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2007

Buy? Sell? Hold? or Hide? Is it Trouble Yet?
Tuesday, 06 March 2007 10:58
by Stephen P. Pizzo

What would a 21st-century depression look like? We have all seen those stark black and white photos and grainy newsreel clips of the 20th century depression 80 years ago. But it's unlikely a worldwide finanical collapse today would repeat that script heartbreak by heartbreak.

The answer is I don't know. And neither does anyone else. But I have the sneaking suspicion we're about to find out. Maybe I'm just imagining things. You tell me. I recently read a detailed history of pre-depression American by historian Frederick Lewis Allen. It was long and you can — and should — read the whole thing yourself. It's free and it's online. (Here)

When I read it I kept having to check the dates he quoted be sure he was talking about the Calvin Coolridge administration and not the two-term George W. Bush administration. While history may not repeat itself precisely, it clearly repeats itself.

So what I did was to lift some of the more startling similarities from Allen's tome, and linked them to their 2007 corollaries. Sorry for the length of this, but it was unavoidable. It could have been a lot longer... which you will see if read Allen's original text. Please do.

1) Auto craze drives economy during 1920s – Today it's the Housing boom

"In 1919 there had been 6, 771,000 passenger cars in service in the United States; by 1929 there were no less than 23 million There you have possibly the most potent statistic of Coolidge Prosperity... As early as the end of 1923 there were two cars for every three families in "Middletown," a typical American City... Investigators interviewed 123 working-class families of "Middletown" and found that 60 of them had cars. Of these 60, 26 lived in such shabby-looking houses that the investigators thought to ask whether they had bathtubs, and discovered that as many as 21 of the 26 had none. The automobile came even before the tub!"

2)Radio technology pushes market in 1920s. Today cellphones and “iPods”:

"The radio manufacturer occupied a less important seat than the automobile manufacturer on the prosperity bandwagon, but he had the distinction of being the youngest rider. You will remember that there was no such thing as radio broadcasting to the public until the autumn of 1920, but that by the spring of 1922 radio had become a craze-as much talked about as Mah Jong was to be the following year or cross-word puzzles the year after. In 1922 the sales of radio sets, parts, and accessories amounted to $60,000,000. People wondered what would happen when the edge wore off the novelty of hearing a jazz orchestra in Schenectady or in Davenport, Iowa, play "Mr. Gallagher and Mr. Shean." What actually did happen is suggested by the cold figures of total annual radio sales for the next few years. In 1922 radio sales amounted to just $60 million. By early 1929 it had exploded 1400 percent to nearly $850 million.) — Don't hurry past those figures. Study them a moment, remembering that whenever there is a dip in the curve of national prosperity there is likely to be a dip in the sales of almost every popular commodity. “

3) In 1920s chain merchandisers squeezed out small, local merchandisers. Today WalMart, Target etc, are doing this again.

“While the independent storekeeper struggled to hold his own, the amount of retail business done in chain stores and department stores jumped by leaps and bounds. For every $100 worth of business done in 1919, by 1927 the five-and-ten-cent chains were doing $260 worth, the cigar chains $153 worth, the drug chains $224 worth, and the grocery chains $387 worth. Mrs. Smith no longer patronized her "neighborhood" store; she climbed into her two-thousand-dollar car to drive to the red-fronted chain grocery and save twenty-seven cents on her daily purchases.”

4) Corporate Profits soar in 1920s, and today.

“Was this Coolidge Prosperity real? Farmers did not think so. Perhaps the textile manufacturers did not think so. But the figures of corporation profits and wages and incomes left little room for doubt. “

5) Easy Credit in 1920 fuels the market, as it does today.

“Prosperity was assisted...by two new stimulants to purchasing, each of which mortgaged the future but kept the factories roaring while it was being injected....The first was the increase in the installment buying. People were getting to consider it old-fashioned to limit their purchases to the amount of their cash balance; the thing to do was to "exercise their credit." By the latter part of the decade, economists figured that 15 per cent of all retail sales were on an installment basis, and that there were some six billions of "easy payment" paper outstanding.'

6) Wall Street players prospered in the 1920, and today.

“The other stimulant was stock-market speculation. When stocks were skyrocketing in 1928 and 1929 it is probable that hundreds of thousands of people were buying goods with money which represented, essentially, a gamble on the business profits of the nineteen-thirties. It was fun while it lasted.”

7) Big Business Lauded in the 1920s, and today.

