Is this market like 1932 ?

[MichaelB]

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

There have been some good posts and links since the OP. Why not make your case that shows why 2016 is like 1932.

 

[MichaelB]

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

Is the decline in commodity prices deflation or just a return to long term trend price?

 

[Hamlet]

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

2000 doesn't. That was a pretty run of the mill bubble/recession.

 

[Gone4Good]

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

The tech bubble was not a financial panic, so no 2000 doesn't count.

A financial panic includes a run on the financial system, so 2008 counts but a garden variety bubble popping (tech stocks, gold, oil, etc) does not.

The difference is important because a financial panic has the capacity to cause a Great Depression, whereas some other market collapse that doesn't endanger the banking system does not.

 

[Senator]

Is the decline in commodity prices deflation or just a return to long term trend price?

I realize that most pricing returns to trend. However, most of the initial commodity price spike was due to demand. Copper, steel, oil, aluminum, etc. was actually being used, not hoarded.

Now the demand has fallen and prices have followed. If it was increased supply, such as in oil, it makes sense. Copper prices should be stabilized and not falling.

The Baltic Dry index is also down. That is a huge indicator of demand.

So, in answer to your question, give me 10 years, and I will have the right answer.

 

[Senator]

The tech bubble was not a financial panic, so no 2000 doesn't count.

A financial panic includes a run on the financial system, so 2008 counts but a garden variety bubble popping (tech stocks, gold, oil, etc) does not.

The difference is important because a financial panic has the capacity to cause a Great Depression, whereas some other market collapse that doesn't endanger the banking system does not.

What about the S&L crisis of the 80s and 90s? Or the Asian financial crisis.

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

There will always be one crisis or another. Running for the hills might seem like a great idea, but is likely the incorrect response.

 

[Gone4Good]

What about the S&L crisis of the 80s and 90s? Or the Asian financial crisis.

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

There will always be one crisis or another. Running for the hills might seem like a great idea, but is likely the incorrect response.

No and no. The Asian financial crisis may qualify . . . for Asia. But it didn't threaten our banking system. And neither did the failure of 1,000 or so nickle and dime S&Ls all of which were resolved under existing deposit insurance mechanisms. Where was the panic?

But rather than argue the semantics of every other market hiccup that also doesn't qualify as a financial panic since the last one in the 20's, I'll just bump MichaelB's request to bring the conversation back to the original topic.

There have been some good posts and links since the OP. Why not make your case that shows why 2016 is like 1932.

 

[haha]

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

I'm on his mailing list. I agree, this is an excellent, well balanced article.

Ha

 

[haha]

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

Who knows about gold, but the other things you mention all have experienced a lot of new mine development to try to meet Chinese demand surging. Now we have those quality mines, and China has slowed down. Mines once built tend to be kept in production. Since mothballing a mine is a very big deal, a good mine will normally produce even if it is not quite making variable costs.

Ha

 

[UnrealizedPotential]

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

Very good article. Thank you for that. The article seems to capture reality as I see it.

 

[Lsbcal]

For an idea of what it was like in the 1930's read this excellant book:
The Great Depression: A Diary

When the stock market crashed in 1929, Benjamin Roth was a young lawyer in Youngstown, Ohio. After he began to grasp the magnitude of what had happened to American economic life, he decided to set down his impressions in his diary.

Benjamin Roth was an investor and an astute observer. Also some discussion about real estate.

Have we been through anything like the 1930's? I think not. When the market went through another downturn in 1937, unemployment was something like 15%. And in those days the 2 income households were few in number.

 

[papadad111]

There have been some good posts and links since the OP. Why not make your case that shows why 2016 is like 1932.

After long and protracted market fall of greater than 50 percent, global growth and equity returns recover and then fall again and for the ensuing following decade remain anemic growing just at the rate of inflation or less. Fed overly priming the pump causing asset bubble and then raising rates too quickly while rest of world falters resulting in prematurely choking out global recovery and growth resulting in not reaching collective economic escape velocity for a couple of decades.

That was 1929-1932. And then 1932-1940...

That was also 2008-2014.... And now 2015-2016 YTD

The 1932 playbook will call for political and economic turmoil caused by election and protectionist measures. Real wages will stagnate or move negative. Commodities will crash. Deflation will reign supreme for a decade. Some economies will totally collapse.

I'm not a market historian. I can draw parallels but I suppose anyone can do that and make it feels like the third or fourth inning of the same playbook.

Seeking perspectives.

