Share Investor: Great Depression

Showing posts with label Great Depression. Show all posts

Thursday, July 7, 2011

My G'G' Generation

Economies and social norms go through cycles. Over generations peoples views change and are moulded by the things going on around them and the values and mood of the day.

If you look at fiscal responsibility and being savvy with money we need to look at a timeline to get an idea of what I am getting at and why there is hope for the current generation.

The generation that grew up during the Great Depression of the 1930s (I added the date because I know of a 17 year old who has no idea when it was and I know he is not alone) and learnt lessons during dark economic times which positively shaped their attitude to life and finances; they lived within a budget, were entrepreneurial, saved money and propelled the global economy from the 1950s to the early 1970s like no time before in modern history.

Skip forward to the generation my parents grew up in, the baby boomer generation, and by sheer numbers alone they swept everything up before them. They seemed to have learnt little from their struggling parents who brought the boomer generation up in the unprecedented good times and proceeded in the 1970s - till now really because of their sheer numbers, to go on an orgy of drugs, sex, debt, share buying, house buying and then more house buying all on an orgy of credit (and took some of my generation along with them) and it is clear that the economy has suffered (in the 1990s and now) as a result of their carelessness with money, failure to live within their means and their arrogance of numbers.

My generation, generation X, who grew up in the 1980s and 90s are a bit confused when it comes to finances. We got the crumbs from the table of the boomers so some of us learnt early on that we must forge out on our own because "nobody owes us a living" and we just have to do it ourselves. Parallel to that though, we also had some of my generation that thought people like me owed them a living and decided to drop out of the competitive environment, seek welfare and stay on it and bleed the economy dry. Those tough times at home and abroad really shaped me and others as entrepreneurs and savers and will lead to a more sound, rational and sustainable economy - at least for the medium term - during our time at the head of the table. Forget about the other part of my generation, we will deal with them at some other stage...nah, lets just cut the mothers off!

I have much more hope for the generations that were born in the 1980s to early 2000s though and my baby who is two years old (I am a late starter - see above re boomers) .They are growing up in economic times that are second only to the Great Depression and lessons learnt from some of my generation and what they are experiencing now will shape these kids into the same sorts of people that were born out of the 1930s. Highly independent, fiercely entrepreneurial and able to live within a budget.

It is looking good for the future.

Recent Share Investor Reading

c Share Investor 2011

Thursday, July 15, 2010

Back to The Future: Wall Street 2010 VS 1931

I was thinking yesterday how the markets seem to be mirroring what happened after the October 1929 Wall Street Crash, that is, they crashed then recovered sharply, only to take further dips during the 1930s and actually falling more after the big 1929 fall.

I am not sure whether we are going to see another big fall in markets but there is little positive economic news on the horizon and huge State debt levels ready to make their impact somewhere down the line so there is clearly going to be more stockmarket downside in the coming year.

What I was thinking was someone must have charted any similarities between the DOW circa 1929 - to the early 1930s and the present day DOW and I am discovering as I find the charts whether my thinking has any merit, just as you are now.

A 5 year chart of the DOW from 1928, a year before the 1929 crash (1928 - 1933)

A 5 year chart of the DOW from 2005, 3 years before the 2008 crash (2005-2010)

Notice the big increase in stock prices from both eras after their respective crashes then also notice the further decline after that rally (the 2009 - 2010 stock recovery was much higher than the depression era) and the DOW has taken that dip over the last few months before another rise over the last week or so. Once again a similar pattern emerged circa DOW depression era.

I certainly don't know whether the DOW is going to repeat its 1930s pattern but as I have already pointed out economic conditions are not good and there is all that debt out there.

If you were a betting man you would have to put your money on a rerun.

Recent Share Investor Reading

Discuss this topic @ Share Investor Forum

c Share Investor 2010

Thursday, October 8, 2009

Time for high fives or time for a pause for thought?

A piece I stumbled upon while looking for something else - boy the internet can sidetrack me - got me thinking pessimistically again about the stockmarket and economy in general:

From EFT Guide, By Simon Maierhofer

A 50% rally, Warren Buffett, extreme levels of optimism, rallies based on vague reports of improvements, etc.; all the aforementioned are parallels between the 1929-1930 bear market rally and the rally from the March lows. If the parallels hold up, a mere rhyme to history (let alone a repeat), will wipe out millions of next eggs. Here’s how to avoid repeating your grand parent’s mistakes.It’s been said (and perhaps you are getting tired of hearing it) that those who don’t learn from history are doomed to repeat it.