“In every American city and town, service clubs gathered the flower of the middle-class citizenry together for weekly luncheons noisy with good fellowship. They were growing fast, these service clubs. Rotary, the most famous of them, had been founded in 1905; by 1930 it had 150,000 members and boasted of — as a sign of its international influence — as many as 3,000 clubs in 44 countries....these clubs (did not) content themselves with singing songs and conducting social-service campaigns; they expressed the national faith in what one of their founders called "the redemptive and regenerative influence of business." The speakers before them pictured the businessman as a builder, a doer of great things, yes, and a dreamer whose imagination was ever seeking out new ways of serving humanity. ..The service clubs specialized in this sort of mysticism: a speaker of before the Rotarians of Waterloo, Iowa, quoted by the American Mercury declaring that "Rotary is a manifestation of the divine"?

8) Business seen as a manifestation of Godliness, then and now.

“Indeed, the association of business with religion was one of the most significant phenomena of the day. When the National Association of Credit Men held their annual convention at New York, there were provided for the three thousand delegates a special devotional service at the Cathedral of St. John the Divine and five sessions of prayer conducted by Protestant clergymen, a Roman Catholic priest, a Jewish rabbi; and the credit men were uplifted by a sermon by Dr. S. Parkes Cadman on "Religion in Business."

9) The Mainstream Media, then and now.

"For the system of easy nation-wide communication which had long since made the literate and prosperous American people a nation of faddists was rapidly becoming more widely extended, more centralized, and more effective than ever before....To begin with, there were fewer newspapers, with larger circulations, and they were standardized to an unprecedented degree by the increasing use of press-association material and syndicated features. ...Newspapers all over the country were being gathered into chains under more or less centralized direction: by 1927 the success of the Hearst and Scripps-Howard systems and the hope of cutting down overhead costs had led to the formation of no less than 55 chains controlling 230 daily papers with a combined circulation of over 13,000,000... No longer did the local editor rely as before upon local writers and cartoonists to fill out his pages and give them a local flavor; the central office of the chain, or newspaper syndicates in New York, could provide him with editorials, health talks, comic strips, sob-sister columns, house- hold hints, sports gossip, and Sunday features prepared for a national audience and guaranteed to tickle the mass mind. “

10) Anna Nicole Smith and O.J., then and now.

“Newspaper owners and editors found that whenever a Dayton trial or a Vestris disaster took place, they sold more papers if they gave it all they had-their star reporters, their front-page display, and the bulk of their space. They took full advantage of this discovery: according to Mr. Bent's compilations, the insignificant Gray-Snyder murder trial got a bigger "play" in the press than the sinking of the Titanic; Lindbergh's flight, than the Armistice and the overthrow of the German Empire. Syndicate managers and writers, advertisers, press agents, radio broadcasters, all were aware that mention of the leading event of the day, whatever it might be, was the key to public interest. The result was that when something happened which promised to appeal to the popular mind, one had it hurled at one in huge headlines, waded through page after page of syndicated discussion of it, heard about it on the radio, was reminded of it again and again in the outpourings of publicity-seeking orators and preachers, saw pictures of it in the Sunday papers and in the movies, and (unless one was a perverse individualist) enjoyed the sensation of vibrating to the same chord which thrilled a vast populace.

The country had bread, but it wanted circuses-and now it could go to them a hundred million strong.”

And that brings us to where they were then — and where we are now:

“One Day in February, 1928, an investor asked an astute banker about the wisdom of buying common stocks. The banker shook his head. "Stocks look dangerously high to me," he said. "This bull market has been going on for a long time, and although prices have slipped a bit recently, they might easily slip a good deal more. Business is none too good. Of course if you buy the right stock you'll probably be all right in the long run and you may even make a profit. But if I were you I'd wait awhile and see what happens."

11) Federal Reserve then and today:

“The speculative fever had been intensified by the action of the Federal Reserve System in lowering the discount rate from 4 per cent to 3'/2 per cent in August, 1927, and purchasing Government securities in the open market. This action had been taken from the most laudable motives: several of the European nations were having difficulty in stabilizing their currencies, European exchanges were weak, and it seemed to the Reserve authorities that the easing of American money rates might prevent the further accumulation of gold in the United States and thus aid in the recovery of Europe and benefit foreign trade.”

12) Happy Talk from above, then and today:

"American business was beginning to lose headway; the lowering of money rates might stimulate it. But the lowering of money rates also stimulated the stock market. The bull party in Wall Street had been still further encouraged by the remarkable solicitude of President Coolidge and Secretary Mellon, who whenever confidence showed signs of waning came out with opportunely reassuring statements which at once sent prices upward again. In January 1928, the President had actually taken the altogether unprecedented step of publicly stating that he did not consider (stock) brokers' loans too high, thus apparently giving White House sponsorship to the very inflation which was worrying the sober minds of the financial community."

