I’m happy to admit that it’s very hard to hold a bear perspective, when all about there appear to be “green shoots”, when 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 columns; 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. Ss 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 August 19, 1930 certainly makes 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, six 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 one long before she admits so to a meeting of AA, 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% of additional demand into the global economy over three 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 instalment.

Peter Fray

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