The Irregular Blather Oct. 14, 2009

No Journal was published Tuesday, Oct. 14, 1930 following Columbus Day. Since I've been doing this blog for a while now, I thought I'd blather on a bit about some of my random thoughts and tentative conclusions from it all. Hopefully this won't wind up too much like one of those late lamented Larry King stream of consciousness columns for USA Today. (Note: That link is not an actual Larry King column but an Onion homage that I think captures the flavor even better than the original – contains some bad language).

First, a bitter rant against some unjustified criticism: Some have said that I'm implying we're in for a replay of the 1930's. I do not think that, as I made clear in the first paragraph of the first post on the blog:
Q. Okay, why are you doing this blog? Are you saying we're in for a replay of the 30's?
A. How did I know you were going to ask me that? No, I don't think things are going to get as bad as in the 30's.

Since there does seem to be some confusion about this, I think some more blathering is in order on what I do think will happen, what I think the usefulness of the blog is, and the similarities and differences I'm seeing with the 1930's.

Not to pussyfoot around too much, I see the most likely path for the US as something like Japan over the past 20 years: a pretty long period of going sideways and down overall, but with some optimistic periods where stocks and the economy rally quite vigorously. Note that the time scale here is years and decades, not months. For example, as David Rosenberg noted, the Nikkei has had four 50% rallies since the bubble burst about 20 years ago, yet is down about 70% over that period. This does beg the question of why I'm doing this blog about the 1930's US instead of 1990's Japan. To this I can only say A) I don't read Japanese, and B) the 1930's are more fun. I also do see a possibility, though unlikely, of a relatively happy ending, which I hope to expound on more later.

As for the usefulness of the blog, I do not believe it's very useful in predicting complex macro-type things like quarter-to-quarter GDP changes or stock market movements. This is because these things are the result of the chaotic interaction of several very large factors, which will probably not all line up the same between the two periods. As a particular example, while I think the dshort.com website in general is great, I don't think comparative bear market charts like this one on that site are that useful as predictors of future stock movements. As another example, in my Aug. 1 post, I quote a really uncanny 1930 analysis doing a comparison with the 1921 market:
Walker Brothers point out strong similarities of current business and market conditions with 1921. Market pattern of break last fall, followed by recovery and second break in spring, almost identical to 1921 in both timing and percentage. Other indicators including commodity prices, freight loadings, and dividend yields also similar. First indicator improving in 1921 was construction, two months before stocks hit lows [followed by 8-year bull market]. Therefore encouraging that construction turned up in June.
I don't know about you, but that one sounded better than any of the comparisons of market movements I've heard recently – yet it turned out to have less than stellar predictive power.

In fact, upon reflection I'd go further and say trying too hard to draw analogies of this kind is dangerous and to be actively resisted, because finding predictive patterns is a basic human survival drive (I'd put it up there with food and sex), so we tend to find them whether or not they're really there.

So, if the blog isn't useful as a predictor of short term macro twists and turns, what good is it? For one thing, I do think macro examples are useful, but as counter-examples, not as predictors. It's useful to see that large market rallies, as in the 1930 US market or Japan over the past 20 years, don't necessarily anticipate a sustained economic recovery. It's useful to see that clusters of quite encouraging reports of business improvement, as we're seeing in the past few weeks from 1930, aren't conclusive proof that the upswing will be maintained until we're back to normal.

What else? While I think macro stuff is too complex to compare directly, I do think some individual factors can be usefully compared between 1930 and today. One example that I'm really struck by frequently is the banking picture. This does seem to be playing out in interestingly similar fashion to 1930, although I believe things diverge later in 1930 when large banks start collapsing. We have theoretically easy credit, with interest rates low and banks having lots of money available to lend. However, credit outstanding is gradually going down, while banks pile money into securities and investments. This seems to be a combination of the pushing on a string problem (with too much debt already, spooked borrowers don't want to take on more) and the zombie bank problem (banks nervous about impaired investments are pulling back on extending credit).

Another particular similarity that I was surprised by was the extent of stimulus applied in 1929-1930, since the popular historical image is of Hoover as standing by and doing nothing; much of this stimulus was applied by “volunteering” industry, particularly rails and utilities, rather than by government spending.

One more useful thing I think can be gleaned from looking at day-to-day reports is a better feeling for what individual economic statistics do better as tell-tale signs of how things are going. I'll leave most of this as an exercise for the reader, but some particular examples of how good some stats are as signs (my opinion only): asset price movements – poor; rail freight loadings – good; government tax revenues – good.

I'm out of time for today, so I will have to continue the discussion of similarities and differences with 1930 at a later date …