13) Sucker rallies, then and today:

"While stock prices had been climbing, business activity had been undeniably subsiding. The tone of the business analysts and forecasters-a fraternity whose numbers had hugely increased in recent years and whose lightest words carried weight-was anything but exuberant. The National City Bank looked for gradual improvement in business and the Standard Statistics Company suggested that a turn for the better had already arrived; but the latter agency also sagely predicted that the course of stocks during the coming months would depend "almost entirely upon the money situation." The financial editor of the New York Times described the picture of current conditions presented by the mercantile agencies as one of "hesitation." The newspaper advertisements of investment services testified to the uncomfortable temper of Wall Street with headlines like "Will You `Overstay' This Bull Market?" and "Is the Process of Deflation Under Way?" The air was fogged with uncertainty."

14) Whistling past the graveyard, then and today:

"Anybody who had chosen this moment to predict that the bull market was on the verge of a wild advance which would make all that had gone before seem trifling would have been quite mad-or else inspired with a genius for mass psychology. The banker who advised caution was quite right about financial conditions, and so were the forecasters. But they had not taken account of the boundless commercial romanticism of the American people, inflamed by year after plentiful year of Coolidge Prosperity. For on March 3, 1928-the very day when the Harvard prophets were talking about intermediate declines and the Times was talking about hesitation — the stock market entered upon its sensational phase.

(And in the weeks ahead the market actually rose.) What on earth was happening? Wasn't business bad, and credit inflated, and the stock-price level dangerously high? Was the market going crazy? Suppose all these madmen who insisted on buying stocks at advancing prices tried to sell at the same moment! Canny investors, reading of the wild advance in Radio, felt much as did the forecasters of Moody's Investors Service a few days later: the practical question, they said, was "how long the opportunity to sell at the top will remain."

15) Insider/Government market-fixers, then and today:

“What was actually happening was that a group of powerful speculators with fortunes made in the automobile business and in the grain markets and in the earlier days of the bull market in stocks-men like W. C. Durant and Arthur Cutten and the Fisher Brothers and John J. Raskobwere buying in unparalleled volume.... The big bull operators knew, too, that thousands of speculators had been selling stocks short in the expectation of a collapse in the market, would continue to sell short, and could be forced to repurchase if prices were driven relentlessly up. And finally, they knew their American public. It could not resist the appeal of a surging market. It had an altogether normal desire to get rich quick, and it was ready to believe anything about the golden future of American business. If stocks started upward the public would buy, no matter what the forecasters said, no matter how obscure was the business prospect. They were right. The public bought."

(On June 12th 1928 a new decline began) "The ticker slipped almost two hours behind in recording prices on the floor....But had the bull market collapsed? On June 13th it appeared to have regained its balance. On June 14th, the day of Hoover's nomination, it extended its recovery. The promised reckoning had been only partial. Prices still stood well above their February levels. A few thousand traders had been shaken out, a few big fortunes had been lost, a great many pretty paper profits had vanished; but the Big Bull Market was still young.

During that "Hoover bull market" of November, 1928, the records made earlier in the year were smashed. Had brokers once spoken with awe of the possibility of five-million-share days? Five million share days were now occurring with monotonous regularity..By the summer of 1929, prices had soared far above the stormy levels of the preceding winter into the blue and cloudless empyrean. All the old markers by which the price of a promising common stock could be measured had long since been passed; if a stock once valued at 100 went to 300, what on earth was to prevent it from sailing on to 400? And why not ride with it for 50 or 100 points, with Easy Street at the end of the journey?”

16) Market "logic," then and today.

"By every rule of logic the situation had now become more perilous than ever. If inflation had been serious in 1927, it was far more serious in 1929, as the total of brokers' loans climbed toward six billion (it had been only three and a half billion at the end of 1927). If the price level had been extravagant in 1927 it was preposterous now; and in economics, as in physics, there is no gainsaying the ancient principle that the higher they go, the harder they fall. But the speculative memory is short. As people in the summer of 1929 looked back for precedents, they were comforted by the recollection that every crash of the past few years had been followed by a recovery, and that every recovery had ultimately brought prices to a new high point. Two steps up, one step down, two steps up again-that was how the market went. If you sold, you had only to wait for the next crash (they came every few months) and buy in again. And there was really no reason to sell at all: you were bound to win in the end if your stock was sound. The really wise man, it appeared, was he who "bought and held on."

17) Warnings met by happy talk, then and today:

"Time and again the economists and forecasters had cried, "Wolf, wolf," and the wolf had made only the most fleeting of visits. Time and again the Reserve Board had expressed fear of inflation, and inflation had failed to bring hard times. Business in danger? Why, nonsense!...On every side one heard the new wisdom sagely expressed: "Prosperity due for a decline? Why, man, we've scarcely started!" "Be a bull on America." "Never sell the United States short." "I tell you, some of these prices will look ridiculously low in another year or two." "Just watch that stock-it's going to five hundred." "The possibilities of that company are unlimited." "Never give up your position in a good stock."

