Is this market like 1932 ?

[papadad111]

Been thinking about the market and what's been transpiring. I'm not a market historian but it feels like we can draw some parallels to 1932 and we all know that was a dead market for the next 15 years, til the end of WW2. Fed raised too quickly after the big crash... sent the economy into a stagnant state til the end of the war. War didnt help, of course, but could we be on the verge (as Bogle suggests) of very anemic (or even negative REAL) returns for the next decade?

Ben B was at least well schooled and studied this time period. Janet less so....

Thinking of sequence of returns risks... Anyway, just wonder if we have any economists or historians (or those who might have lived through it...ya never know) who studied that period of time indepth that can share parallels and/or perpendiculars...

 

[Gone4Good]

I'm not a market historian either but what I do know suggests the two periods couldn't be more different. We, for example, didn't let our banking system collapse like we did in the 30's. The Fed also didn't significantly contract the monetary base to defend the gold standard like it did in the 30s. The recent Fed tightening comes against the backdrop of 5.5% unemployment rather than >20%.

Other than a debatable, but minor, 25bp increase by the Fed recently, I'm struggling to see any parallels at all.

 

[MichaelB]

In 1932 the world was in the midst of a great depression, the global economy had contracted by 20%, corporate profits were negative, and unemployment was over 25%. In 2016 the global economy is growing >2.5%, corporate profits are at a historic high, and a greater percentage of the world's population has escaped poverty than at any other time in history. Where exactly is the similarity between 1932 and 2016?

 

[Senator]

No on will ever know, until it is over... No one can put a finger on the cause of the Great Depression. Stock prices are more about emotion, rather than economic factors, although they both correlate. The similarities of the stock market charts are rather eerie... That makes sense if the emotion of the investors is the same.

In 1932, we had the fed tightening, deflation and a bad economy. Today is similar. While the official unemployment rate is ~5%, the under-employed and people that have given up are closer to ~20%.

In 1932, once we got the USA on track, we were pretty much all set. Global trade was a small pittance compared to today.

Deflation is a big killer. We have global deflation now, there is no way we can have inflation in the USA and deflation on a global scale. Factor in a stronger dollar with increased interest rates, and deflation starts to get even stronger. People hoard money, rather than spend. Prices fall even faster.

We have a global surplus of labor, and it is getting worse. There is a virtually unlimited supply of low-skilled labor in the world. The demand for STEM jobs, while still strong, is not keeping pace with population growth. We can replace many scientists by just developing a faster CPU or better software. In 2000 time frame, there was a huge shortage of STEM people in the USA, now we just import them by the millions.

Many companies are having a hard time increasing top line revenue growth. Demand is not increasing, at least not at current prices. The companies cuts costs by paying less, having workers do more, laying off workers, and increasing automation. That all makes for deflation in the long run.

 

[MichaelB]

The chart drawn is deeply misleading, each curve is drawn to a different scale to make them look similar when they are not.

Stock prices are more about emotion, rather than economic factors, although they both correlate.

Stock prices are a reflection of corporate profits and cash flows, and correlate very closely. In 1932 corporate profits were negative. In 2016 they are at record highs.

In 1932, we had the fed tightening, deflation and a bad economy. Today is similar.

In the 1930's there was economic contraction in the US and around the world. In 2016 there is economic growth in the US and around the world. In what way are they similar?

 

[Gone4Good]

The similarities of the stock market charts are rather eerie...

Someone is pulling your leg.

Take a look at the scale used for both time series in the image you posted. The Dow from 1928 has a price range of 200% while the current period uses a range of 32%.

With that same technique I'm pretty sure I can make just about any two stock charts correlate the way they have above (and that's assuming the other data isn't fudged as well).

As to the rest of it, yes, we have what might be a period of economic stagnation perhaps driven by many forces (slow productivity growth, aging populations, increased inequality, etc.) At the same time we have financial assets that are at the high end of historic valuations.

None of which is good. All of which probably means we'll experience lower investment returns in the future than we've enjoyed in the past. But we can talk about all of these things without needing to fit the square peg of the 1930's into the round hole of our current situation. The two really don't fit.

 

[LOL!]

How to Create Financial Porn easily in your own home.

 

[Senator]

In the 1930's there was economic contraction in the US and around the world. In 2016 there is economic growth in the US and around the world. In what way are they similar?

My portfolio is counting on economic growth, but there are a lot of things that could be indicating a worse environment going forward.

I wonder what growth rates would be if Governments did not spend (considerably) more than they take in? Do governments (i.e. politicians) manipulate numbers?

Until we see some sort of inflation, I do not see any major economic growth. Some of the growth that is being reported is because of population growth. The world needs inflation or currency devaluation to get back on track. Although I am not a gold bug...

Central Bank interest rates in the world are headed down, not up. Except in the USA. Governments are spending a lot more than they take in, which is 'normal', but seems to be accelerating. Japan is an example.

If the world was really growing economically, commodity prices would be stable, or headed up. The Baltic index would be higher, not lower. Productivity would be higher.

in the end, we will know looking back, but not forward...

 

[JoeWras]

OK so we know Senator's chart is whacked due to different scales. But let's say it comes true. Dow 13000? I'd say it is quite possible, maybe even likely. A bear, but not catastrophic. Maybe even healthy.

The big difference between 30's and now is we are more globally connected. Europe may have issues now, but they were completely whacked in the 30s.

