Parallels Between 1920's Stock Crash and Current Times

Comments

• synthetik

  February 2007

  From Mish's blog - Mish's opinion on why we're more headed for 1929 style depression vs. 70's stagflationary period.
  

  70's Rerun
  
  Similarities
  
  1. War in Vietnam war then vs. the war in Iraq now
  2. Rising oil and commodity prices
  
  Differences
  
  1. Rising Oil prices [demand side shock vs. supply side shock]
  2. Spiraling wages then vs. declining wages now
  3. Wage and price controls then
  4. Consumer Debt levels – Significant ability to take on more debt in the 70's
  5. Housing down payments – 20% then 0% now
  6. Two family incomes now vs. one family income then
  7. The power of unions - then
  8. Globalization & Global wage arbitrage - now
  9. Outsourcing - now
  10. Productivity improvements - The internet and other innovations - now
  11. Declining credit standards - now
  12. Downfall of communism
  13. Long term interest rates under 5% - now
  14. New creative financing ideas running rampant - now
  15. Massive use of derivatives - now
  16. China, India, and Emerging Markets
  
  
  1920's Rerun
  
  1. Throughout the 1920s, the Fed deliberately and unwisely stimulated the stock market by keeping the "call rate," that is, the interest rate on bank loans to the stock market, artificially low. – Margin rates were just lowered here and the FF rate which was lowered to 1% supported a big housing boom.
  2. In the late 1920s, bank credit propelled a massive real estate boom in New York City, in Florida, and throughout the country. We now have the biggest housing bubble in history.
  3. In the 1920's there was a massive infusion of money (gold) from war torn Europe stimulating our economy. We currently have a massive stimulus of cheap money from Japan and China via and various carry trades and cheap credit supporting our economy.
  4. In the 20's we intervened in foreign exchange markets to enhance or stabilize Europe's power to buy our exports. We currently are involved in disputes with China over currency issues attempting to get China to buy more of our goods.
  5. There were massive productivity improvements in the 20's along with the industrial revolution and assembly line processing. The 90's – 2000's productivity miracle was the internet. Huge boom periods on account of disruptive innovation. By contrast there was no such innovative disruptions in the 70's.
  6. In late 20's credit was expanding at a rapid pace but there was no need for additional productive capacity. Today GDP is rapidly falling but credit is still rising. There is no pent up demand for homes, restaurants, retail stores, strip malls, autos, truck, etc, just as there was no need for additional assembly line production in 1929. Speculation replaced productive capacity just as it is today.
  7. In 1929 leverage was extreme via stock margin. In 2006 credit derivatives leverage is extreme to the tune of 340 trillion dollars worth with no one really understand exactly what the counterparty risk is.
  8. A few days before leaving office in March 1929, Coolidge called American prosperity "absolutely sound" and assured everyone that stocks were "cheap at current prices." Based on the "Treasury Model" and unsustainable earnings growth due to financing activities, we are once again told time and time again that "the economy is sound" and stocks are cheap at current prices.
  9. "Keynesian Folly", along with other massive government interventions managed to convert what would likely have been a short, sharp recession into a chronic, permanent, stagnation with an unprecedented high unemployment that only ended with World War II. Massive government interventions between 2002 and 2005 prevented a badly needed recession and instead created the biggest asset bubble in history.
  10. In 1933 gold coins were confiscated – now we have a threat of nickels being confiscated.
  11. At the time, the stock market of 1929 was the biggest asset bubbles in history. We have now vastly exceeded all previous credit bubbles.
  12. The Smoot-Hawley Tariff was signed into law on June 17, 1930. There are renewed threats of tariffs in the U.S. Congress right now.
• B-hamster

  February 2007

  I think we are in for an interesting ride. Think about the MSM media's role in all these market runs: from the tech boom, real estate, through the current equities run. The media was always first to the party when things were going well, but the last one to leave when the picture wasn't so rosy.
  
  Think about how much you needed to dig for news stories when these blogs were in their infancy and people knowledgeable about the markets were considered kooks and doomsayers. Now that the tides are beginning to shift, it's unfortunately too late for many people who are under water in their mortgages and are basically screwed. The same thing may be said about the equity markets, as many of the sophisticated investors have probably bailed or are invested in some form of contrarian investsments, such as short sales, options, or hedge funds.
  
  Ever since companies no longer funded their employees' pensions (which were primarily invested treasury debt instruments) and individual investors became responsible for their own retirement investing did these market manias appear, driven mostly by (you guessed it) the media in its get rich quick schemes.
  
  As our society continues to outlive its collective means, and wages continue to stagnate (as was mentioned elsewhere), a strong work ethic no longer ensures a predictable reward. Consequently, Alternative means of acquiring/building wealth need to be embraced. And considering the vast majority of investors have little working knowledge of market fundamentals – whether equity, real estate, commodities, etc. – they are basically gambling with their life savings. This isn't a weekend gambling trip to Vegas.
  
  I hate to sound negative, but I think we're screwed. My prediction is Q4 2007 things will really turn sour, and Q1 2008 when the corporate earnings reflect this.