 

[DrRoy]

I am not suggesting a parallel here either, but 1932 was the time to buy stocks. The market put in it's lowest mark in the last 100 years. Sentiment is generally an inverse indicator.

 

[Senator]

Fed overly priming the pump causing asset bubble and then raising rates too quickly while rest of world falters resulting in prematurely choking out global recovery and growth resulting in not reaching collective economic escape velocity for a couple of decades.

I think the fed rate [-]raises [/-]increases will be a big killer. There is no inflation. Wages are relatively flat. CEO pay has increased, but the average hourly earnings for an average worker, is flat. The rates increases are a bonus for the banks.

When you have a 1% deflation, and a 2% fed funds rate, it is a 3% real interest rate. That 2% is the target for the next 12 months or so. It is a tightening of the money supply, which reduces output and limits investment.

Tax rates were also raised in that era, as they have been recently.

Excess economic capacity was in that time frame, as it is today. We have a huge labor surplus in the world and the USA. Some of it is structural, some of it is a natural product of our society.

I do not think we have an exact correlation between now and the years around 1932, but there are many similarities.

Of course, we have better mechanisms now to defeat a bad economy. We can cancel all US debt with a stroke of a pen. In the 1930s, dollars were backed by gold.

 

[Gone4Good]

That was also 2008-2014.... And now 2015-2016 YTD

Perhaps part of the confusion is that the title of your post should have been "Is this Market Like 1937." That makes more sense to me, keeping in mind that the aftermath of 2008/2009 was nothing like that of 1928/29 because the response by government's world wide was much, much better.

We do, surprisingly enough, learn from history (well, at least institutions like the Fed do.)

Which also leads us to the reasonable possibility that the Fed will not blindly keep tightening monetary policy in the face of all evidence in 2016 and beyond. Thus far they've raised rates by 0.0025 and are not honor bound to raise any more. Futures markets have dramatically cut the odds of another Fed increase.

If inflation continues to be a no-show and the labor market softens, I'd say the Fed tightening will be "one and done."

 

[Gone4Good]

I think the fed rate raises [plural?] will be a big killer.

See above response to papadad111

 

[papadad111]

Perhaps part of the confusion is that the title of your post should have been "Is this Market Like 1937." That makes more sense to me, keeping in mind that the aftermath of 2008/2009 was nothing like that of 1928/29 because the response by government's world wide was much, much better.



We do, surprisingly enough, learn from history (well, at least institutions like the Fed do.)



Which also leads us to the reasonable possibility that the Fed will not blindly keep tightening monetary policy in the face of all evidence in 2016 and beyond. Thus far they've raised rates by 0.0025 and are not honor bound to raise any more. Futures markets have dramatically cut the odds of another Fed increase.



If inflation continues to be a no-show and the labor market softens, I'd say the Fed tightening will be "one and done."

Well. I did mean 1932..... In that There was a pronounced market crash. 1929. A recovery, 1930-1931 and then another crash. 1932. To whit:

"Who could have predicted it... It is worth noting that the 1932 stock market crash is deemed to be the worst in the 20th century and not the one in 1929. By mid-1930, the market was up 30% from the trough of the 1929 crash. However, by the summer of 1932, the Dow reached a low of just 11% of its high in 1929, or a loss of roughly 89%, trading more than 50% below the low it had reached on October 29th, 1929. If one had $1000 on September 3rd 1929, it would have gone down to $108 by July 8th, 1932 -- end of the worst crash -- or an 89.2% loss. To recover from such a loss, one would have to watch one's portfolio go up by 825%!"

 

[Lsbcal]

I am not suggesting a parallel here either, but 1932 was the time to buy stocks. The market put in it's lowest mark in the last 100 years. Sentiment is generally an inverse indicator.

Volatility was incrediblly high in 1932, nothing like we have seen in today's markets.

I could show some data if anyone requests it.

 

[MichaelB]

After long and protracted market fall of greater than 50 percent, global growth and equity returns recover and then fall again and for the ensuing following decade remain anemic growing just at the rate of inflation or less. Fed overly priming the pump causing asset bubble and then raising rates too quickly while rest of world falters resulting in prematurely choking out global recovery and growth resulting in not reaching collective economic escape velocity for a couple of decades.

That was 1929-1932. And then 1932-1940...

That was also 2008-2014.... And now 2015-2016 YTD

The 1932 playbook will call for political and economic turmoil caused by election and protectionist measures. Real wages will stagnate or move negative. Commodities will crash. Deflation will reign supreme for a decade. Some economies will totally collapse.