If the parallels of the Great Depression continue to hold up as they have (and according to historical indicators they will), history doesn’t have to repeat itself to severely hurt investors. A mere rhyme to the Great Depression would be enough to wipe out tons of portfolios.But who cares about history when the market is up and the forecasts call for better days ahead. The Dow Jones (DJI: ^DJI) and S&P 500 (SNP: ^GSPC) have rallied over 55% while the Nasdaq (Nasdaq: ^IXIC) has soared nearly 70%. Wall Street is anxiously expecting another earnings season, which is expected to be predominantly good.

Reuters reports that “earnings optimism lift Wall Street” while Credit Suisse encourages their clients to buy bullish Alcoa options in advance of Alcoa’s (NYSE: AA) profit reports.

If there is one thing we should have learned from history, it’s that the bear strikes hardest when least expected. Pierre Corneille hit the nail on the head when he said that “danger breeds best on too much confidence.”

Black Monday’s or Thursday’s wouldn’t be called “black” if they were expected. Market tops are always marked by extreme levels of optimism.

In January 2009, with the Dow Jones slightly above 9,000, the ETF Profit Strategy Newsletter noticed elevated levels of optimism and warned of a severe decline with a target of Dow 6,700. Today, sentiment readings are even more extreme than they were in January. The implications are obvious.

If there is just one time you want to take a lesson from history, it is RIGHT NOW. The parallels between today and the Great Depression are numerous and strikingly similar. This 5-minute history lesson might be the best investment you’ll ever make. Continue article here

I was aware of the sucker rally of the 1930s that the author discusses but it certainly gets one thinking about where we might be right now and if the authors research and main points are accurate then it makes for grim reading.

The apparent economic "recovery" (green shoots my arse Mr Obama) that has led to markets skyrocket over the last six months is based on large amounts of State money borrowed from the Chinese or money simply being printed.

Banks and financial institutions in the US, which have made up a large part of the rally, have better looking balance sheets thanks to the aforementioned handouts, not for any concrete economic reasons.

Lets not even go into the massive debt that many Western countries have on their balance sheets - personal and State.

I don't think things are as bad or necessarily the same as what was experienced during the Great Depression - it very well could be worse I suppose - and I have been buying stocks ( 1 2 3 ) before the current rally but the general message from the writer is one that should be taken on board as an added risk factor when considering any type of investment in the current cycle of economic uncertainty.

Recent Share Investor Reading

Friday, March 6, 2009

What is a Depression?

There has been talk of recessions, deep recessions and depressions and I am confused. I think I have my head around a recession but what the hell is a depression?

You would have to be blind, deaf plain stupid or just Al Gore if you didn't know about the current global recession.

So read on and let me explain how I see things

Some commentators are saying recession, some deep recession and some the dreaded "D" word, depression.

A recession is technically 2 quarters of negative economic GDP growth with various other determinants depending on what school of economics you when to.

A deep recession is a prolonged deeper felt recession.

But what is a depression?

Well, those of us old enough to know about economic depressions know about them from their knowledge of the Great Depression. Briefly, in case you didn't, the Great Depression kicked off on October 24, 1929, or “Black Thursday” when U.S. stock prices fell 15 - 20%, causing a stock market crash. The following depression was a worldwide economic collapse that lasted approximately 10 years and led to massive unemployment in the U.S. of 25% at its peak in 1933 and those that were in work having their incomes drop by 40%. GDP halved and world trade dropped 65% ! Similar events occurred world-wide.

http://static.howstuffworks.com/gif/house-flipping-7.jpg

We have all seen the images of long lines of people queuing at soup kitchens for food, rushing their banks to get their money out and vast tracts of empty business.

Assets were worth what you could get for them depending on your need to sell.

We are also aware of the bailouts by the Roosevelt Government and the subsequent failure of those measures as they prolonged the downturn.

People were in despair.

The globe only recovered because of WW2.

A depression though seems technically harder to define than a recession but many economists think that a 10% GDP drop in one year indicates one but others would define it by the number of quarters there was double digit unemployment.

Many economists would say that a depression is merely a "prolonged recession" and from the reading I have done I think that this description best suits.

The impetus for the current global recession was the U.S. housing bubble finally bursting and that took the banks down, then weak businesses, then the US stockmarket dropped by nearly half and unemployment looks set to top 10% when figures are released tomorrow.

Global trade has been hit badly in January dropping by around 40%.

Assets of all kinds are not selling for their true worth.

This has also reverberated around the globe.

