It’s Hard Being a Bear (Part One)

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I’m hap­py to admit that it’s very hard to hold a bear per­spec­tive, when all about there appear to be “green shoots”, yet accord­ing to my body clock it’s still hiber­na­tion time.

There are, how­ev­er, four fac­tors that keep me in my lair:

1. Good His­to­ry;
2. Bad Eco­nom­ic The­o­ry;
3. Good Eco­nom­ic His­to­ry; and
4. Good Eco­nom­ic The­o­ry

I’ll cov­er the last three in sub­se­quent posts; here I rely on Mark Twain’s bril­liant obser­va­tion that “his­to­ry doesn’t repeat, but it sure does rhyme”. A US blog­ger is giv­ing us very good evi­dence of that with the blog News From 1930, in which every day he sum­maris­es the news from the same day of the year in 1930. As Alan Kohler also remarked recent­ly, “one thing that comes through loud and clear is that they didn’t know they were hav­ing a Depres­sion” (to which I would add the word “either”).

The entry for this day in 1930 (August 19^th—a Tues­day as it hap­pens) cer­tain­ly make that obvi­ous. Change the com­pa­ny names (and those of politi­cians and mar­ket pun­dits) to their mod­ern equiv­a­lents, and you’d be hard pressed to decide whether you were read­ing a paper from 1930, or 2009.

Some excerpts:

• “Sea­soned com­mon stocks” are now sell­ing to yield about 1.5% above com­mer­cial paper rate (3%). In 33 year his­to­ry of the Dow Jones aver­ages, stocks with­out excep­tion have been prof­itable long-term invest­ments when aver­age yield was 1% or more above the com­mer­cial paper rate.
• R. Bab­son (the econ­o­mist who pre­dict­ed the 1929 stock mar­ket crash, and inspired Irv­ing Fish­er to make his “bull”statement that “Stock prices have reached what looks like a per­ma­nent­ly high plateau” days before Black Mon­day wiped 13% off the mar­ket) … notes com­mod­i­ty pro­duc­tion has declined about 30% vs. 10% decline in con­sump­tion; pre­dicts short­ages soon, restart­ing of pro­duc­tion to sup­ply demand. Does­n’t yet rec­om­mend buy­ing stocks, but feels “time is approach­ing when buy­ing oppor­tu­ni­ties may appear.”
• Har­vey Fire­stone, Pres. Fire­stone Tire & Rub­ber, states Amer­i­ca is on eve of greater pros­per­i­ty than past 10 years. Express­es belief in Ford’s state­ment there will soon be work for every­body. Says com­pa­ny has met depres­sion by cut­ting over­head and low­er­ing prices; plant now run­ning night and day, 6 days a week.
• Eco­nom­ic news and indi­vid­ual com­pa­ny reports:
  • Fed. Reserve mem­ber banks report “all oth­er” (com­mer­cial) loans up $9M to $8.481B in week end­ed Aug. 13; loans on secu­ri­ties down $58M to $8.376M.
  • S.W. Straus report of build­ing per­mits issued for July in 589 lead­ing cities and towns finds vol­ume of planned con­struc­tion was $187.6M vs. $184.7M in June; reverse of usu­al sea­son­al decline, but down 36% from 1929.
  • Labor Dept. reports retail food prices down 2.5% in month end­ed July 15, and 9% in year.
  • Coca Cola seen tak­ing advan­tage of low sug­ar prices by buy­ing a year’s sup­ply in advance. Has enjoyed increased sales every year since 1922.
  • R.J. Reynolds sell­ing about 49, earned $3.22/share in 1929, expect­ed to earn more in 1930, yield 6.1% based on $3 annu­al div.
  • Sev­er­al cig­ar stocks sell­ing at yields over 9%, includ­ing Gen­er­al Cig­ar (9.3%), Con­gress Cig­ar (16%), Con­sol­i­dat­ed Cig­ar (13.8%).
  • Com­pa­nies report­ing decent earn­ings: Drug Inc., Gen­er­al Amer­i­can Tank Car, Fox Film, Fifth Avenue Bus Corp, Inter­na­tion­al Salt.”

The gen­er­al tenor of reports for August 1930 has “recov­ery” writ­ten all over it—though there is “bad”, or at least puz­zling news amidst the good, such as the fall in prices.

It appears that, rather like an alco­holic who is an alco­holic long before she takes the pledge at an AA meet­ing, the pub­lic and com­men­ta­tors in 1930 didn’t realise that a Depres­sion has start­ed.

I feel the same way now—and the eco­nom­ic his­to­ri­ans Bar­ry Eichen­green and Kevin O’Rourke pro­vide empir­i­cal sup­port for this in their “Tale of Two Depres­sions”.

Of course, there’s more than mere­ly rhyming his­to­ry to our cur­rent sit­u­a­tion: as Rudd point­ed out in his recent essay, gov­ern­ment fis­cal stim­uli is pump­ing some­thing close to 18 per­cent of addi­tion­al demand into the glob­al econ­o­my over 3 years. So there are con­cert­ed efforts to ensure that 2009 plays a dif­fer­ent tune to 1930. I’ll dis­cuss whether our mod­ern eco­nom­ic musi­cians are up to the task of com­pos­ing a dif­fer­ent eco­nom­ic con­cer­to in the next install­ment.