I'm not a market historian. I can draw parallels but I suppose anyone can do that and make it feels like the third or fourth inning of the same playbook.

Seeking perspectives.

Just a couple of points.

Audrey1 gave a link to an excellent essay by Howard Marks. You should read it.

There are strong parallels to the 1930's, but only if you ignore all the facts that are not common. Such as two world wars and a great depression.

There was a banking panic in 1930 and another in 2008. In 1930 there were systemic bank failures where both investors and depositors lost everything, This led to a global depression where aggregate demand contracted by more than 20%. In 2008 the panic was not systemic, bank failures were absorbed, investors lost but depositors were made whole. This led to a recession where there was a slight contraction in global demand, a larger contraction in the US.

Equity market values reflect corporate profitability, bond values reflect risk of default. For the markets to decline sharply, investors fear that either bonds will not be redeemed or profits will disappear. That was a reality in 1930, and a fear in 2008.

There is no similar fear in the bond markets today, and fear of rising rates is totally different from fear of mass default.

There might be a fear in the equity markets that profits may not rise enough to justify higher asset prices, but there is also no mainstream evidence to suggest that system-wide profitability is in any way threatened.

 

[JoeWras]

There's also this vague 40 year cycle. The 1890's, the 1930's, the 1970's, the 2010's.

It will work out. The thing about ER is you hope you are not the down-line on the firecalc front page. But I guess that is what firecalc helps you assess.

 

[redduck]

Volatility was incrediblly high in 1932, nothing like we have seen in today's markets.

I could show some data if anyone requests it.

Would someone please request the data because I would like to see it.

 

[papadad111]

Michael B. Good post. You forgot to mention the incompetent fed ... Oh wait. That's both then and now ... Strike that.

 

[MichaelB]

Michael B. Good post. You forgot to mention the incompetent fed ... Oh wait. That's both then and now ... Strike that.

I couldn't disagree more. Fed monetary action in 2008 prevented that banking collapse from turning into something more similar to the 1930's. It has been quite effective.

Is this a serious discussion? It seems a bit trollish...

 

[papadad111]

Jokes aside. The counterparty risk is less transparent today with global connectedness. Much more risk of contagion today than during the GD.

Fascinating - sitting where we are today ... In 2016 And sitting at 1932 as a comparison...no one then knew there would be another world war and that is what it would take to lift us from the depression. Hindsight is 20-20.

In fact. Headlines were quite the contrary. All this happened despite assurances from prominent government and business leaders of-the-time that the worst was behind.

. September 1929: “There is no cause to worry. The high tide of prosperity will continue.” - Andrew W Mellon, US Secretary of the Treasury

After the stock market crash in October 1929, the Dow Jones Industrial Average (DJIA) partially recovered in November-December 1929 and early 1930.

Reassuring headlines such as the following became increasingly common:

. May 1, 1930: “I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity!” – US President Hoover

. August 29, 1930: “American labour may now look to the future with confidence.” – James J Davis, US Secretary of Labour

. October 16, 1930: “Looking to the future I see in the further acceleration of science continuous jobs for our workers. Science will cure unemployment.” – Charles M Schwab.

On July 8th, 1932 the Dow reached its lowest level of the 20th century and did not return to pre-1929 levels until 23rd November, 1954. The full impact was not felt until the next year. By 1933, the Great Depression was very real and it would take more than 22 years before the market would regain what had been lost.


After the crash in 1932, not 1929:

1. The Securities and Exchange Commission (SEC) was established;

2. The US Congress passed the Glass-Steagall Act mandating a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds and other securities;

3. The Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to $100,000; and

4. Works Projects Administration (WPA), the largest New Deal agency, was set up employing millions to carry out public works projects.

However, while FDR's New Deal did help restore the GDP to its 1929 level and did introduce basic banking and welfare reforms, FDR refused to run up the government deficits that ending the depression required. Only when the federal government imposed rationing, recruited 6 million defence workers (including women and African Americans), drafted 6 million soldiers, and ran massive deficits to fight World War II did the Great Depression finally end.

The extent of the economic devastation of the 1930s went far beyond the imagination of anyone in the financial markets or governments across the world.

 

[papadad111]

I couldn't disagree more. Fed monetary action in 2008 prevented that banking collapse from turning into something more similar to the 1930's. It has been quite effective.

Is this a serious discussion? It seems a bit trollish...

Trolling. Are u kidding me ? It's As serious as cancer ... The fed did well in 2008. Now, however, I question their actions. The fed did not exist until 1932 and was incompetent then to fix the economy too.