1930s Déjà vu

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The excerpts below come courtesy of David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates.

“An old contact of ours at Merrill Lynch pointed out these articles from the Wall Street Journal after the initial post-crash rally that took the market up some 50% from the interim lows. Sounds eerily similar to what we hear today:

August 28, 1930:

There’s a large amount of money on the sidelines waiting for investment opportunities; this should be felt in market when “cheerful sentiment is more firmly entrenched.” Economists point out that banks and insurance companies “never before had so much money lying idle.”

September 3, 1930:

Market has now reached resistance level where it ran out of steam on July 18 (240.57) and July 28 (240.81). Breaking through this level would be considered a highly bullish signal. General confidence that this will happen based on recent market action; many leading stocks have already surpassed July highs. Further positive technicals seen in recent volume pattern (higher on rallies and lower on pullbacks), and in continued large short interest.

Some wariness based on recent good rally recovering all of drought-related break; some observers advise taking profits on at least part of long positions, to be in position to rebuy on good pullbacks.

Most economists agree business upturn is close; peak in business was reached July 1929, so depression has lasted about 14 months. “Those who have faith and confidence in the country and its ability to come back will profit by their foresight. This has also been the case over the past half century.”

Harvard Economic Society points to steady rise in bond prices as favorable for stocks. Says there is “every prospect that the [business] recovery … will not long be delayed,” although fall period may not be strong as expected. Notes worldwide decline in business, but 1922 recovery demonstrates U.S. due to “great size, natural advantages, and diversity of conditions … can lift itself out of depression without the stimulus of improved foreign demand.”

“We only know now with perfect hindsight what these pundits did not know back then – that there was another 80% of downside left in the bear market.” Source: David Rosenberg, Gluskin Sheff & Associates – Lunch with Dave, September 4, 2009.

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1 comment to 1930s Déjà vu

  • Nick

    Perhaps it all comes down to consumer spending, which now makes up about 70% of the US economy. Just as in 1930s, US consumers have very large debts now, while their incomes are declining due to increasing unemployment.

    The debt burden for consumers is getting more difficult to bear. And cost-cutting by private companies to increase their profitability only makes the situation worse for these consumers, who happen to be workers at these private companies.

    It’s a negative feedback kind of situation in the economy, where cost-cutting by consumers leads to cost-cutting by their employers. And it won’t stop until consumers cope with their debts and get rid of them in some way.

    The second world war helped consumers get rid of their debt obligations last time around. Either through destruction of their societies in Europe. Or through deprivation and extreme frugality in USA, where consumer goods became unavailable and essential goods were rationed. Americans saved almost all of their war-time incomes and bought US government bonds to help the war effort.

    It will be interesting to see how the deeply indebted consumers around the world will get rid of their debts this time around. It doesn’t have to end in war and destruction. It can end in a very, very long economic depression, similar to the one in the late 1800s.

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