18) Americans encouraged to shop, then and today:

“Meanwhile, one heard, the future of American industry was to be assured by the application of a distinctly modern principle. Increased consumption, as Waddill Catchings and William T. Foster had pointed out, was the road to plenty. If we all would only spend more and more freely, the smoke would belch from every factory chimney, and dividends would mount.”

19) Consumers encouraged to buy more cars and radios, then, houses today.

“Gradually the huge pyramid of capital rose. While super-salesmen of automobiles and radios and a hundred other gadgets were loading the ultimate consumer with new and shining wares, super-salesmen of securities were selling him shares of investment trusts which held stock in holding companies owned the stock of banks which had affiliates which in turn controlled holding companies — and so on ad infinitum. Though the shelves of manufacturing companies and jobbers and retailers were not overloaded, the shelves of the ultimate consumer and the shelves of the distributors of securities were groaning. Trouble was brewing-not the same sort of trouble which had visited the country in 1921, but trouble none the less. Still, however, the cloud in the summer sky looked no bigger than a man's hand."

20) Recognizing the “oh shit,”moment then and today.

“Early in September the stock market broke. It quickly recovered however, indeed, on September 19th the averages as compiled by the New York Times reached an even higher level than that of September 3rd. Once more it slipped, farther and faster, until by October 4th the prices of a good many stocks had coasted to what seemed first-class bargain levels.... there was little real alarm until the week of October 21st. The consensus of opinion, in the meantime, was merely that the equinoctial storm of September had not quite blown over. The market was readjusting itself into a "more secure technical position."

In view of what was about to happen, it is enlightening to recall how things looked at this juncture to the financial prophets, those gentlemen whose wizardly reputations were based upon their supposed ability to examine a set of graphs brought to them by a statistician and discover, from the relation of curve to curve and index to index, whether things were going to get better or worse...Professor Irving Fisher, however, was more optimistic. In the newspapers of October 17th he was reported as telling the Purchasing Agents Association that stock prices had reached "what looks like a permanently high plateau." He expected to see the stock market, within a few months, "a good deal higher than it is today."

The disaster which was impending was destined to be as bewildering and frightening to the rich and the powerful and the customarily sagacious as to the foolish and unwary holder of fifty shares of margin stock. On October 29, 1929 the market crashed."

Mr Allen ends his essay with this reflection on the 1929 crash and the depression that swept American and the world in its aftermath:

"Prosperity is more than an economic condition; it is a state of mind. The Big Bull Market had been more than the climax of a business cycle; it had been the climax of a cycle in American mass thinking and mass emotion. There was hardly a man or woman in the country whose attitude toward life had not been affected by it in some degree and was not now affected by the sudden and brutal shattering of hope. With the Big Bull Market zone and prosperity going, Americans were soon to find themselves living in an altered world which called for new adjustments. new ideas, new habits of thought, and a new order of values. The psychological climate was changing; the ever-shifting currents of American life were turning into new channels."

So?

What would a 21st century depression look like? How will it change our lives? Stay tuned. In the meantime I think it's time stop thinking big and to start thinking small. That is, get small yourself. Lower exposure to speculative stocks and funds, and instead invest your money in sustainable, — home-centric assets. That would include a nice garden and greenhouse in your backyard. Silly? Maybe. But if I'm wrong my punishment will be more vegetables than I can eat.

For those of you buried in credit card debt, what can I say? You have been one of those consumer horses that pulled the bull-market wagon for Wall Street bunch and bankers. But have no doubt about it, the second they suspect you've broken a leg, they'll drag you behind the barn and shoot you.

So much for the godliness of big business.
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Russell Wellen said:

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As Eerie as Parallels Get
Thanks for excerpting Allen's article, Stephen.

Start-with-the-garden is great advice. Especially in light of how Jim Kunstler says how food will be grown locally.

My brother married into a family that has had the same farm land since the 1600s. They don't make much money from it, but I've told them to resist the urge to sell it to developers (it's in the "fabulous Hamptons" of New York's Long Island) because one day suburban farm land will be the center of the community and local economy.

Even though they're organic farmers and one might think they'd be disposed to understand, I'm not sure they're hearing me. Most of us push Peak Oil to the same dark recesses of our mind already occupied by nuclear fears.

As for a garden and a greenhouse, alas, because of that very credit card debt, we're unable to afford a house with land for a greenhouse and garden. Still, my wife keeps a small garden.
 
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