Comparing the Great Depression to today

monty21 · Jun 9, 2009

Oh, yeah, the Reg T was 10% in those days, now it is 50%. A little difference there.

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10% in equities.

OTC derivatives you can have as much as 30:1 leverage. Plus there is far less liquidity in the OTC mkt as compared to the stock market.

*****

We can be in the early stages of a depression.

monty21 · Jun 9, 2009

Quote from Dr. Zhivodka:

This is a long-running theme I've been returning to time and again. From the very early stages of the financial crisis that began unfolding last September, it has been fashionable to say that banks had stopped lending, and that this was the proximate cause of the economy's collapse. I've taken pains to demonstrate that this was not true at all. This crisis had nothing to do with a shortage of money or a decline in bank lending.

To be sure, the growth in bank lending has declined, as these charts show, and loans outstanding have declined in the past 3-6 months. But as the charts also show, lending is still up at a handsome rate over the past year or two. It is also the case that all measures of the money supply, which are ultimately driven by bank lending (banks have the unique ability to create money in our fractional reserve system), are at or near all-time highs, and they are still growing (with the exception of currency which is now flat but still at an all-time high).

That loans outstanding have declined in recent months is not surprising at all, and in fact it is exactly what one would expect given the economy's weakness and the rise in bankruptcies and defaults. Everyone has been working very hard to deleverage over the past year, because leverage was a very bad thing to have had at a time when asset prices (e.g., equities and housing prices) were plunging. Many people and many companies and banks and hedge funds have been forced to deleverage by declining asset prices.

My main point continues to be this: there is no shortage of money out there. Our problems have nothing to do with a lack of money or a lack of bank lending. In fact, one of the big problems we face going forward is that there is too much money sloshing around the global financial markets. We know that to be true because all currencies are weak against gold. An ample supply of money has stopped the deflation train dead in its tracks: breakeven spreads on TIPS have surged. Now we will have to contend with an abundance of money that is likely to result in higher-than-expected inflation in coming years.

--Scott Grannis
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Well said. The money supply is out of control. Capital exists, but what happens when it becomes gradually worthless.

If anyone is interested in the Austrian school of economics, this is a great source:

http://mises.org/

It tackles a lot of issues on the money supply, the free-market and gold.

4444CJones4444 · Jun 9, 2009

Quote from ByLoSellHi:

If you really believe inflation will support, let alone float, equities, then I think there is a basic flaw in that rationale.

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I'm unsure of the rationale behind the high inflation = higher equity prices, too. 1974-1981 saw the highest inflation rate since before the Great Depression and I see no pattern in the Dow that supports the "stocks will go up with inflation" theory. If anything, there was extreme volatility with stocks crashing from '74 to '75 and again '77 to '78.

The same holds true for extremely low inflation. Stocks didn't crash, they tended to rise.

Of course it's difficult to compare today with any other period in history, with the government tossing around so much money and all. Logically all that cash has to go somewhere. Will it float the stock market? It's hard to say and I'm sure behind closed doors economists with PhDs can't agree on what will happen in the next five to ten years.

dandxg · Jun 9, 2009

Thanks for posting. One of the few remaining gems here.

monty21 · Jun 9, 2009

Quote from 4444CJones4444:

I'm unsure of the rationale behind the high inflation = higher equity prices, too. 1974-1981 saw the highest inflation rate since before the Great Depression and I see no pattern in the Dow that supports the "stocks will go up with inflation" theory. If anything, there was extreme volatility with stocks crashing from '74 to '75 and again '77 to '78.

The same holds true for extremely low inflation. Stocks didn't crash, they tended to rise.

Of course it's difficult to compare today with any other period in history, with the government tossing around so much money and all. Logically all that cash has to go somewhere. Will it float the stock market? It's hard to say and I'm sure behind closed doors economists with PhDs can't agree on what will happen in the next five to ten years.
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I think the rise in commodity stocks is a testimony of the potential rise in inflation.

http://www.schaeffersresearch.com/streetools/centers/commodities/commod_quick_analysis.aspx

4444CJones4444 · Jun 9, 2009

Quote from monty21:

I think the rise in commodity stocks is a testimony of the potential rise in inflation.

http://www.schaeffersresearch.com/streetools/centers/commodities/commod_quick_analysis.aspx
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I see your point with commodity stocks and I agree inflation is a real danger. But I'm still on the fence with inflation increasing the nominal value of the broader market. Right now I see high inflation as a one step forward, one step backwards scenario with the market.

It's a tough issue to prove or disprove. During the '74-'82 inflationary period (there was a three year period where inflation averaged over 12% annually), the market was basically flat with a 2% gain. One could argue inflation had little overall effect on the market or one could argue the market would have been down 50% over that period without the effects of inflation on equities.

http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=2

Spectre2007 · Jun 9, 2009

if past history repeats... the market bottom is within three years of the peak... and then post crash consolidation.

Pa(b)st Prime · Jun 9, 2009

Inflation in itself is bullish for share prices. What mitigates said bullishness is the normal accompaniment of higher interest rates along with higher inflation. The reason you see asset explosions on the first signs of slowing price growth is because that's when rates are collapsing.

Here's a simple example. We'll use real estate.

Rental income: $12,000
Price: $200,000
Rates:5%

Would you pay 10k a year in interest to pick up 12k in earnings? All day, right?

Now let's put inflation in the mix.

Rental Income: $15,000
Rates: 10%

Now attractive is a 200k purchase? Suddenly carry charges are 20k a year so you'd be a net loser even with the increase in rental income. The same property would need trade $130,000 for you to receive the same return at a 10% vig as you made borrowing 200k at 5%.

If rates stayed constant at 5% then the inflationary rent increase would cause the resale price to auction higher.

Quote from 4444CJones4444:

I see your point with commodity stocks and I agree inflation is a real danger. But I'm still on the fence with inflation increasing the nominal value of the broader market. Right now I see high inflation as a one step forward, one step backwards scenario with the market.

It's a tough issue to prove or disprove. During the '74-'82 inflationary period (there was a three year period where inflation averaged over 12% annually), the market was basically flat with a 2% gain. One could argue inflation had little overall effect on the market or one could argue the market would have been down 50% over that period without the effects of inflation on equities.

http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=2
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peilthetraveler · Jun 9, 2009

Quote from countryBoy:

My mother (deceased 20 years) told me that when she was a kid, grown men would knock on the back door of her mother's house (an early widow). This was in the early 1930's. The men, popularly known as hobos, would offer to paint, rake leaves, etc for a meal. Work for food.

Do you see any similarity to today? I don't.
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Houses back there were still pretty much set up in a preindustrial way. Meaning that houses were closer together and you didnt have to walk as far to get to a store. Those Hobos could easily hit up a 500-1000 houses and get lucky. Now houses are more spaced apart so they are lucky to get 50-100 houses in a day . Also, alot of us are in gated communities which would shield us from that sort of thing. I actually still get some knocks on my door(front door of course as they would get shot if they came to my back door LOL) of people asking me to buy stuff. (Cleaning products, security systems, or my favorite... COUPONS!) Yeah people come to my door trying to sell me coupons to stores for something like 20 or 40 bucks telling me i can save 1500 bucks on all these businesses.

bruceistheone · Jun 9, 2009

Most hobos where I live don't need to work. The rest of the working class hobos have credit cards and can use debt to delay knocking on my door.