of the confidence numbers are worse today than they have been in many years.

But there are others who have a longer time horizon by which to judge the current situation. Ira has been investing since the early 1960’s and has seen his share of bad markets and recessions. “I have to tell you—I think the media’s comparisons of today to the seventies are way overblown. Back then, I remember waiting in line for two hours to fill up my gas tank, paying my employees more when the company could not afford it and getting a mortgage for 11% and feeling lucky. It’s different this time!”

Listening to Ira, I realized that one of the biggest differences between the seventies and today is that the work force has lost leverage. In the 1970’s, unions had more power and as a result, wage growth regularly jumped above 8% and beyond. Today, employees can not walk into the boss’ office and ask for a raise to cover increased household expenses, because each of us realizes that we are one pink slip away from having our job outsourced. As a result, workers see their energy and food costs rising sharply without a concurrent increase in wages. The good news is that because companies are not paying more, they are not raising prices as much as they did in the past, causing what economists call a wage-price spiral.

Of course, every economic cycle is different than all others. How different may depend on where you are in your life, whether you are an employee or an employer and the sector in which you work. What is NEVER different is something that is worth remembering: the down cycle will end and be replaced by an expansion that makes you forget the pain of the last one.