I don't know whether we are currently in the middle of a deep recession or some kind of depression but one would have to consider the amount of fear and angst there was during the Great Depression and what is happening now.

http://unemploymentality.com/Images/unemploymentality_itunes.jpg

89 year old Victor Zarnowitz has an interesting take:

Victor Zarnowitz also doesn't think we're there yet. He ought to know. The 89-year-old is one of six NBER board members that date U.S. business cycles. Besides being one of the world's leading economists, Zarnowitz was also a young man himself during the Depression of the 1930s. "It's too close, and the information is too incomplete to be sure we are in a depression and not a severe recession," he said. "Unemployment is much lower than it was at the peak. It was much worse than what I see today." Forbes.com

Personally I have not been affected badly yet.

It is really hard to know in the middle of all this what is really happening and we will always know more looking back but what is clear is that the recession we are experiencing now is nowhere near as bad as the Great Depression.

What is also very clear is that we have not seen the worst yet.

Roll on 2018 or boom 2011?

Recent Share Investor Reading

Sunday, October 12, 2008

Learning from history

I haven't been purposely looking for an explanation of what is happening to global stockmarkets and what might happen to economies around the world but I stumbled on the following article from the Wall Street Journal when I was googling around for some info on Warren Buffett.

For me the following article puts the whole market frenzy and it current fear mode into sharp focus and gives some perspective, from history, about where we could be heading.

Here is a n extract from the article discussing Benjamin Graham's analysis of the US stockmarket in 1932:

Just eight days before the Dow hit rock-bottom, the brilliant investor Benjamin Graham -- who many years later would become Warren Buffett's personal mentor -- published "Should Rich but Losing Corporations Be Liquidated?" It was the last of a series of three incendiary articles in Forbes magazine in which Graham documented in stark detail the fact that many of America's great corporations were now worth more dead than alive.

More than one out of every 12 companies on the New York Stock Exchange, Graham calculated, were selling for less than the value of the cash and marketable securities on their balance sheets. "Banks no longer lend directly to big corporations," he reported, but operating companies were still flush with cash -- many of them so flush that a wealthy investor could theoretically take over, empty out the cash registers and the bank accounts, and own the remaining business for free.

Graham summarized it this way: "...stocks always sell at unduly low prices after a boom collapses. As the president of the New York Stock Exchange testified, 'in times like these frightened people give the United States of ours away.' Or stated differently, it happens because those with enterprise haven't the money, and those with money haven't the enterprise, to buy stocks when they are cheap."

After the epic bashing that stocks have taken in the past few weeks, investors can be forgiven for wondering whether they fell asleep only to emerge in the waking nightmare of July 1932 all over again. The only question worth asking seems to be: How low can it go?

Make no mistake about it; the worst-case scenario could indeed take us back to 1932 territory. But the likelihood of that scenario is very much in doubt.

WSJ.com

The great Crash of 1929 was not the low for the Dow though, that came 3 years latter, when on July 9 1932 the index hit 41.63. It was down 91% from its level exactly 3 years earlier.

Out of the 1929 crash came Benjamin Graham and David Dodds Security Analysis, the handbook or bible for subsequent Wall Street practitioners. It is a shame that modern Wall Street types seem to have ignored the main message of this book though:

While we were writing,we had to combat a widespread conviction that financial debacle was to be the permanent order; as we publish,we already see resurgent the age-old frailty of the investor-that his money burns a hole in his pocket. But it is the conservative investor who will need most of all to be reminded constantly of the lessons of 1931-1933 and of previous collapses.

Security Analysis - From the preface to the 1934 edition

Graham went on to say that "fixed value investments" can only soundly chosen if they are approached form a viewpoint of "calamity".

The last part of Benjamin Grahams advice is perhaps the most poignant and relevant to today's situation:

In dealing with other types of security commitments, we have striven throughout to guard the student against overemphasis upon the superficial and the temporary...this overemphasis is at once the delusion and the nemesis of the world of finance.

Quaint English but nevertheless well worth remembering.

I will finish this piece with something that I was watching on Voice of America last night.

It was from an individual which I cant remember but a female who has studied the 1929 crash and the subsequent depression.

She said that the crash itself needn't have caused a depression but the reaction of President Herbert Hoovers administration did. At first the government did nothing and then when it realised things might be bad it did all the wrong things.

It will be interesting if the current Bush administration has learnt from history and whether the next President, probably Barack Obama, will copy Democrat President Roosevelt's blanket socialism of the 1930s and spend taxpayers money to stimulate future prosperity.

