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Are the 2010s destined to be a rerun of the 1930s?

August 11, 2012 | About:
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Gordon Pape

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Are the 2010s destined to be a rerun of the 1930s? There are many similarities between the two decades so it's a legitimate question to ponder. Here are some of the issues. Many of the statistics are American as comparable Canadian numbers are not available.

High unemployment. The official unemployment rate in the U.S. is 8.3%. The broader U-6 rate, which includes some part-timers and "all persons marginally attached to the labor force" (U.S. Department of Labor definition) is 15%. At the end of the 1930s, between 9.5% and 14.6% of the American labor force was out of work according to a paper published by Robert A. Margo of Vanderbilt University in the Journal of Economic Perspectives. The current numbers are not far off,

Homelessness. The sub-prime mortgage crisis has cost millions of Americans their homes. According to The New York Times, approximately four million families lost their homes to foreclosure between the beginning of 2007 and early 2012. Of these, an estimated 1.5 million were over 50. Moreover, the U.S. Education Department reported that, for the first time, the number of homeless students in America topped one million by the end of the 2010-2011 school year. I could not find any credible estimate for the number of homeless people in the 1930s, but the period is remembered for its hobo camps and "Hoovervilles" - shanty towns named for Herbert Hoover who was President from 1929-1933. Today we have squatter communities - homeless people moving into vacated properties en masse.

Drought. This year's drought in many parts of the world has led to comparisons with the Dust Bowl of the 1930s which ravaged both Canada and the U.S.

Political paralysis. The severity of the Depression was exacerbated by the inability of world politicians to make the hard decisions needed to kick-start a recovery. In fact, they added fuel to the fire with beggar-thy-neighbour policies that brought international trade almost to a halt. Europe's dithering over the fate of the euro and the on-going gridlock in Washington are echoes from that bleak past.

Civil war. The battle for Syria is our decade's version of the Spanish Civil War. It is a proxy conflict with the great powers using Syrian surrogates for their own geo-political ends. Instead of the Lincoln Brigade of the Spanish war, we have jihadists pouring into Syria from all parts of the Middle East to fight for "the cause". In both cases, the big losers are the innocent people caught in the middle.

The stock market. The "Dirty Thirties", as history has branded them, began with the stock market crash of 1929. That was the trigger that set the world on a downward economic spiral that didn't end until the outbreak of the Second World War.

Few people realize that the market plunge of 2008-09 was actually worse than the initial 1929 crash, although it took longer to unfold. In 1929, the Dow Jones Industrial Average hit what was then an all-time high of 381.17 on Sept. 3. The index then began to trend down, with the biggest losses coming on Black Monday and Black Tuesday, Oct. 28 and 29, when the Dow shed about one-quarter of its value in two days. That wasn't the end, however. Sellers kept dumping stocks until Nov. 19 when the Dow closed at 196.69, a loss of 47.9% from its Sept. 3 high.

In 2008, the Dow set a high for the year of 13058.2 on May 2. It trended downward during the summer and then the collapse of Lehman Brothers on Sept. 15 set off a selling panic. The index fell more than 500 points that day and the sell-off continued until March 9 when it touched bottom at 6547.05, down 49.8% from the May 2 high.

In both cases, the markets staged big rallies afterwards. By April 16, 1930 the Dow was back up to 294.07, a rebound of 49.5% in five months from the Nov. 19 low of the previous year. By Aug. 7, 2009, the index was back up to 9370.07, a gain of 43.1%. To this point, the parallels are obvious.

But here's where we part company with the Depression era. After the April 1930 rebound, the Dow started to dive again. The decline accelerated as the year wound down and continued through 1931 and the first half of 1932 until the index bottomed at 41.22 on July 8 of that year. That represented a total loss of almost 90% from the high of Sept. 3, 1929.

We haven't even come close to that kind of market devastation. In fact, the Dow has continued to climb, in fits and starts, and is now trading above its 2008 high, closing on Friday at 13207.95. In order to repeat the experience of the 1930s, we would have to see the Dow drop all the way to the 1300-1400 range. As difficult as conditions are at present, there is nothing on the horizon to suggest we should be gearing ourselves for a financial earthquake of that magnitude, or anything approaching it.

There are several other factors that differentiate the 2010s from the 1930s. These include:

Government support. Most countries have strong social safety nets that provide government aid to the needy, although as we are seeing in Greece and Spain those aren't always enough. In Spain last week, desperate union workers raided supermarkets and carted off food to feed their families.

Cash hordes. The U.S. Federal Reserve Board estimates that American corporations are sitting on US$1.7 trillion in cash. But the Internal Revenue Service (IRS) put the figure in 2009 at US$4.8 trillion. Either way, there's a ton of money out there which could fuel a huge recovery if deployed. Some political certainty in Washington after the upcoming election could start the process.

Developing nations. In the 1930s, China was torn by war, India was hopelessly mired down in the caste system, Russia was being run into the ground by the Stalin regime, and Brazil was a far-off land famous only for beaches, sambas, and coffee. The emergence of these and other countries, and the growth of their middle classes, has created an economic dynamic that had no 1930s equivalent.

Freer trade. Unlike the 1930s, the thrust today is for more open global trade rather than the erection of barriers. Canada is in the process of trying to work out deals with the European Union and the Pacific Rim. The U.S., where protectionism is still a force, is a leading player in the Pacific Rim talks. Europe, despite its euro problems, has benefitted immensely from its common market. There will be no retreat.

When you take all these factors into account, it's clear we are not going through a rerun of the 1930s. The next few years will undoubtedly be difficult as the world continues to deleverage. Interest rates will remain low, stock markets will likely be range-bound, and we will lurch from crisis to crisis.

But things are not as bad as the pessimists would have you believe. We may not be in boom times, but things have been much worse. There's no need to crawl into a shell and hide.

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.8/5 (12 votes)

Comments

w1omega
W1omega - 2 years ago
how about if European banks domino started by bank runs.

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