 

[MichaelB]

My portfolio is counting on economic growth,

Yet you have two posts showing extreme pessimism and compare the current US and global economy with the worst economy in the post-civil war era. Why would you invest in global economic growth if you believe there is none?

 

[audreyh1]

This graph doesn't even go out to the end of 2015, let alone include this January. Why does it stop at mid to late 2014? Over a year of recent data is missing.

We're already past the end of that graph now, so I don't understand the parallels.

Oh - I see - it was predicting out to some time in 2014. Well, we are well past that now and didn't kiss DOW 13,000 at the appointed time, so I don't see the point.

When looking at predictions, it helps to see when they were dated - like this one: Feb 11, 2014? Almost 2 years out of date? http://www.marketwatch.com/story/scary-1929-market-chart-gains-traction-2014-02-11

I notice no discussion online of the Tom Demark prediction past when this article was published, so it looks like that one too was thrown in the dustbin of history.

 

[JoeWras]

Removed: I am confused. Time to sign off for a while. I gave out some bad numbers and history in the removed post.

 

[audreyh1]

How to Create Financial Porn easily in your own home.

Good one!!!

 

[ESRwannabe]

Well, I definitely believe that we will have a stagnant economy for many year, maybe even a decade.

Investing wise I think it will pay to use leverage as I don't think we will have much deflation nor inflation, just a stagnant going nowhere economy.

In other countries like China I could see them go into a 1930s depression. I think for the US we will be similar to Japan's lost decade(s).

 

[W2R]

Somehow, a part of human psychology (at least for many people) is a deep craving for doom and gloom and the worst possible situation.

It helps to view the market objectively and avoid the self indulgency of wallowing in unwarranted doom and gloom, complete with doctored charts to support it.

I mean, seriously. Just because the market has been cooperating in the past few years (as it did in the 1990's), and now is faltering a bit (as it did in 2002) doesn't mean that this is a run-up to another Great Depression. It is what it is, no more and no less.

 

[audreyh1]

Can I add this post here too for market perspective? I originally posted this on the More Worried About Markets Now Than Any Time Since 2009 thread.

Here is an article I think gives a good perspective on how to look at markets. It is a far more nuanced view than that pushed by the traditional panting finance media, and IMO far more accurate.
What Does the Market Know? by Howard Marks of Oaktree

 

[W2R]

Can I add this post here too for market perspective? I originally posted this on the More Worried About Markets Now Than Any Time Since 2009 thread.

Here is an article I think gives a good perspective on how to look at markets. It is a far more nuanced view than that pushed by the traditional panting finance media, and IMO far more accurate.
What Does the Market Know? by Howard Marks of Oaktree

Interesting article, Audrey! Thanks.

 

[Hamlet]

If the world was really growing economically, commodity prices would be stable, or headed up.

Why do you assume this? Commodities mostly got cheaper from 1980-2000, which where pretty good economic times overall.

It could just be that we're producing more of this stuff than can possibly be used, and that growth is coming in areas that don't need much in the way of commodities to be produced (ie software, movies, services, etc).

 

[Senator]

Yet you have two posts showing extreme pessimism and compare the current US and global economy with the worst economy in the post-civil war era. Why would you invest in global economic growth if you believe there is none?

Good question. I am going to rely on 130+ years of stock market history and not my gut feelings or any market pundits opinion.

Even in 1932, things got better. Most bear markets fall quick, and recover slower. Maybe the worst is behind us? Maybe it is different this time? Maybe, woulda, coulda shoulda...

 

[Senator]

Why do you assume this? Commodities mostly got cheaper from 1980-2000, which where pretty good economic times overall.

It could just be that we're producing more of this stuff than can possibly be used, and that growth is coming in areas that don't need much in the way of commodities to be produced (ie software, movies, services, etc).

Maybe, but would oil, gold, copper, steel, iron, etc. all have the same deflationary spiral at the same time?

 

[Gone4Good]

Maybe it is different this time?

What really would be different this time is experiencing two Great Depression sized financial panics within a single decade.

 

[W2R]

What really would be different this time is experiencing two Great Depression sized financial panics within a single decade.

Uh huh. How soon we forget.

The Great Depression had devastating effects in countries both rich and poor. Personal income, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. Unemployment in the U.S. rose to 25% and in some countries rose as high as 33%. Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming communities and rural areas suffered as crop prices fell by approximately 60%. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as mining and logging suffered the most.

https://en.wikipedia.org/wiki/Great_Depression

 

[M Paquette]

Oooooooh! Spooky charts are spooky!

In unrelated news, did you know that fractal noise sources are both unpredictable, and exhibit self-similarity on different scales?

Spooky!



Sent from my iPad using Early Retirement Forum

 

[papadad111]

What really would be different this time is experiencing two Great Depression sized financial panics within a single decade.

2000 and 2008 don't count...right ?

 

[Hamlet]

Maybe, but would oil, gold, copper, steel, iron, etc. all have the same deflationary spiral at the same time?

Most of them did from 1980-2000.

Hey, I'm worried about deflation too, I just don't think commodities are the place to focus. Wages are the place to focus. If commodities go down, but we have strong employment and increases in real wages, that would be fine with me.

Lately, we've had decent employment gains, but wages have been muted because we are still digging out of the hole dug during the Great Recession.

Hopefully the weakness abroad doesn't derail the recovery.