Given this it would be curious to know why the current Labour Government in New Zealand are doing nothing in the face of massive economic uncertainty.

Wednesday, April 2, 2008

Dont dare use the "D" word

The announcement on March 31 (US time) that secretary Paulson is going to regulate the United State's financial markets with changes to it not seen since the Great Depression leaves me with a thought that has been running rat wheels in my mind ever since the current "Credit Crunch" kicked off.

Midway through last year, the Fed began sticking its filthy little hands in dikes all across the financial backbone of the USA by propping up institutions who had lent too much money to those who now cannot pay and to keep the wheels of commerce greased by trying to increase liquidity in the credit market-so we can do business with each other.

Now I am skeptical at the best of times as to State involvement in anything, let alone interfering in capital markets and don't have the foggiest whether the announcement by Paulson is going to change anything in the future at all.

Latest on global financial fallout

German watchdog eyes $600 bln global bank losses: report Reuters
Overhaul of Wall Street regulation doesn't address current crisis Int' Herald Tribune
International Financial Panel Urges Bank Disclosures on Risk Exposure Wall Street Journal
G7 to press big banks to reveal extent of credit crunch losses Times Online
US prepares to give Fed sweeping oversight powers Taipei Times
Ghosts of the Great Depression Business Spectator
US Fed to be grilled over massive support to financial system MercoPress
World Bank cuts East Asia growth forecast Channel News Asia
East Asia Economies Pressed by Inflation The Associated Press

The 1933 changes didn't stop the bear market in the 1970s, it didn't stop the sharemarket crash of 1987 or the tech bubble bursting in 2000 or the current credit crisis because of dodgy lending and investment practices related to that lending.

The interventions by the Fed and its global equivalents, to shore up credit liquidity is the main rat on the wheel in my mind.

What have these interventions stopped?

One can only speculate but one can do that with a largish amount of surety.

During the Great Depression, when faith in financial markets at the time was at an all time low there simply wasn't any intervention by the State apparatus to ameliorate what happened on that infamous day in 1929 when Wall Street threw a woopsey and capitalism jumped out of tall buildings in the financial districts around New York and around the world.

Have interventions in financial markets by State backed funds globally stopped some sort of 2008 crash from happening?

Probably, but not to the extent of 1929, but it is clear that it would have been a crash of some serious nature had there not been intervention.

Another question I have running through my head is, how long will the squillions of taxpayer dollars pumped into the economy stave off the inevitability of a bigger blowout?

That is harder to answer. In order to know better one would have to know the losses involved in the Sub prime loans and associated sub prime bonds, and we are no closer to knowing that than knowing if Hillary Clinton is going to be the Democratic Party leader or if Barry Obama still loves his preacher.

The vexed question of the massive derivatives market also looms in the minds of investors:

Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by nondealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.

"Derivatives are financial weapons of mass destruction. The dangers are now latent--but they could be lethal".

[Warren Buffett 2003]

Warren Buffett aside, I don't think anyone fancies the Fed's chances of shoring up the derivatives market should the dominoes start to topple.

Warren Buffett has always
feared the massive derivatives
market.

What is clear is this scenario has at least the rest of the year to fully play out and further State intervention should be carefully applied only if is really going to work and not because the Fed needs to be seen to be doing something.

Hold onto those gold bars and keep the cash under the mattress, you just might need them.

Essential related reading from Share Investor

The Global Economy looks bad now? But wait there's more
Global credit squeeze: There is no free lunch
Current Credit crunch a blessing in disguise
Lenders must come clean over losses to restore faith in credit markets
Watch for dead cats bouncing
Global Market Meltdown: I can smell the fear from here
Warren Buffett's The Intelligent Investor
Global Market's dropping and your portfolio
Global Market Meltdown: What is Warren Buffett doing?
A sensible approach to global market volatility

Visit Everything Warren Buffett-for everything Warren Buffett

C Share Investor 2008

Share Investor

Thursday, July 7, 2011

My G'G' Generation

Thursday, July 15, 2010

Back to The Future: Wall Street 2010 VS 1931

Thursday, October 8, 2009

Time for high fives or time for a pause for thought?

Friday, March 6, 2009

What is a Depression?

Sunday, October 12, 2008

Learning from history

Wednesday, April 2, 2008

Dont dare use the "D" word

Total Pageviews

Translate

Search Share Investor

Share Investor Blog Archive

Share Investor

Share Investor Portfolio Individual Shareholder Websites

Market/Financial News

Stockmarket/Business Blogs/Share Forums

My Favourite Reading