2 Weeks Ago: Real Estate: The Precursor to the Crisis
Last Week: Employment, Wages, and Government Workers
This Week: Social Attitudes and the Stock Market
Social attitudes will be greatly affected by another economic downturn that rivals the original Great Depression of the 1930s. Prior to the Great Depression, leaders at the time had confidence in the market. John Galbraith, in his book The Great Crash said, “President Coolidge neither knew nor cared what was going on. A few days before leaving office in 1929, he cheerily observed that things were ‘absolutely sound’ and that stocks were ‘cheap at current prices’” (pg 26).
President Hoover carried the same type of confidence even after the crash saying, “’the fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis’” (Galbraith, pg 106).
A good preceding attitude to any crisis is one of confidence that nothing will go wrong in the future—such as the current attitudes of key leaders in the US. To summarize: nothing will go wrong in the future because the leaders “won’t let it happen.” First of all, the leaders “let” the crisis happen in the fall of 2008. But alas, the crisis is not about the leaders. No leader, state, or country can stop social attitude from morphing, especially into something negative.
Let’s start with some recent presidential comments. Just like Coolidge and Hoover, President Obama has confidence in the recovery. In a December 14, 2009 speech (source: www.whitehouse.gov), President Obama said, “Today, due to the timely loans from the American people, our financial system has stabilized, the stock market has sprung back to life, our economy is growing, and our banks are once again recording profits.”
In another President Obama speech recently posted on ndn.org, he said, “But, having said that, something that our economic team emphasized is that there are core strengths to the American economy that will put us in good stead over the long term. Having gone through this very wrenching adjustment, we continue to have the best universities in the world, the best innovation and technologies in the world. We continue to have some of the best workers in the world, the most productive workers in the world.”
Obama’s confidence has spread to other layers of government. The confidence exhibited by Tim Geithner can be interpreted as pushing a level of arrogance. An article on cnbc.com titled “Geithner: There Will Be No 'Second Wave' Crisis” quoted, “’We are not going to have a second wave of financial crisis,’ Geithner said in an interview with National Public Radio. ‘We cannot afford to let the country live again with a risk that we are going to have another series of events like we had last year. That is not something that is acceptable.’"
Confidence in anything will turn to fear in everything. Galbraith commented, “Finally, when misfortune had struck, the attitudes of the time kept anything from being done about it. This, perhaps, was the most disconcerting feature of all. Some people were hungry in 1930 and 1931 and 1932. Others were tortured by the fear that they might go hungry…Meanwhile everyone suffered from a sense of utter hopelessness. Nothing, it seemed, could be done” (pg. 187).
In the book Down and Out In the Great Depression, the editor Robert S. McElvaine gathered and read letters from US citizens to the government during the 1930s. A very grim attitude was painted by several people. In an anonymous letter to President Hoover, the author wrote, “Now don’t think that I want to live over my means, or want to live like a rich man, I only wants a common living to exist without starving and freezing to death” (pg. 133).
Another letter written from Beaverdam, Virginia said, “I wish to express my thoughts of our poor and needed country. First we are looking for work, but can’t find any to do. Need clothes, food, and in debt so bad.”
In Conquer the Crash by Robert Prechter, he cauterized a bear market’s social mood: “Bear markets engender labor strikes, racial conflict, religious persecution, political unrest, trade protectionism, coups, and wars” (pg. 232). Basically, society will be “at war” with itself—sometimes in the physical way, but sometimes in the political way.
There is recent evidence in a social mood shift already beginning in the US, but this will be just the beginning. The article, “Americans Most Pessimistic They've Been Since January” posted on cnbc.com commented: “Americans are the most pessimistic they've been since the beginning of this year, when the US was mired in a deep recession, while confidence in President Obama and Congress is at the lowest level of 2009, according to the latest NBC/Wall Street Journal poll.”
The sad stories continue, but if the Greater Depression hits the US, articles like this one as well as letters like the ones in the Great Depression will be commonplace. Consumer confidence will be at all time lows, and feelings of desperation, no hope and discontent will be vast.
How can we have a Great Depression comparison without mentioning stock prices? Let’s look at how a stock portfolio will perform in the Greater Depression. First, let’s quickly examine where the US stock market is right now. The general public believes that market conditions right now can be categorized as “looking positive” because the stock market rallied sharply from a complete meltdown. This is not radically different from what occurred in the 1930s.
In The Great Crash, John Kenneth Galbraith stated, “In January, February, and March of 1930 the stock market showed substantial recovery. Then in April the recovery lost momentum and in June there was another large drop. Therefore, with few exceptions the market dropped week by week, month by month, and year by year through June of 1932” (p. 141). It is eerie that Galbraith also called the stock market rally a “recovery” because that is a word that cannot be missed if reading or watching financial news.
At that point, people living on the eve of the Great Depression probably had hope and couldn’t imagine stocks falling back down to levels in the October 1929 crash. Related to today, we are probably still far from the bottom in stock prices as well.
For starters, if there is a Greater Depression, the stock market will have to decline more than in the 1930s (88% drop from the peak). Let’s say stocks will drop by 95% from the peak of the DJIA of late 2007. If that happens, the DJIA will be trading at 710. That seems steep to even the most bearish situation, but if all the other factors (housing, unemployment, etc.) are combined with falling stock prices, then I suppose it is a possibility.
With the recent reading of only 15.6% bears according to Investor’s Intelligence, the stock market is a far cry from instilling fear of speculation. Invest for the long term is still the message. If you invested for the long term before the 1929 crash, you would have had to have held your stocks (that is, if they didn’t go bankrupt along the way) for about 20 years just to break even.
Also attitudes about stocks would have to be so negative that virtually no one would want to buy any. Galbraith said, “Nothing would have induced Americans to launch a speculative adventure in the stock market in 1935” (pg. 171). Currently people are still buying stocks and remain unafraid of a crash.
If the attitudes toward stocks change, not only will you not want anything to do with stocks, but the government could make it very difficult for you to own any. When discussing the Great Depression, Galbraith said, “Authority was given to the federal Reserve Board to fix margin requirements and these could, if necessary, be made 100 percent and thus eliminate margin trading entirely” (pg 166).
Steps of this magnitude have already been taken. According to darwinsfinance.com, “Beginning on December 1, 2009 margin requirements for leveraged ETFs increased dramatically from prior levels, with ranges from 50% for 2x long funds to as high as 90% for 3x inverse funds.” FINRA is trying to protect people from themselves after the first leg down of the crisis. This type of “protection” as it was called in a letter I received from my brokerage would have been helpful when the DJIA was trading at all time highs, not after a 40% decline.
If the Greater Depression hits, any type of trading margin will probably outlawed because stocks are too “dangerous” to have any type of leverage against. If stock prices fall and fall, they could no longer be used as collateral in a margin account. Thus, there would be no margin without any collateral.
Several “heroes” tried to step into the market and save it through buying stock and collaborating to stabilize the market. Those same activities have already been present in today’s market. We just saw Abu Dhabi step in to “save” Dubai. We saw Warren Buffet buy Goldman Sachs in the “eye of the storm.” Those decisions will prove to be these investors’ downfall, because even big investors won’t be saved if the market goes down more than in the 1930s.
All of these ideas have gotten me thinking that I hope a Greater Depression doesn’t hit the economy. However, I also know that there is no room for hope in business. Either way, whether we continue to recover from here, or we begin a huge decline, one thing is for certain. We will survive as a nation and as a world, and life will go on just as it continued in the 1930s.
